Issuance in mid-August week grows 67% to $465 million; month's sales outpace July's by 59%

By Emma Trincal

New York, Aug. 22 - Issuance bounced back unexpectedly last week, nearly hitting the half a billion mark and giving August a solid lead over July, according to data compiled by Prospect News.

Agents sold $465 million last week, up 67% from the week before, which recorded $278 million in sales. The number of deals remained roughly the same with 94 offerings last week versus 92 in the previous week.

Sales for the month to date jumped up nearly 60% to $1 billion from $630 million between July 1 and July 18, confirming that August is a healthier month than July.

For the year to date though, the trend continues to be disappointing. Agents have priced $22.62 billion so far this year, a 21.5% drop in volume from the $28.83 billion priced last year.

Issuance volume was also more robust in August last year at $1.88 billion. Comparatively, this month to date is down 47% from a year ago.

However, last week's figures coupled with a relentless rally led some market participants to express some optimism.

Big week

"I think [last week's volume] shows the willingness of investors to get back into the market. Once they see the market has gone up, they feel better and get more confident," said Andy Valentine Pool, main trader at Regatta Research & Money Management.

Not everyone is a long-term bull, but many individual investors are, at least for now.

"I feel different as a trader. When the market rallies so much, I have this disconcerting thought in the back of my mind that I need protection. If you had entered the market in May, you would have made a bundle, but it's riskier now as the market is up in the double digits. Yet that's the mindset. People are becoming more confident, and you have the upcoming elections. There is a bullish sentiment among investors," Pool said.

A market participant was surprised at last week's strong pace at a time of the year when most financial advisers are away and when structurers have also left their desks to go on vacation. His interpretation was possibly a higher than usual volume of rollovers.

"It seems to me that a lot of money was reinvested in structured notes from maturing bonds," this market participant said.

"Back in 2007, '08 and '09, a lot of middle-term notes were issued in the summertime. We may have seen a lot of notes mature in this part of the year. It would explain this very large volume in the middle of August. They may even have replaced their bonds with structured products in order to capture more yield."

The robust volume of activity also varies from one corner of the distribution network to another.

"It's been a relatively slow month, as August usually is. A lot of financial advisers are away. But it's been particularly slow in the wealth management, retail side," a sellsider said.

"Our capital market structuring group works across Wall Street and generates products for various clients. They can structure deals for another private bank or another large entity. But retail hasn't been so strong," he said.

Equity

Issuance was almost entirely equity-based, with the asset class amounting to 91.5% of the volume. Two-thirds of the volume came from equity indexes, and the top five deals belonged to that category. The S&P 500 index continued to be the underlying with the most appeal. Issuers priced $227 million of notes linked to it in 16 deals, nearly half of the total volume.

While the trend is not new, some said that the popularity of the benchmark is somewhat out of proportion.

"They are so many S&P ties out there. I have an email here. It shows six deals, and half of that are S&P ties. I don't know why the underwriters do it that way. I guess the benchmark is easy to understand, everybody knows it, it has consistency, and it's transparent. Investors know what they're getting as opposed to a basket of commodities for instance," Pool said.

"It could also be that many advisers are not that familiar with other asset classes such as emerging markets or developed countries. We would like to see more diversity. We're loaded on so many S&P, we don't know what to do with it. Give me some Vietnam."

Yield hunting

Despite the low volatility, some of the most popular structures last week were short volatility plays such a reverse convertibles, autocallables and callable reverse convertibles.

Reverse convertibles, including those with a call feature, amounted to 31% of the volume last week, a 73% increase from the week before. Callable reverse convertibles in particular did very well. They grew 50% and made for 17% of the total.

Autocallables represented 14% of the total with $64 million sold in four deals.

"We used to do reverse convertibles, but we got out of them. We got burned. If you have a 10% barrier and the stock is down 30%, you get hammered and your clients are not going to like it," said Pool.

But he agreed that the callable products have grown in popularity.

"It's not my bag. But people are doing it because they want more coupon," he said.

A market participant said that despite the drop of the VIX index below 15 this month, sales of those products are driven by demand.

"We have an ultra-low volatility and interest rates environment," he said.

"The pricing may not be best, but investors are searching for yield regardless of what the market is doing. They are hungry for the yields that they are not getting from their bonds."

This led him to assume that rollovers last week originated from a broad variety of maturing bonds and not just structured products.

"Investors are trying to replace lost income from maturing products, and I mean all bonds," he said.

For the year to date, leverage with partial downside protection remained the top structure with 20.5% of the total volume. Other structures such as knock-outs were also heavily bid.

Leverage with no downside protection, on the other hand, was down 34% year to date.

"I can understand this limited appetite for these types of products," said Pool.

"I stay away from those, and I can understand this trend. A 10% buffer can make a big difference versus no buffer.

"The market is choppy, but it has gone up. It makes sense to look for downside protection."

Top offerings

The top deal last week was an autocallable brought to market by Royal Bank of Canada in its $42.81 million of 0% Strategic Accelerated Redemption Securities due Aug. 30, 2013 linked to the S&P 500 index.

The notes will get called if the index closes at or above its initial level on one of three observation dates, with no call for the first six months. At maturity, if the notes are not called, investors benefit from a 5% buffer.

The agent was Bank of America Merrill Lynch.

The second largest deal was Morgan Stanley's $41.97 million of contingent income autocallable securities due Aug. 20, 2019 linked to the Russell 2000 index, a callable reverse convertible structure.

Investors can get 8.5% per year if the index closes at or above a 50% barrier on a quarterly determination date; if the index closes at or above the initial level on any annual redemption date, the notes will be called and the coupon will be paid.

At maturity, if the index finishes below the barrier level, investors are fully exposed to the index's decline from its initial level.

The top agent last week was Bank of America. It priced seven deals totaling $119 million, or 25.63% of the total. It was followed by JPMorgan and Goldman Sachs.

"There is a bullish sentiment among investors." - Andy Valentine Pool, main trader at Regatta Research & Money Management

"Investors are trying to replace lost income from maturing products, and I mean all bonds." - A market participant

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