Issuance volume tepid amid government shutdown, debt ceiling stalemate, sources say

By Emma Trincal

New York, Oct. 16 - With the government shutdown in its second week and fears about the possibility of a debt ceiling impasse in Washington, action in the U.S. structured products market was on hold last week, sources said.

Agents sold $280 million during the week ended Friday, which was the second week of the month. Volume was down 48% from the previous week, which had seen more than half a billion issued. The number of deals fell to 97 from 123 the week before, according to data compiled by Prospect News.

In terms of size, the number of offerings larger than $10 million dropped to five last week from 20 the week before.

Last week was the fifth smallest week of the year for volume, according to the data.

Washington stalemate

The ongoing government shutdown led to the non-release of some important economic reports such as the monthly jobs report, which the Labor Department did not release earlier this month. Inflation data was also postponed.

"Investors' attention is on Washington and nothing else," a market participant said.

"It's just really slow because of the debt ceiling and everything happening in Washington. For most people, it's the wait-and-see game."

The debt ceiling stalemate is weighing on the market, a sellsider said.

"This government shutdown froze everything. There is no data. People are just sitting, waiting for something to happen," this sellsider said.

"There is this budget impasse, and volume is extremely slow. That's what it is.

"When you have no data coming out and this back and forth between talks and no talks, people would rather just wait."

Equity markets see-sawed back and forth as well last week along with the ups and downs of the Washington discussions.

While the market was turbulent in the first part of the week, stock prices skyrocketed on Thursday on the news that an agreement in Washington may have been reached. The rally continued the next day, and the S&P 500 index finished the week on a positive note.

However, uncertainty remained.

"There's been some volatility. But taking down a position is that much more risky. We, the underwriters, have noticed that investors are more risk-averse right now," the sellsider said.

"They'd rather take one or two days off to see how things shake off."

The emergence of short-lived rallies amid rising fears around the debt ceiling was surprising for some. Others had an explanation.

"We've seen a good dose of optimism despite the uncertainty because the market thinks that in the past, we raised the debt ceiling on the day of the deadline, and even if they don't do it then, there is still more time," an industry source said.

Calendar

This source did not attribute the lackluster volume to the budget stalemate.

"I think it's a matter of calendar, that's all. It's a middle-of-the month type of flow," he said.

Given October's robust first week, month-to-date figures were encouraging, according to the data compiled by Prospect News.

Agents this month through Oct. 12 sold $649 million in 184 deals, a 5.88% increase from the $613 million during the same period last month.

Volume has grown 2.41% to $29.30 billion for the year to date from $28.61 billion last year, according to the data as of Oct. 12.

The number of deals decreased 2.25% to 6,206 for this year to date from 6,349 last year.

The number of deals in excess of $50 million grew to 63 this year from 56 last year.

The main asset classes and structure trends last week were dictated by the nature of the top offerings, with sources saying that a pattern was difficult to identify.

For instance, notes linked to exchange-traded funds were up 27% from the week before and made for 22% of the total due to the top deal of the week, an unusually high market share.

This No. 1 deal was brought to market by Bank of Nova Scotia. It was $46.86 million of 0% capped enhanced participation notes due March 31, 2016 linked to the iShares MSCI Emerging Markets index fund. The cap is 40%. The upside is leveraged at a rate of 1.75 times. There is no downside protection. Scotia Capital (USA) Inc. was the underwriter, and Goldman Sachs & Co. was the dealer.

"No one trade stands," the market participant said.

"Money is on the sidelines. The guys are being tactical. There is nothing specific going on around one asset class, stock or structure in particular. It's on a case-per-case basis. It's all very tactical.

"One guy will do a leveraged note, and another guy will do an autocallable buffered note. I don't see any real pattern. The flows are down tremendously. And I think a lot of that has to do with the government shutdown and the debt ceiling deadline."

Offerings

Royal Bank of Canada priced the No. 2 deal of the week, a traditional autocallable structure: $19.23 million of 0% Strategic Accelerated Redemption Securities due Oct. 31, 2014 linked to the S&P 500 index. BofA Merrill Lynch was the agent.

If the index closes at or above its initial level on any observation date, the notes will be called at par of $10 plus an annualized call premium of 9.5%. The call dates are April 17, 2014, July 11, 2014 and Oct. 24, 2014.

If the notes are not called, investors will share in any losses.

The third deal was a leveraged buffered product brought to market by Barclays Bank plc: $18.92 million of 0% buffered Super Track notes due Feb. 13, 2018 linked to the S&P 500. The upside participation rate is 123%. There is a 25% buffer on the downside with 1.33333% of loss for each 1% index decline beyond the 25% buffer.

Barclays also priced the next deal, $13.69 million of 0% buffered digital notes due Sept. 17, 2015 linked to the MSCI EAFE index.

If the index return is positive or zero, the payout at maturity will be par plus a digital percentage of 15.05%. Investors will receive par if the index declines by 10% or less and will lose 1.1111% for every 1% that it declines beyond the 10% buffer.

The top agent for the week was Scotia Capital with just one deal topping the list and 16.72% of the market. It was followed by Barclays and JPMorgan.

"For most people, it's the wait-and-see game." - A market participant

"We, the underwriters, have noticed that investors are more risk-averse right now." - A sellsider

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