Volume rises 8% to $257 million; stock-linked deals increase amid silver sell-off, VIX spike

By Emma Trincal

New York, May 11 - Volume rose on a month-over-month basis last week, aided by a spike in volatility that pushed stock deals as a share of the total to a higher level, data compiled by Prospect News showed.

Agents sold $257 million of non-exchange-traded notes in the first week of May, compared with $238 million during the comparable first week of April, an 8% increase.

On the other hand, sales dropped by 83% compared to the prior week when issuance reached $1.54 billion excluding ETNs. But sources said that the week-over-week comparison is biased by the calendar cycle, as month-ends tend to be heavier in volume than the early part of the month.

Including ETNs, last week's volume fell to $499 million from $1.6 billion the week before, a 69% drop.

"ETNs are limiting the decline, but overall, it hasn't been great since March," a sellsider said. "I wouldn't be surprised if we had some layoffs coming up."

And yet, this year remains higher than last year to date. Issuance is up nearly 4% at $15.87 billion, excluding ETNs, according to data compiled by Prospect News.

"It's difficult to come up with a clear picture. Week to week, you often get a lot of noise," a New York structurer said.

Stocks and commodities

All asset classes fell in dollar amounts, but stocks and commodities increased as a percentage of total volume.

Single stock deals accounted for 44.23% of the non-ETN total last week versus 30.7% the week before.

"I have seen more stock deals, and there is more demand for equity in general given the strong appreciation of the market," said Andrew Pool, structured products specialist and main trader at Regatta Research & Money Management.

"Before you had more rates deals. But there has been a shift to equity and real assets."

Commodity notes took more market share. They amounted to 18.37% of the total last week versus 10.28% the week before.

Sources said that the rise of stock deals originated from a surge in volatility.

"You had a series of events last week, in particular the silver sell-off with prices down 30%," the sellsider said.

"For some clients, a volatility spike represents a good entry point."

Reverse convertible land

Reverse convertible notes, despite a drop in dollar amount, were the most popular structure as a percentage of total issuance. They represented 24% of the sales versus 16% the prior week.

Investors were particularly fond of reverse convertibles linked to energy stocks, according to data compiled by Prospect News.

Barclays Bank plc for instance priced $10 million of 9.75% reverse convertibles due Oct. 31, 2011 linked to Peabody Energy Corp. shares. This size was relatively large for a week that saw only seven offerings in the $10 million to $20 million price range.

Volatility as measured by the CBOE Volatility index, or VIX, rose by 13% last week while the S&P 500 index declined by 1.5%.

"The spike in volatility makes the options more expensive. It's a better environment for reverse convertibles," said Pool.

Sources said that although reverse convertibles often gain momentum at the end of the month, they might also be popular during other parts of the cycle as was the case last week.

"Reverse convertibles are usually calendar deals. But not all of them are calendar offerings. It really boils down to when the investor is ready to pull the trigger," the structurer said.

"People have to be bullish. And they have been bullish about energy and food. Reverse convertibles are bullish trades. So it happens that sometimes, reverse convertibles have little to do with the calendar," he said.

Institutional investors

"You also have institutional investors who are going to do a deal whenever they feel it's the right time. They will go in when the timing is right. It could be now. It's not a function of the calendar," he said.

"For those who want a reverse convertible deal now, two things are key: first the price level, the entry level, and second the volatility.

"With a reverse convertible, the investor is selling a put. As a result, you want the entry level to be as low as possible so that the chances that the put will be exercised are lower.

"When volatility rises, you're getting paid a lot for taking that short position on the option."

The structurer added that one factor that helps investors decide whether to buy a reverse convertible or not is the amount of coupon they get paid for the risk. This in turns depends on the bank's willingness to pay a higher premium for the option sold by the investor.

"When implied volatility goes up, in other words, when the VIX is up, banks are willing to pay more because the consensus is that volatility is probably going to keep going up," the structurer said.

Single assets

The top deal of the week was a commodity-based ETN. Like several other recent commodities deals, the underlying was a single commodity, a recent trend, some sources observed.

Barclays priced an additional $50 million of its 0% iPath exchange-traded notes due June 24, 2038 linked to the Dow Jones - UBS Coffee Subindex Total Return, bringing the total issue size to $150 million since inception in June 2008.

The notes are listed on the NYSE Arca stock exchange under the symbol "JO."

Royal Bank of Canada priced the second-largest offering with $23.01 million of trigger phoenix autocallable optimization securities due May 10, 2012 linked to the common stock of Apple Inc. The annual contingent coupon is 11.89%, and the trigger price is 80% of the initial share price. UBS was the agent.

The third deal, also brought to market by Barclays, was tied to a single commodity. Barclays priced $20.93 million of 0% trigger performance securities due May 10, 2016 linked to the Dow Jones - UBS Gold Subindex. UBS was also the agent.

UBS topped the league tables with $94 million sold in 10 deals, or nearly 19% of the total issuance volume. Barclays was next with $75 million in five deals for 15% of the total. JPMorgan priced 11 deals totaling $44 million, or almost 9% of the volume.

Bank of America Merrill Lynch was No. 1 the week before followed by UBS and JPMorgan.

"I wouldn't be surprised if we had some layoffs coming up." - A sellsider

"You also have institutional investors who are going to do a deal whenever they feel it's the right time." - A structurer

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