Volume remains flat at $477 million in week following sell-off, but bid on equity is stronger

By Emma Trincal

New York, Oct. 29 – Agents priced $477 million in the week ended Friday, only $8 million more than the week before, according to data compiled by Prospect News.

Despite the market plunge on Oct. 15 triggered by Ebola fears, the following week started with a renewed appetite for equity-linked notes. Those, which are linked to single stocks, indexes, exchange-traded funds or baskets, accounted for nearly $400 million, up from $348 million during the turbulent previous week.

Separately, a great number of very small deals continued to hit the market, the data showed.

More equity

“Equity in volume is up. Look ... it’s always good,” a sellsider said.

“When it happens after the market drops, it’s hard to say that it’s because people find good entry points or if it’s because they’re scared and want some protection since the market is so hard to predict. Really you can’t tell.”

Equity-linked issuance made for 83% of the market last week, which is its yearly average so far. During the prior week, equity’s market share was lower at 74% of the total notional, the data showed.

“In the week before last week, on Oct. 16, you had a bond rally while the stock market sold out,” a distributor said.

“Since then, stocks recovered because people realize that the Fed is not going to raise rates anytime in the foreseeable future. We’ll see what the Fed has to say this afternoon, but the market expects that the easing is going to continue. Some even say that QE is not going to stop.”

The Federal Reserve’s policy-making committee was scheduled to make an announcement on Wednesday in early afternoon, prior to press time.

“Bottom line now is that money is cheap and people know that. Stocks as a result recovered quickly,” the distributor said.

Despite the volatility spike of the previous week, the market closed higher on Friday.

“Some Fed governors spoke recently, giving the impression that the Fed realizes the economy is still too weak. And it’s true. Look at growth. Unemployment is a joke. The only positive thing in the economy is that oil prices are at record lows. But that’s not growth. With that, stocks are set to continue to rise, and you’ll see more demand for equity. That means more appetite for equity-linked notes,” he said.

The recent sell-off also had benefits.

“As we’ve just had some volatility, people find prices attractive. If you buy a reverse convertible with a 20% buffer and the stock is already down 10%, you have a 30% downside. People say, I’ll take that risk,” he added.

Small is big

Agents, or at least a few of them, continued to price very small deals.

The total number of offerings rose to 166, a 37% increase from the previous week. But out of those deals, 145 were $5 million or less in size, according to the data. UBS did 61 of them and HSBC, 30.

“It’s not that good from the issuers’ perspective because small size is not the most efficient way to grow. But if that’s the trend, then that’s the way it is,” the sellsider said.

“I guess one can conclude that one of the reasons for this thing is the popularity of structured notes. More people are adopting those products.”

The data for the year to date also showed an increase in the number of deals in the less than $10 million size range.

Agents have priced a total of 7,501 deals this year as of Friday, up from 6,493 last year through Oct. 24, a 15.5% increase. Total volume has grown nearly 10% to $34.23 billion.

During this period, the number of deals below the $10 million mark rose by 23%, according to the data. Those offerings made for 83% of last year’s volume and represent nearly 90% of it this year.

The sellsider said the “tiny” deals of less than $1 million are the biggest concern.

“It makes little sense in my opinion,” he said.

“You have legal costs that will eat up your profit even if you reuse the same shelf and streamline it; you still have to pay the lawyers, the registration fees.

“I would think it’s dictated by market forces. If issuers could price bigger deals, they would. Maybe the idea is that hopefully it will lead to bigger sizes later.”

For the distributor, the tendency to price smaller deals was a natural evolution.

“It makes sense because those deals are tailor-made and advisers don’t put big chunks of their portfolio in structured notes. It’s usually not more than 5%. They often do it because they see those notes as a fixed-income alternative; they see a one-year item that has a coupon,” he said.

“For the issuer it’s not such a big deal. They have a shelf. They make the product under that shelf. They boilerplate the process.”

Rates

Interest rate-linked products declined in volume by 80% last week, down to two offerings totaling $20 million. But the data showed the opposite for the year to date, with volume up 47% at $1.71 billion.

The distributor, however, noted that progress is much more visible in the secondary market.

“In structured notes on the rate side, I’m talking steepeners, step-ups, we’re finding the secondary market is much more attractive than the new issue market. The reason is that with the historically low interest rate environment, even if rates have backed up a little recently, the funding rate, the cost of money for issuers is very low, and that’s the starting point for new issues. With such low rates and tight spreads, terms are not so attractive,” he said.

“In the secondary market, you can pick and choose. You have bid lists that come in. The secondary market is much more attractive.”

Top deals

The top offering last week was a leveraged buffered note of nearly $60 million.

Bank of America Corp. priced $59.59 million of 0% buffered leveraged notes due Oct. 28, 2019 linked to the S&P 500 index. The upside is uncapped and leveraged at a rate of 1.35 times. There is a 25% buffer on the downside with a 1.333 times multiple below that threshold.

The second deal was a more complex structure linked to a single stock.

Barclays Bank plc priced $37 million of 8% notes due Oct. 28, 2015 linked to the common stock of Twitter, Inc.

The structure has three strikes: a lower strike price at 82.5% of the initial price, a middle strike price at 114.5% and an upper strike price at 123.75%. Interest is paid monthly.

If the final share price is less than the 82.5% lower strike price, the payout at maturity will be 72% of the initial price. If it is between the lower strike and the 114.5% middle strike, the payout will be 87.34% of the final share price. If the final share price is between the middle and upper strikes, investors will receive par. Finally, above the 123.75% upper strike, the payout is par plus 0.65% for every 1% in excess of the strike.

“It looks like a kind of exchangeable where the investor gets about 72% principal protection at the one-year maturity – subject to Barclays’ credit risk, of course – with different layers of participation if the stock price is above 82.5% of spot. It was probably done for investors who like Twitter but want interest income, 8% here, some protection, and they get 72% and some participation, which above the upper strike is 65%,” the sellsider said.

Finally, Goldman Sachs Group, Inc. priced an additional $25 million principal amount of 0% notes due Dec. 30, 2014 linked to the Topix index, bringing the total size of this tracker-type product to $75 million.

Goldman Sachs was the top agent last week with $85 million in five deals, or 17.91% of the total. It was followed by JPMorgan and BofA Merrill Lynch.

“As we’ve just had some volatility, people find prices attractive.” – A distributor

“Maybe the idea is that hopefully it will lead to bigger sizes later.” – A sellsider on issues of less than $1 million

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