Volume up for week, month driven by growth products, investors re-entering equity market

By Emma Trincal

New York, Aug. 31 - Volume surged last week as investors sought upside opportunities offered by more attractively priced deals and depressed equity prices, closing most of August on a better note than July.

Volume up

Agents sold $905 million of notes - excluding exchange-traded products - in 198 deals during the week ended Friday, up 65.5% from 163 deals sold the week before for a $547 million total.

For the month up to Aug. 26, sales rose by 26% to $3 billion from $2.38 billion during the same period in July, according to preliminary data compiled by Prospect News.

The data may not be complete as the reporting of deals tends to be delayed toward the end of the month.

In the year to date, volume has grown by 15% to $30 billion from $26 billion in 2010.

Growth quest

An important trend seen last week was the strong interest in simple structures linked to equity benchmarks that offered an attractive upside potential to the investors.

The top deals reflected an effort on the part of issuers to enhance the upside either through leverage or contingent minimum returns.

For a market participant, the prevailing theme was growth and investor desire to re-enter the market under good conditions.

"Growth products are driven by investors getting back to the market, and that's the theme right now," he said.

"Equity investors have exited the market, and now, it looks like the equity market is picking up again.

"As the market has been beaten down so much, the growth theme is appealing to people who want to get back in."

The top deals for the week offered aggressive structures with some measure of protection.

"The most popular offerings are those trying to give investors something extra on the upside," the market participant said.

"After all, that's what makes a structured note attractive: when you're able to outperform a direct investment in the equity under certain market conditions. To do that, you want to have some attractive features, whether some leverage, a contingent minimum coupon or a step-up feature."

But because pricing conditions have improved, issuers were able to create products that also reduce some of the risk, he said.

"They're throwing in there some downside protection mechanism, either a hard protection or a conditional protection, but still something," he said.

Deals featuring more upside potential with some partial protection were the top sellers last week, according to the data compiled by Prospect News.

On top of the list was Morgan Stanley's $78 million of 0% buffered jump securities due Feb. 27, 2015 linked to the S&P 500 index. It is an uncapped structure with a contingent minimum return.

The payout at maturity will be the greater of the index return and 42% if the final index level is greater than the initial index level. There is a 10% buffer on the downside.

The second largest deal was Citigroup Funding Inc.'s $34.89 million offering of 0% trigger Performance Leveraged Upside Securities due Aug. 30, 2016 linked to the S&P 500 index.

The structure is leveraged with a 155% participation rate and no cap. Investors benefit from a 50% barrier on this five-year product.

JPMorgan Chase & Co. priced the third largest deal with $34.63 million of 0% capped index knock-out notes due Sept. 12, 2012 also linked to the S&P 500 index.

A knock-out event will occur if the closing index level falls by more than 20% from the initial level during the life of the notes.

If a knock-out event occurs, the payout at maturity will be par plus the index return, which could be positive or negative. If it does not occur, the payout will be par plus the greater of the index return and 11.2%. The upside in both cases is capped at 20%.

For some, the conditional payouts offered by issuers may just be a gimmick.

"I think those minimum contingent coupons are a way to entice clients. It's more of a marketing play. It sounds better; it sounds appealing. It's an easier sale," said Lisa Smith, a structurer at Bankers Financial Services LLC.

Others said that structures giving more upside were key in making people decide to re-enter the market.

"That's not the decisive factor, but it helps," said the market participant.

"The market has had a tremendous decline over the last few weeks, and people are trying to get a good entry point.

"The increased volatility gives issuers more flexibility to put attractive terms into the deals.

"That's why firms have been able to capture a large portion of investors who want to go back into the market."

Equity push

This in part explains the return to equity observed recently, especially last week when this asset class rose 63% in volume from the week before to $732 million making for 81% of the total. It made up 63% of the total in the prior week.

For the month, equity regained 80% of the market versus 72% during the same time in July.

In the late spring and early summer, equity deals posted a noticeable decline. In one week in mid-May, equity dropped to less than 50% of the total

The asset class is back in favor now, said Smith.

"Equity is about the only way for banks to structure a product and still be able to put an option on it," she said. "Options are cheaper on equity than they are on commodities indexes."

Commodity notes last week more than quadrupled to $71 million from $17 million the week before. But their volume remains weak compared to levels seen in the first half of the year.

This asset class made for less than 8% of the total volume last week.

Fewer stocks

Within the equity asset class, the trend was a decline in single-stock issuance as a percentage of the total accompanied with a surge in equity index-linked products.

Stock deals made for only 20% of the total this month to date against 46% in July.

By comparison, equity index issuance represented 60% of the total this month versus 26% last month.

Last week, agents sold $523 million of equity index deals, or 58% of the total.

Meanwhile, stocks last week accounted for only 23% of the volume with $210 million, and it was the last full week of the month.

Smith said that the pullout from stocks was driven by demand, with investors becoming more risk-averse. However, supply factors were also at play.

"Those hedge providers, such as HSBC, JPMorgan, are more uncertain about their options portfolio. They don't want to place as many bets on single stocks," said Smith.

Reverse convertibles struggle

Reverse convertibles continued to struggle despite the recent volatility spike.

Their volume increased by 70% to $92 million last week, a normal outcome at the end of the month. But their market share - 10% of the total- was weak for that period of the month.

In addition, this category fell 50% from last month.

"The customers are fleeing to safety in a market like this," said Smith, commenting on the declining volume of this structure.

Autocallables, which also sell volatility and benefit from higher volatility levels, nearly doubled in volume to $50 million and were up 12% for the month.

"Some of the biggest deals are done with the large institutions, the private banks of JPMorgan and UBS, and they don't do a lot of reverse convertibles. They tend to do mostly equity index and some autocallables," the market participant said.

"Now if the market turns bullish, we'll see a lot more reverse convertibles."

The market may have not turned bullish yet, but it started to recover last week with the S&P 500 finishing up 4.65%.

The VIX index, which measures implied volatility on S&P 500 options, was down 15%. But at 35.6, it still remains higher than average, sources said.

The top agent last week, according to preliminary data compiled by Prospect News, was Morgan Stanley with $220 million, or 24.31% of the total.

It was followed by Bank of America with $200 million and by Goldman Sachs with $131 million.

Goldman Sachs was No. 1 the week before.

"Growth products are driven by investors getting back to the market. ..." - A market participant

"I think those minimum contingent coupons are ... more of a marketing play." - Lisa Smith, a structurer at Bankers Financial Services LLC

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