Issuance at $358 million is second slowest week of year so far; focus on overseas, U.S. stocks

By Emma Trincal

New York, April 22 – Volume was slow in the week ended Friday. Agents priced only $358 million, which represented the second slowest week of the year so far after the prior one ended April 10, according to data compiled by Prospect News.

The April 15 tax deadline had a lot to do with the lackluster action, sources said.

“We had people doing last-minute taxes. They would say to us, ‘I need to fund my IRA. I want to open a SEP. I don’t have that 1099,” a financial adviser said.

“I spent 25% to 50% of my time putting out fires. It’s not like our clients were focused on putting some money to work.

“I can certainly imagine that banks would slow down in terms of volume and number of offerings. It’s just not a great week to invest.”

Investors expressed interest in international equity indexes, shying away from the usually predominant S&P 500 index, according to the data.

“The S&P has been choppy, especially last week with the sell-off on Friday,” a sellsider said.

“Meanwhile, we’re still close to all-time highs.

“It’s encouraging to see investors trying to diversify away from the U.S. markets.”

Go East

The largest deal of the week used a basket of Asian equity indexes. Barclays Bank plc priced $44.88 million of 0% leveraged notes due Oct. 20, 2016 linked to a basket consisting of the Taiwan Stock Exchange Capitalization Weighted Stock index with an 80% weight and the Hang Seng China Enterprises index with a 20% weight.

The deal featured uncapped leverage at a 1.68 multiple with no downside protection

“We’ve seen many deals on the euro zone, and the story was simple: it was QE. For Asia, it’s not as clear what’s behind this. First, it may not be a trend yet. But if it is, it’s perhaps because despite the slowing growth in China, people are still bullish on the stock market,” the sellsider said.

“What’s obvious is that if you want exposure to several indexes in Asia, using a U.S. registered note that references the countries you want to allocate to is very convenient.

“You can always get access to the U.S. through many channels, funds or ETFs. But if you’re bullish on Asia, it’s much more efficient to get exposure to a basket with a structured product. You get one Cusip, one security.

“Access is the name of the game.”

Baskets

Investors showed appetite for baskets of indexes, the data showed. Aside from the top deal, Barclays and Credit Suisse AG, London Branch each separately priced an offering linked to what has become a standard basket – the Euro Stoxx 50 index (37% weight), the FTSE 100 index (23% weight), the Topix index (23% weight), the Swiss Market index (9% weight) and the S&P/ASX 200 index (8% weight).

The U.S. markets declined at the end of last week amid concerns around the Greek crisis and new Chinese regulations on trades. Volatility showed a couple of spikes through the week.

“Baskets are popular from a correlation perspective. They usually give a good pricing,” a structurer said.

They also lower the cost of leverage, he noted.

Asked whether last week’s sell-off prompted issuers to use baskets, the sellsider said he doubts it.

“The use of baskets is not dictated by technicals and pricing. In this case, I think it’s reflective of clients’ views. It’s more of an access thing in general,” he said.

Single stocks

Single-stock deals almost always associated with income plays were one of the highlights last week with stocks making for 37% of the total versus 55.5% for equity index notes, the data showed.

The year-to-date average is 18.5% and 67% for stocks and equity indexes, respectively.

Autocallable reverse convertibles and traditional autocalls last week made for 26.35% of the volume versus 16.6% for leveraged notes with a barrier or buffer. Leveraged products with no protection were the top structure with 24.4% of the notional amount sold.

Deutsche Bank AG, London Branch priced the top single-stock deal and second in size for the week with $33.13 million of 8.5% STEP Income Securities due April 29, 2016 linked to the common stock of Celgene Corp.

BofA Merrill Lynch was the agent.

Interest is payable quarterly.

If the final price of Celgene stock is greater than or equal to the step level, 108.5% of the initial level, the payout at maturity will be par of $10 plus the step payment of 5.2%.

If the final share price is greater than or equal to the initial share price but less than the step level, investors will receive par.

If the final share price is below the initial share price, investors have a one-to-one exposure to the decline.

“It’s a standard reverse convertible. You get the 8.5% coupon and more if at maturity the stock is above the step level. The 8.5% coupon paid quarterly is clearly treated as income tax. For the potential extra 5.2% at maturity, it’s not clear,” the sellsider said.

“What I’m looking at is the fact that the term is more than one year by a few days. That’s usually a sign that the deal is retail because if there is capital gain tax treatment, investors want the long-term benefit. Institutions don’t care that much. Their tax rate is the same whether it’s long-term or short-term capital gains or losses.”

Small caps

Investors did not completely abandon the U.S. equity market. They merely switched their focus from large to small caps.

“You can’t call that a trend. Investors in general like the S&P. That was last week,” the sellsider said.

Agents priced four deals totaling $14.3 million based on the S&P 500 index. Separately, they sold $55.2 million in six offerings based on the Russell 2000 index, the data showed.

Deutsche Bank priced the No. 3 deal of the week, which used the Russell 2000 as underlier. It was $23.78 million of two-year buffered digital notes with an 85% barrier. Above or at the barrier level, investors receive an 11.05% digital return; below it, they are fully exposed to losses.

The top agent last week was Barclays with $90 million sold in 10 deals, or 25.22% of the total volume.

It was followed by BofA Merrill Lynch and JPMorgan.

“I spent 25% to 50% of my time putting out fires.” – A financial adviser on last week

“Access is the name of the game.” – A sellsider

© 2015 Prospect News.
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