April still not the best month, sellsiders say; focus last week was on equity indexes, Apple

By Emma Trincal

New York, May 2 - Issuance volume was light for April despite a robust pickup during the week ended Friday. Many of the week's large deals were based on equity benchmarks and brought to market by the wirehouses.

"It's not the most robust month across the industry," a structurer said.

Apple Inc. and Amazon.com, Inc. dominated the headlines, and issuers sold a noticeable number of small offerings based on big tech stocks, according to data compiled by Prospect News.

Strong week, slow month

Agents sold $1.09 billion of non-exchange-traded notes last week, almost twice as much as the previous week, which recorded $570 million of sales.

However, April's $1.84 billion volume fell by 56% from the $4.15 billion volume sold in March.

Compared to the $3.30 billion sold in April a year ago, sales last month fell by 45%.

There were 637 deals priced this year in April, compared with 506 a year ago.

"A lot of people are on holidays in April, plus you have the tax issue," the structurer said.

"Financial advisers depend upon where the clients are. If they're not in the mindset to look at those deals, it's going to have an impact. These deals require phone calls, education. For many, it's best to wait until May," he said.

So far this year as of Monday, agents have priced $11.99 billion in 2,795 deals, a 29% decline from the $16.91 billion sold in 2,140 offerings during the January-April period last year.

"It's a little light across the board, and it's hard to put your finger on it," a sellsider at another firm said.

He mentioned some market factors.

"It could be uncertainty in Europe or the spring break and the Jewish holidays. It's hard to see what's the real catalyst behind it."

But this sellsider downplayed the role of tax season.

"I'm not sure it's so much about taxes except in advisory, but for the big platforms, not really," he said.

"We had a good first quarter, knock on wood. But business has been a lot choppier in April."

Tenors and rollovers

The structure of the deals may also be a factor, as investors are increasingly dependent on yield for their income, according to the structurer.

"Volume is definitely lower this year, and you have to look at the trend," he said.

He offered two main explanations.

"First, you have more CDs that are not being captured. I'd say it's probably about 15% to 20% of the market," he said.

"Second, when rates came lower, deals became longer. If you constantly do longer-dated trades, until the deals get called, knocked out or redeemed, you don't really see a lot of deals rolling. It may be a factor in the decline of new issues."

This structurer estimated that rollovers may account for 30% to 40% of the new issuance volume for established firms on a regular basis.

A sellsider at another firm agreed.

"Rates could play a hand. If rates are low, people are looking at longer maturities. They want attractive deals," he said.

"Credit spreads as well have come in. They're more compressed. That gives you less leeway in funding."

Plain vanilla

The structurer said that the pace of issuance of equity deals compared to the rapid growth of plain-vanilla, lightly structured products such as step-up notes, step-down notes, fixed-to-floating notes and capped floaters may have an impact on the amount of rollovers.

"The fixed-income business - plain vanilla deals - is growing. These are more bullet style, more static. When you do a CPI deal, that's a limited deal. That's kind of it. It's different from S&P offerings that keep on coming but in smaller sizes," he said.

"Equity-linked notes behave more like equity. It's more like in and out.

"For now, what really drives the market is more the search for yield, the search for consistency. People want stability."

Both CDs and lightly structured plain-vanilla fixed-income offerings are not included in Prospect News totals.

Tech appeal

Most of the bullish action in the U.S. equity market last week centered on technology stocks. Apple and Amazon saw their share prices skyrocketing post-earnings.

Issuers took advantage of the pre-earnings volatility to strike deals around those names, according to the sellsider.

While small in size, those tech stock-linked note offerings were many: agents priced 34 of them out of a weekly total of 147 offerings, or nearly one deal out of four.

Apple stock was used in 24 of the 34 deals, representing $31 million.

There was a total of $55.57 million of deals linked to technology stocks, the biggest of which was Bank of America Corp.'s $19.95 million offering of STEP Income Securities linked to Hewlett-Packard Co.

JPMorgan Chase & Co. brought the biggest Apple deal and the second largest deal linked to a tech stock with its $17.39 million of contingent absolute return autocallable optimization securities linked to Apple.

The majority of the deals were small-sized reverse convertibles.

"Apple works because it's a high-volatility stock. When people look for vol, Apple shows up," the structurer said.

"With a reverse convertible, you want high volatility, but most people don't want to limit their upside too much.

"If you compare outlook with volatility, Apple fits the bill as nobody really expects Apple to double in one year.

"It's a name that makes sense for retail. The cap makes sense, and you have downside protection."

The sellsider said that issuers probably structured notes on Apple in anticipation of the earnings announcement that took place after the close April 25. The next day, the share price jumped 9%.

"Apple going into earnings, there was a lot of noise. People are taking advantage around that, and Apple is a vey popular name," the sellsider said.

"Structures are more attractive than a month ago. Most of the recent Apple deals have probably been structured prior to earnings when volatility was high. A lot of the hedging activity was done prior [to] earnings."

Top in FX

Exceptionally, the top deal for the week was not based on equities but on currencies.

Barclays Bank plc priced $67.48 million of 0% notes due May 1, 2014 linked to the performance of the Chinese renminbi relative to the dollar.

The payout at maturity will be par plus 146% of the currency return. Principal is protected at 100% subject to credit risk. The notes were sold by JPMorgan.

This offering raised the market share of foreign exchange as an asset class to 9% of the total.

But equity remained prevalent with 60% of the volume tied to equity indexes and 15.5% to single stocks.

Bank of America tops

As always at month's end, Bank of America led the way, selling more than half a billion of the week's volume by itself, or 51% of the total with $551.88 million in 26 deals.

The agent priced 12 out of the 15 largest deals of the week, selling the top eight excluding the big Barclays currency offering that topped the list.

"These [Bank of America products] are the core kind of repeatable deals. A lot of these are rolls or reflect the view of the bank," the structurer said.

The No. 2 deal was issued by HSBC USA Inc., which priced $62.61 million of 0% Capped Leveraged Index Return Notes due April 25, 2014 linked to the S&P 500 index.

Sold by Bank of America, the notes offer two-times leverage on the upside up to a 21.5% cap with a 10% buffer on the downside.

The third largest issue of the week also gives investors enhanced return through leverage but without downside protection.

It was Bank of America's $61.09 million of 0% Accelerated Return Notes due June 28, 2013 linked to the S&P 500 index with triple leverage on the upside up to a 17.79% cap.

Bank of America sold a deal on the behalf of Royal Bank of Canada. Ranked No. 5 for the week, the $45.89 million of 0% Strategic Accelerated Redemption Securities due May 8, 2013 linked to the S&P 500 index is an autocallable product with an 8.75% call premium, a trigger at 95% of the initial price and three observation dates.

"It's a little light across the board, and it's hard to put your finger on it." - A sellsider

"Apple works because it's a high-volatility stock. When people look for vol, Apple shows up." - A structurer

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