Last week's volume on record as the second most feeble of the year as elections approach

By Emma Trincal

New York, Oct. 24 - As the election race nears its term, the structured products market continued to shrink. Last week's volume was the weakest on record this year after the first week of July, according to data compiled by Prospect News. Investors continued to flock to well-known values bidding on 21 Apple deals that hit the market last week. In terms of favored asset classes, stocks took over but commodities made a comeback scoring the top three slots in the list of the biggest deals.

During last week - the third of the month - agents priced $192 million, a 45% decline from $351 million sold the week before, according to preliminary data compiled by Prospect News.

It was the smallest weekly volume after the week of July 1, which saw the pricing of $113 million in 45 deals.

The decline observed on a month-to-date basis was 7%, with sales in the Oct. 1 to Oct. 20 period amounting to $1.05 billion versus $1.13 billion during the same period in September.

Issuance has fallen by 19% year over year to $28.75 billion this year to date from $35.52 billion last year.

Meanwhile the number of offerings increased to 6,906 from 5,970.

"Issuance in the last few months seems to have been slow," a sellsider said. "We have our own clues about why that might be the case.

"A lot of people are on the sidelines waiting for the election results. Once it's over, the uncertainty hopefully will be lifted."

Elections

Some sources noted that the gap in volume between the last week of the calendar and the rest of the month was widening.

"What wouldn't surprise me is that, as you get closer to the elections, outside of the regular end-of-the month calendar, nothing much is going to price. For October, most of the production is probably going to close this Friday," an industry source said.

"Some of that volume slowdown may be related to the proximity of the elections as well as the tightening of the elections," he added.

"If it was clear which way it's going to go, it would make people more comfortable to invest accordingly to what they think will happen in terms of policies."

"It may be difficult to speculate right now with all the different policy outcomes. We're talking rate forecasts, Fed forecasts, taxes etc. These things have big implications," he said.

Apple was the major theme last week as investors rushed into small reverse convertibles tied to the popular stock.

Single stock-linked notes accounted for 36% of the total, more than the market shares taken by equity indexes (31%), which is unusual, according to the data.

Agents sold $23.59 million in notes tied to Apple shares, or 12% of the total volume. Sixteen percent of the 114 deals that priced last week were tied to this security. The majority of those deals - nine of them - priced on Friday, a day marked by a technology selloff, which was precipitated by disappointing quarterly results from Google the day before after the close.

The pricing of those Apple-linked notes occurred just a few days prior to Apple's unveiling of its new iPad Mini tablet on Tuesday.

Apple frenzy

"Everybody was coming out with an Apple deal last week," the sellsider said.

"Some deals priced before the announcement. We passed on those. It's a little risky before a new product.

"But we saw them coming and we're sure there will be more to come this week because volatility is a little bit elevated."

Those deals were many but small in size. The largest one was Credit Suisse AG, Nassau Branch's $8,837,000 leveraged return deal distributed by JPMorgan. The smallest was a $100,000 offering sold and issued by UBS. Except for two deals, all these Apple-based notes were reverse convertibles. Aside from the Credit Suisse name, all the other deals were either issued by Barclays Bank plc or by UBS AG, London Branch.

"All Apple all the time," the industry source said.

"You may have a couple of things that helped. One was a selloff late last week in the interest rates market," he said.

The 10-year Treasury rate rose to 1.86% on Thursday from 1.70% Monday. The bond selloff was due to investors fearing that a Republican victory would interrupt the bond buying program implemented by the Fed with its three QE programs, sources said.

"Second the price of Apple dropped last week increasing the volatility," he added.

Volatility increased overall as well.

The VIX index rose Friday reaching 17, its best level in more than a month. Less-than-expected earnings and the option expiration on Friday contributed to the volatility spike.

"Rates went up and volatility rose, those two things combined may have made it easy to sell Apple products.

"Apple is such a widely recognized name it has become a bellwether of the market as much as the S&P, except that it's much more volatile than the S&P. It's almost in a way as if Apple had become a household benchmark in the news and that's what makes it such a popular underlying."

Apple's volatility was in evidence on Friday when the share price dropped to $609 from $632.

Apple volatility

"The spike down in Apple on Friday caused a 15.5% jump in implied volatility on its options, so it definitely affected it," said Joe Bell, a senior equity analyst at Schaeffer's Investment Research.

"The overall market was down quite a bit that day and technology stocks have lagged in recent weeks. Google also pre-announced a poor earnings report the day before, so tech stocks in general were weak. Apple was no exception and was down pretty big on Friday."

Suzi Hampson, structured products analyst at Future Value Consultants, said that the drop in price may have provided a good entry point.

"The implied volatility for the stock was at 29% approximately last week and is now at 31%," she said.

"Apple is one of the top stocks used for structured products in general. If there was a spike in issuance, it must be something else rather than necessarily the pricing. Volatility might be part of it. But it could simply be because people were looking to buy into that stock as the price dropped, not necessarily that they were getting better terms," she said.

Howard Simons, president of Rosewood Trading, also downplayed the role of volatility in Apple.

"I didn't see an unusual spike in vol. for Apple. There was a generalized technology selloff. Volatility tends to rise anyway during any stock market downturn especially for a stock as beheld as Apple.

"Friday's drop is nothing at all for Apple. It's normal noise," he said, adding that the multitude of Apple-linked notes issued last week could have simply been issuers responding to a growing appetite for the name.

Another factor makes Apple a favorite for income-seekers and conservative investors, he noted.

"You really can't sell it. It's in most benchmarks. A lot of people forget about the implications of the indexes," he said.

"What any active fund can do in situations like that is to hold it while playing around with options. And that's probably what those notes are about."

Reverse convertibles combining a put sale and a call sale were the equivalent of being short a strangle in options, he said.

"You're trading sideways. This bid is income-driven," he said.

Commodities, top plays

Commodities regained favor last week totaling $57 million in six deals or nearly 30% of the total. The top largest offerings were commodities-based and linked to the price of gold.

The size of those top sales - in the $15 million range - was disappointing.

"That's not much," the sellsider said.

JPMorgan Chase & Co. priced $16.01 million of 0% capped contingent buffered notes due Oct. 31, 2013 linked to gold. If the final gold price was greater than the strike price, which was the gold price on the pricing date, the payout at maturity would be par plus the gain, subject to a maximum return of 14.5%. If the price of gold fell by up to 15%, the payout would be par. If the final gold price was less than the strike price by more than 15%, investors would be fully exposed to the decline.

J.P. Morgan Securities LLC was the agent.

The No. 2 deal was UBS' $14.04 million of 0% gold participation notes due Oct. 31, 2013 linked to the spot price of gold. The upside was unleveraged and capped at 14.2% while investors had an 85% barrier on the downside. JPMorgan was the placement agent.

The third offering was also a commodities play. It was Goldman Sachs Group, Inc.'s $14 million of floating-rate notes due Oct. 29, 2013 linked to the S&P GSCI Excess Return index.

The top agent was JPMorgan with $46 million sold in 15 deals, or 24% of the total for the week. It was followed by UBS and Goldman Sachs.

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