Sellsiders say summer is unexpectedly strong; August’s volume so far increases 13% over July

By Emma Trincal

New York, Aug. 20 – The terms “sluggish” and “slow” do not apply to this summer’s activity unlike most summers of the past, sellsiders said.

“We’re seeing a surprisingly strong August. It’s not just August but also July and even June. We haven’t felt such a strong summer in a long time,” a sellsider said.

Volume in August rose to $1.42 billion as of Aug. 15, a 13% increase from the $1.26 billion sold during the same period in July, according to data compiled by Prospect News. The number of deals remained roughly the same at 352 during the first half of August and 347 during the first half of July.

“I know it sounds silly, but the World Cup at the end of June, beginning of July has considerably slowed everything down. In many banks I know, traders were obsessed with the World Cup and that’s all they could talk about,” a market participant said.

So far, however, the full summer and not just August has been more active than last year, the data showed.

Agents priced $8.36 billion in 1,861 deals from June 1 to Aug. 15, compared with $6.77 billion in 1,504 offerings during that period last year, a 23.5% volume increase.

Big deals

A number of deals in excess of $100 million that priced both in July and August may have helped, sources said.

In the first full week of August, Bank of Montreal sold $103.78 million of New U.S. Energy Paradigm notes due Aug. 8, 2014 linked to a basket of energy stocks.

Last week, Barclays Bank plc issued $103.82 million of 0% buffered return enhanced notes due Sept. 3, 2015 linked to futures contracts on WTI crude oil.

In July, HSBC USA Inc. priced $162.57 million of 0% Accelerated Return Notes due Sept. 25, 2015 linked to the S&P 500 index, with BofA Merrill Lynch as the underwriter.

Also in July, JPMorgan Chase & Co. priced an additional $155.7 million of 0% return notes due Nov. 27, 2018 linked to the J.P. Morgan Enhanced Beta Select Backwardation Alternative Benchmark Total Return index while BofA Merrill Lynch sold Barclays’ $118.18 million of 0% Accelerated Return Notes due Aug. 28, 2015 linked to the S&P 500.

“Now it may just start to be slower. But so far, the whole summer hasn’t felt much different than late spring,” the sellsider said.

“I don’t know why business is strong right now, especially when things are usually very quiet. There’s a lot going on in the world, but apparently, not much here. Nothing that keeps anyone away from their office anyway.”

Volume for the year has grown more than 16% to $26.62 billion from $22.90 billion last year, according to the data.

The sellsider said he is optimistic for the remainder of the year.

“We had a very strong start of the year, then it tailed off a bit. But it stayed consistently strong overall,” he said.

“Activity has been very strong. I talk to other issuers. Some of them tell me that this is the best year they’ve had in terms of overall activity. We’re getting close to last year’s level. The $40 billion mark is achievable,” he said.

Last year’s volume was $38.2 billion, according to the data.

Energy bets

Energy has become a big theme this month, sources noted.

For the second time in a row, last week saw energy as the theme used in the largest deal.

Barclays’ $103.82 million deal linked to oil was the largest offering. The structure offers 1.3715 times leverage on the upside up to a 13.715% cap. The downside is protected up to 10% by a geared buffer with a 1.11 leverage factor applied beyond 10%. JPMorgan was the distributor.

“There’s definitely an interest in energy whether it’s played directly via commodities or through a basket of stocks or an ETF,” the market participant said.

A structurer explained why the cap and the leverage factor were built around the same number.

“It is probably due to the view that oil can go up to 10%. So if the cap is 10% and the leverage 1.371 times, that gives you a 13.71% cap. They did a call spread at 110 and then they applied the leverage. It’s consistent with a 10% buffer on the downside with slightly less leverage at 1.11 times,” this structurer said.

For the market participant, the heavy bid was the result of JPMorgan’s distribution clout.

“JPMorgan’s private bank operates like a giant asset allocator,” he said.

“With Ukraine, the Middle East and Iraq, they are probably betting that at some point, sooner than later, oil prices are going to surge. Right now, the view is that oil is undervalued.

“The 10% buffer is not much for oil, however, and I think this is a pretty risky trade. Crude oil prices have been down this month. It could be because U.S. troops intervened in Iraq or because the tension between Russia and Ukraine seems to be receding. In any event, oil is pretty volatile, and 10% on the downside really isn’t that much.”

Commodity-linked notes represent this month 11% of total volume versus the 5% average for the year, according to the data. Those deals do not account for investors’ overall interest in commodities since exposure is also gained via stocks, as the Bank of Montreal offering illustrated. Energy has been the predominant sector seen in commodities this year, with a strong emphasis on oil, the data showed.

“With the Ukraine crisis, the political sanctions, geopolitical tensions and the natural gas fracking, a lot of people are interested in energy. They anticipate a spike in oil should the crises continue,” the sellsider said.

Barclays top issuer

Barclays was the No. 1 issuer last week with the top three deals carrying its name.

While JPMorgan distributed the first one, the second was internally distributed by Barclays. It was $80.89 million of 0% synthetic convertible notes due Aug. 18, 2021 linked to the common stock of General Electric Co.

“Barclays does a fair number of deals as an issuer. They do a lot of business through others, but they still have the ability to do some business for themselves. This deal could have been done for an RIA or a smaller broker-dealer,” the sellsider said.

Income

Autocallable reverse convertibles were the preferred structure last week, and stocks, which tend to be used in those deals, exceeded the volume of equity products with 50% of the volume versus 23% for the indexes, according to the data.

Those types of deals, however, remained small in size. Out of the 103 autocallable reverse convertibles that priced last week, only five were above the $15 million mark.

“People are selling vol right now. It makes sense, especially after the recent pickup in volatility we had for a couple of weeks at the end of last month and beginning of August,” the market participant said.

Other structures also designed for income investors gathered bigger bids, for instance STEP Income products, a signature of Bank of America.

An example was last week’s third largest deal: Barclays’ $42.6 million of 8% STEP Income Securities due Sept. 1, 2015 linked to the common stock of Whirlpool Corp.

Above the 108% step level, investors receive a bonus of 3.47%. If the stock is positive but below the step level, they will only receive par. The downside is not protected.

BofA Merrill Lynch was the agent.

“It’s the expression of a view on the stock,” the market participant said.

“It’s different from the step notes that let you participate above the step level. Here you get an extra coupon, but your upside is capped. It’s really more geared toward income. When you think of it though, 8% over one year is not bad.”

“Some [issuers] tell me that this is the best year they’ve had in terms of overall activity.” – A sellsider

“Right now, the view is that oil is undervalued.” – A market participant

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