Issuance nearly triples to $1.77 billion; increase driven by monthly cycle, not world events

By Emma Trincal

New York, March 2 - Volume nearly tripled in the short and last week of February. Sources attributed the surge to cyclical factors rather than the oil fears that rattled the markets as a result of the Libyan revolt.

"This has nothing to do with geopolitical events," a structurer said. "It's just that activity is usually busier in the first part of the year than in the second part. It's just the cyclical nature of the business."

Agents sold $1.77 billion in the week, which began Tuesday due to Presidents Day, versus $644 million the week before.

The number of deals also skyrocketed to 441 from 287, according to data compiled by Prospect News. There were no notably big exchange-traded notes issued in either week.

Volatility and size

Sources often attribute issuance volume surges to a spike in volatility because favorable pricing conditions allow products that short volatility such as reverse convertibles to offer attractive coupons. And with geopolitical uncertainty, volatility should have been up last week, not down, sources said.

But the CBOE Volatility index, or VIX, fell toward midweek after a spike earlier on. Overall, the VIX was down 7.6% for the week.

"When Saudi Arabia rose their production levels, they appeased investors' worried about supply disruption," a New York sellsider said. "It dissipated fears."

Yet the VIX remains at elevated levels not seen since December, he said.

"The high issuance volume is strange. You would think with oil prices skyrocketing, people would be risk-averse.

"Honestly I was surprised by those levels. I would have expected to see volume fall.

"It's obviously due to the end-of-the month cycle. A three-fold increase is not atypical. In the first week, the second week, the third week, people do nothing. Then all of a sudden they collect orders."

Last week accounted for nearly half of the $3.65 billion sold from Feb. 1 to Feb. 25. Yet compared to the $6.56 billion issued during the same period in January, February remained weak, according to data compiled by Prospect News.

Results varied from bank to bank.

"We had a much stronger February than we had a January. Our numbers do not reflect that," the structurer said.

Investors' confidence

Another factor behind the healthy pace of sales, sources said, was the overall bullishness in the equity markets.

"The markets have been doing well," the structurer said. "We're seeing a bit more in notes volume. People are getting more confident with principal at risk," he said, adding that "there is still a large demand for protected [certificates of deposits]."

The risk appetite trend was reflected in the prevalence of leveraged deals with no principal protection, which neared a third of the overall volume.

Agents sold 22 deals in this structure type totaling $525 million, or 30% of the total. It was the most popular structure used last week.

Some sources attributed the high use of leverage to pricing factors as leverage becomes cheaper to structure when volatility declines.

But for others, investors' sentiment explained the bid on leveraged notes.

"When markets do well, people are more inclined to choose products that have principal at risk," the structurer said.

"They're more confident. They're looking for performance over protection."

But some sources believe that the trend is a cause for concern, saying that the impact of rising oil prices will be negative on stocks.

"People are crazy to use leverage right now. Oil prices are surging. At those levels, it's extremely risky," the sellsider said.

Large reverse convertibles

Reverse convertibles were the second most popular structure with $278 million sold last week versus $92 million the week before. The number of deals augmented as well to 82 from 23.

"This is business as usual for reverse convertibles. It happens at the end of each month," the sellsider said.

Morgan Stanley priced two exceptionally large deals in this category.

The first one was a $68 million offering of Equity LinKed Securities due Aug. 25, 2011 linked to Freeport-McMoRan Copper & Gold Inc.

The other deal was $54 million of was Equity LinKed Securities linked to Wells Fargo & Co. with the same maturity date.

Top deals

In general, the number of large deals was greater last week than the week before. Agents priced 51 deals over $10 million, versus 13 during the preceding week. Eight deals over $50 million sold last week, compared with three the week before.

The top offering came from Citigroup Funding Inc., which priced $100 million of 8% synthetic buy-write notes due March 7, 2012 linked to the common stock of Wells Fargo. The structure gave buyers the option to receive the payout in shares or cash, a feature that was part of what made the offering appealing to investors, the sellsider noted.

The bullish view on energy was evidenced by the size of the second top deal of the week.

AB Svensk Exportkredit priced $73.63 million of 0% Accelerated Return Notes due April 27, 2012 linked to the Energy Select Sector index. Merrill Lynch was the underwriter. The structure involved a leverage factor of three, a cap of 18.75% and no downside protection.

Equity as always was the dominant underlying, with $1.22 billion of notes linked to this asset class, or 69% of the total.

Commodities totaled $134 million sold in 10 deals, or 7.5% of the volume. Rates deals amounted to 7.7% of the issuance with $136 million. In this last category, JPMorgan Chase & Co. priced the third-largest deal with $71.23 million of fixed-to-floating notes due Feb. 25, 2021 linked to the Consumer Price Index.

Merrill Lynch led in the league table with the sale of a third of the volume, or $575 million in 22 deals. It was followed by JPMorgan with $291 million, or 16.5% of the total. UBS was third with $221 million amounting to 12.5%.

The week before, the top agent had been JPMorgan, followed by UBS and Citigroup.

"This has nothing to do with geopolitical events." - A structurer

"People are crazy to use leverage right now." - A New York sellsider

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