Short week at beginning of month sees tepid volume; leverage, indexes dominate flow

By Emma Trincal

New York, Sept. 11 - The month started slowly after market participants went back to work following the Labor Day holiday. Sales for the week ended Friday amounted to $223 million in 65 deals.

It was of course much less than the prior week's $1.79 billion, which closed August volume. But it also was slightly less than the comparable first week of August, which recorded $268 million sold in 96 deals.

Sales of notes linked to single stocks retreated last week, leaving room for equity index-linked notes, which made for 85% of the total. Stocks amounted to slightly more than 11%, according to data compiled by Prospect News. At the same time, leveraged structures made for more than half of the issuance.

"Between Labor Day and the Jewish holidays that came early this year, it was a very quiet week. But I've seen activity pick up in the last few days," a sellsider said.

"Generally speaking, the summer has been pretty slow," a distributor said.

"Last week we had even less activity for obvious reasons. ... A lot of people were not in the office. I'm not too concerned about that. Now that retail sales people are back in the office, I'm pretty confident that we'll see more volume, more offerings," this distributor added.

There were only two deals in excess of $20 million last week, with the top one at less than $30 million, the data showed. In comparison, the previous week saw the pricing of 42 offerings in the $20 million to $50 million size range as well as two deals in excess of $50 million, according to the data.

Flying without a net

Last week's largest deal was a leveraged note with full downside exposure. Barclays Bank plc priced $28.47 million of 0% Super Track notes due Sept. 7, 2018 linked to the S&P 500 index.

The payout at maturity will be par plus 1.4272 times any index gain. Investors will receive par if the index falls by up to 30% and will be fully exposed to the index's decline if it finishes below the 70% trigger level.

Barclays was the agent.

The No. 2 offering fell into the same category of products, emphasizing the enhanced upside exposure and giving up any downside protection. Bank of America Corp. priced $23.35 million of 0% Accelerated Return Notes due Oct. 31, 2014 linked to the S&P 500.

The upside consists of 300% of the index return, subject to a 13.2% cap. Investors would lose 1% for every 1% decline in the index.

"When the investor is willing to forego the downside protection to get more upside, I think it's fair to say that the deal is probably more geared toward institutional investors," the distributor said.

"It's not always the case with index deals, but it's certainly true when you deal with unprotected leverage applied to stock."

Big buffers

An inverse approach, securing more protection with less upside, was seen with the two following deals, which happened to have the same size although issued and distributed by different firms.

Instead of giving up the downside protection for more potential return, investors in those two nearly "twin" offerings were willing to accept a non-leveraged, yet capped upside participation for a bigger-than-average buffer, sources said.

In the first one, Bank of Nova Scotia priced $16.71 million of 0% buffered enhanced participation notes due Sept. 9, 2016 linked to the MSCI EAFE index. The payout at maturity will be par plus any gain in the index, up to a maximum return of 40.2%. On the downside, investors benefit from a 20% buffer with a 1.25% leverage factor beyond this level. Goldman Sachs was the dealer.

In the second deal, issued by Royal Bank of Canada and distributed by RBC Capital Markets, LLC, the $16.71 million of 0% buffered notes due Sept. 9, 2016 are linked to the S&P 500. The upside offers a one-for-one participation subject to a 13.12% cap. Both the buffer and geared downside are at the same levels as the previously mentioned deal.

"I'm not sure why those two deals had the same size. They looked similar, but they came from different firms," a source said.

"We've seen those kinds of deals. Anytime a product gives you one-for-one on the upside in exchange for a solid buffer, it's more like a retail trade, I think. Maybe RBC offered it out of their retail distribution network," the distributor said.

"Structured products are pitched to retail for the downside protection, so it seems to fit the bill."

The fifth largest deal was a standard leveraged product with some protection: Goldman Sachs Group, Inc. priced $15.75 million of 0% leveraged buffered index-linked notes due May 7, 2015 tied to the MSCI EAFE index.

The leverage factor is 1.5, the cap 20.85% and the buffer 10% with 1.1111% downside participation for every 1% decline beyond 10%.

Fewer stocks

Leveraged notes with or without buffers or barriers accounted for 53% of the volume, with the popular autocallable reverse convertibles making for less than 10% of the volume. This trend was related to the diminished use of single stocks as underliers.

The top stock deal and No. 6 product of the week was brought to market by JPMorgan Chase & Co. It was $14.7 million of contingent income autocallable securities due Sept. 9, 2016 linked to Dow Chemical Co. shares.

The notes pay a contingent quarterly coupon of 2.5% if Dow Chemical stock closes at or above the 75% downside threshold level on the determination date for that quarter.

If the stock closes at or above the initial share price on any of the first 11 quarterly determination dates, the notes will be redeemed at par of $10 plus the contingent payment.

If the notes are not called, the payout at maturity will be par plus the contingent payment unless the stock finishes below the downside threshold level, in which case investors will lose the same amount as the stock with their principal paid back in shares or, at the issuer's option, the cash equivalent.

"Anytime you see a trade tied to a stock, in the majority of the time it's an institutional trade because from the retail perspective, it's easier for a retail financial adviser to go out and buy the stock on the behalf of their clients rather than using a structure like this one," the distributor said.

Despite the slow start of September, sources said they are relatively optimistic about the year-end outlook.

"I think we'll catch up," the distributor said.

"The summer has been a bit sluggish, but if we continue to see an uptick in interest rates, the protection will become more attractive. If you see the 10-year Treasury continuing to rise and be around or above 3%, you'll see an uptick because buffers will become more appealing.

"With the performance of the S&P and the Dow, there's a consensus among investors that maybe we are at a peak. Investments allowing people to seek some protection while maintaining some upside exposure will be in high demand, and that's precisely what structured products are designed for. That's why they're being sold."

The top agent last week was Goldman Sachs with $52 million in 10 deals for 23.14% of the total. It was followed by Barclays and JPMorgan.

"Between Labor Day and the Jewish holidays that came early this year, it was a very quiet week." - A sellsider

"If you see the 10-year Treasury continuing to rise and be around or above 3%, you'll see an uptick because buffers will become more appealing." - A distributor

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