Volume slows down to $632 million amid Libyan crisis, market uncertainty, emerging bearishness

By Emma Trincal

New York, March 9 - Volume fell 70% to $632 million last week amid the Middle East turmoil as investors turned more cautious, seeking protected structures, moving away from stock deals and bidding on commodities for hedges, according to sources as well as preliminary data compiled by Prospect News.

The number of deals also declined to 83 last week from 224 during the week ended Feb. 25. While a strong slowdown in issuance is normal at the beginning of a month, sources said that market factors - in particular, rising oil prices - dampened volume last week.

"The stuff going on in Libya has spooked investors and has slowed down market activity," a New York sellsider said.

Buffers wanted

The top structure of the week was leverage with partial downside protection. This structure amounted to $168 million, or 27% of the total, priced in 14 deals. The preference for buffering was a reverse of the past few weeks when data showed that leverage with no protection was the dominant structure.

"Investors are definitely more skittish than they were two weeks ago. That would explain the increased demand for buffers," the sellsider said.

The top offering in this structure type - and the second-largest deal for the week - came from Goldman Sachs Group, Inc., which priced $69.41 million of 0% leveraged buffered index-linked notes due July 3, 2013 linked to the MSCI EAFE index. The deal offered a 125% participation rate and a 15% buffer.

Market uncertainty

Thomas E. Livingston, director of structured products at Halliday Financial Group, said that several factors explained the relatively low pace of issuance last week.

"Investors are cautious, not necessarily bearish. People are taking a little bit of money off the table. They're being more defensive," he said.

"You had a big run in equity prices, a big run in commodity prices. Quite frankly, there hasn't been much talk on anything you can be bullish on. Gold is probably the only bullish story."

He predicted that some asset classes, such as interest rates-linked notes, may be vulnerable to some of the Federal Reserve Board's anticipated policy changes, in particular, the eventual ending of the effort known as Quantitative Easing round two, or QE2.

"People are talking about QE2 ending. Interest rates type of issuance is likely to be down for a while," Livingston said.

Last week's market was flat as measured by the S&P 500. On the other hand, volatility, as measured by the VIX index, gained 3.5%. Yet, Livingston said that volatility moves are unclear, which is a factor that renders investors more hesitant to step into the market.

"As you see a dramatic swing in volatility one way or the other, issuance will pick up," he predicted.

Finally, rising energy prices added to the overall uncertainty, he noted.

"With what's going on in the Middle East, there's a lot of talk and not a lot of information. Some of these issues are quite dramatic. Unless we get more clarity, issuance is going to be on hold for a while. If what happened in Egypt happens in Saudi Arabia, it will have a dramatic impact on oil prices and it would not be good for equity prices," he said.

Index appeal

Another trend seen last week was the prevalence of equity-linked notes compared to single-stock offerings, which respectively amounted to 56% and 9.5% of the total. During the prior week, equity deals accounted for 32% of the issuance total while stocks represented 26%.

While the monthly cycle partly explains the weakening of stock-based issuance, sources also attributed the strong bid for equity index-linked notes to market factors.

"The increased demand for indices is indicative of more risk aversion. Investors are trying to reduce risk through diversification," Livingston said.

Agents last week priced 24 reverse convertible deals totaling $47 million, or 7.5% of the total. Only two autocallable deals were sold for a total of $4 million.

Demand for commodities

Another market trend was the strong bid for commodities. This asset class as a percentage of the volume went up to 28% from 19%. Agents priced $177 million of commodity-linked notes in nine deals.

"The surge in commodity issuance is really driven by the increase in the price of oil," the sellsider said.

Two among the top five deals of the week were commodity based, according to data compiled by Prospect News.

The first one - which also was the No. 1 deal for the week in size - was AB Svensk Exportkredit's $87.5 million add-on of 0% Elements due Oct. 24, 2022 linked to the Rogers International Commodity Index - Total Return via Nuveen Investments, LLC and Merrill Lynch, Pierce, Fenner & Smith Inc.

The notes settled in 21 tranches between Jan. 19 and Feb. 28. In total, the issuer has priced $923 million principal amount of the notes in 85 tranches at prices ranging from 53.494 to 137.809. The original $4 million of the notes priced at par of $10 on Oct. 17, 2007.

The other big commodity offering - and the fifth-largest deal of the week - was Goldman Sachs' additional $30 million of 0% GS Connect S&P GSCI Enhanced Commodity Total Return Strategy index exchange-traded notes due May 8, 2037 linked to the S&P GSCI Enhanced Commodity Index Total Return. The issuer has now priced $184.23 million of the notes in six tranches at prices ranging from 83.1352 to 120.54. The original $57.38 million of notes priced at par on May 3, 2007.

JPMorgan led the week with $195 million sold in 22 deals for 31% of the total. It was followed by Goldman Sachs with $158 million in 10 deals. Nuveen was the No. 3 agent with $98 million in three deals.

"Investors are definitely more skittish than they were two weeks ago." - A New York sellsider

"Unless we get more clarity, issuance is going to be on hold for a while." - Thomas E. Livingston, director of structured products at Halliday Financial Group

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