May volume grows 27% from April, but year-to-date sales show weaker picture; leverage prevails

By Emma Trincal

New York, May 30 - Agents' sales recovered from a couple of weak months in March and April. Volume as of May 26 was up 27.31% from the same period in April, according to preliminary data compiled by Prospect News.

Up and down

Issuance for this month's period reached $3.01 billion sold in 562 deals. During the period in April, agents priced 645 deals totaling $2.36 billon.

Sales amounted to $866 million last week, a 40% decline from the week before.

The weekly data, however, is subject to change because not all filings were posted on the Securities and Exchange Commission website at press time, in particular some of the largest deals from Bank of America Corp. were not yet accounted for.

For the year to date, agents sold $16.03 billion, a 19.5% drop in volume from the $19.91 billion sold in the same Jan. 1 to May 26 period of 2011.

"We're up for the month but down for the year. The big picture is that we're reversing the trend seen in a couple of bad months earlier this year," a structurer said.

The worst month so far this year was March with $2 billion. April was second with $2.3 billion. These figures do not include the end of each month. Instead they represent the 1st through 26th of each month.

March was especially "bad," the structurer noted, compared to March of last year, which recorded $3.74 billion of sales.

"When you try to explain why we're down 20% this year, it looks like March is the culprit, dropping 46% from March 2011," the structurer said.

May 1 through May 26 this year versus the same part of May 2011 shows no decline. Volume is flat with a 0.23% increase, a positive sign, according to the structurer.

Accelerated returns

The main trend for last week but also the month to date was a surge in leveraged notes providing no downside protection. Bank of America Merrill Lynch alone drove the trend. It priced $291.53 million of such notes in nine offerings last week, 96.5% of the $302.1 million worth of deals falling into that category, according to the data.

It is not unusual for this agent to bring leveraged notes of noticeable size at the end of each month, according to prior data, and the size of last week's two top transactions reflected this pattern.

Bank of America priced $118.5 million of 0% Accelerated Return Notes due May 30, 2014 linked to the S&P 500 index.

The product, the No. 1 deal of the week, offered three times upside leverage with full exposure to losses on the downside. Returns were capped at 21.06%.

The second largest deal was also a pure leveraged play from Bank of America, which sold $59.32 million of 0% Accelerated Return Notes due May 30, 2014 linked to the S&P 500. The leverage factor was three on the upside, the cap was 27.96%, and investors were fully exposed to losses.

A total of $1.28 billion of leveraged notes with no downside protection priced this month as of the end of last week, almost six times the $228 million amount sold during the same period in April, according to the data.

Low interest rates

Sources, especially in the structured certificates of deposit space, attributed the trend to the low-yield environment.

"With interest rates being as low as they are, look at the 10-year Treasury below 1.70%. ... That's the barometer for banks' funding. With such low rates, you can't do anything principal protected. Therefore, a lot of structures you see are not principal protected," the structurer said.

A New York sellsider agreed.

"In this rush to zero rates, investors are forced to seek higher risk for more return," he said.

"It's hard to say if they're moving into riskier assets like pure leverage because the economics are different just to chase the returns or if it is because it's harder for issuers to create buffered or principal-protected notes that are appetizing for investors."

With volatility rising, however, pricing conditions are not optimal for leverage, he said, adding that "the Merrill effect" may have to do with the bulky issuance volume of those riskier leveraged, non-buffered notes.

"The VIX was as low as 14 in March. It's now at about 23. The historical average is 20. So we're higher than average but not widely higher. Just higher than before," this sellsider said.

"However, more volatility isn't ideal for leverage. You spend more to buy the calls. It works against the trend," he noted.

"I think it may have more to do with a Merrill effect. Apparently, this is the product that works the best in their channel. I'm not sure how they determine what they make available to their investment professionals, but that's definitely what's selling."

Equity reigns

Equity as an underlying asset class increased this month versus last both volume-wise and in terms of market share.

Agents priced $2.49 billion of equity-linked notes month to date, up 40% from the month before. Equity deals made for nearly 83% of the total in May versus 75% in April.

"People go into U.S. equities because what are the alternatives? Europe still has problems, and it's better to go into equity than park your money in cash," the structurer said.

"Investors may also feel comfortable with equity prices right now. They may feel that the entry points are safe enough to go in."

The sellsider offered an additional explanation.

"It's been a fairly rough run for commodities of late, which makes them as an asset class less attractive even though people should look into it due to their low valuations. But the drop in commodities probably means more demand for equity," he said.

Commodity-linked deals fell by 49% month to date to $88 million from $172 million. Their market share dropped as well to 2.93% from 7.27%.

FX fashion

Currency-linked notes regained traction in May with an increase of 125% from April, which saw the pricing of $166 million in this asset class.

"With the euro heading toward new lows, there is a headline appeal here. It probably makes currencies a more interesting asset class," the sellsider said.

HSBC USA Inc. priced the top FX deal, which was also the third largest issue last week. It was $55.18 million of 0% knock-out buffer notes due June 10, 2013 linked to the performance of the Mexican peso relative to the dollar. The knock-out event occurred at 85% of the initial exchange rate. In the absence of a knock-out, investors received a contingent minimum return of 9.45%. JPMorgan was the agent.

Another continued trend was the decline of reverse convertibles. Sources put it in parallel with the renewed appeal of autocallables.

"I won't say that autocallables have replaced reverse convertibles, but they've gained in popularity over the past few months. It's a continuing trend," the sellsider said.

"Just because volatility goes up doesn't necessarily mean that you're going to see more reverse convertibles. Investors have more choices today, and autocallables are taking some of the market shares. People look at an autocallable as a product where you have more chances of being right because you can get called, while with a reverse convertible, you sit through the end," the structurer said.

Bank of America Merrill Lynch was by far the top agent last week with nearly 70% of the total in 24 deals totaling $598 million, according to the preliminary data. It was followed by HSBC and Barclays.

"The big picture is that we're reversing the trend seen in a couple of bad months earlier this year." - A structurer

"I won't say that autocallables have replaced reverse convertibles, but they've gained in popularity over the past few months." - A New York sellsider

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