April volume is disappointing so far despite a strong second week, sellsiders say

By Emma Trincal

New York, April 18 - Volume slowed down in the first half of April compared to March and a year ago, according to data compiled by Prospect News. The data does not incorporate exchange-traded notes.

Two asset classes, rates and single stocks, fared better in terms of market share while reverse convertible products appeared to consolidate their recovery.

Volume more than doubled in the week ended Friday from the week before to $451 million in 135 deals from $206 million in 95 deals.

However, the $656 million sold month to date is a 40% decline from the $1.1 billion priced in the first half of February, the data shows.

Compared to a year ago, the first two weeks of April are a 44% decline. Agents priced $1.16 billion during the first half of April 2011.

Quiet April

"It's very quiet. March saw a pickup, but since then, April has not been great," a market participant said.

According to Prospect News' data, agents sold $2.9 billion in January, $3.1 billion in February and $4.1 billion in March.

Volume during the last week of the month has always been the determining factor for the strength of any given month. In March, for instance, sales between March 26 and March 30 made for 53% of the total monthly volume.

Even if the same rate applied this month, however, April sales - with a little bit over $650 million sold in the first half - point to a lackluster volume, the market participant noted.

"You had the holidays, the taxes and a few rates deals. But we're not in a very active market," he said.

A sellsider said that he noticed a slowdown compared to 2011 but not for this year so far.

"Volume has leveled off at a lower level. I see that from last year but not from last month. It's been rather steady for us for the last three months," this sellsider said.

To be sure, sales vary among issuers, but overall the year-to-date volume is down 27% from last year. Agents have sold $10.78 billion in 2,389 deals year to date versus $14.77 billion in 1,771 offerings in the first three and a half months of last year.

"I agree that since the last few weeks, it looks like people are less willing to commit. The eurozone uncertainty is certainly a concern," the sellsider noted.

Last week's equity market was characterized by some continued turbulence as investors began to focus on the Spanish debt auction.

"Just after Greece and Italy, Spain is the next one to have their own problem, and people are saying 'Oh no! Here we go again!' I think it makes them hesitant to enter the market. They want to have more assurance that the market is not going to shift in the wrong direction," he said.

Rates

One market trend last week was the pricing of five rates-linked notes, including the top offering, which gave this asset class 18% of the volume with $80 million.

No such deals were priced the week before, according to data compiled by Prospect News.

Prospect News does not include a more plain-vanilla type of rates products, which it calls structured coupons. Those include step-up notes, step-down notes, fixed-to-floating notes and capped floaters.

"Rates are so low, anytime you can pick up 3% or 3½%, people are jumping on it frantically," the market participant said.

The top offering last week was Morgan Stanley's $40 million of senior floating-rate notes due April 13, 2014 linked to the two-year Constant Maturity Treasury rate. The coupon is the two-year CMT rate plus 125 basis points, with a minimum rate of 2%. Interest is payable monthly. The payout at maturity will be par.

Morgan Stanley & Co. LLC was the agent, and Morgan Stanley Smith Barney LLC was in charge of distribution.

"Rates sell because they've been successful trades," the sellsider said.

"It's one of the biggest products within our system. We do a lot of range accrual types of structures. People buy them for the yield they can produce."

Some macroeconomic factors may also drive investor interest, he noted.

"I think people realize that the Fed will keep rates low for quite some time. Our own Federal debt is obviously expanding and is structured very short term. Having to continuously roll the debt that we have, if short-term rates were to go up significantly, it would have a very negative impact on the current deficit. Bernanke is doing whatever he can to keep that from being an issue. However, he can only do that for so long."

Another notable rate deal - and the No. 5 issue in size - was brought to market by Goldman Sachs Group, Inc. It priced $25.62 million of 15-year callable quarterly CMS spread notes due April 20, 2027 linked to the 30-year Constant Maturity Swap Rate and the two-year CMS rate.

Interest is 9% during the first year. After the first year, the interest rate will be four times the spread of the 30-year CMS rate over the two-year CMS rate, subject to a maximum rate of 10% and a minimum rate of zero.

New player

Another development last week was the emergence of a relatively new name in the market, a Canadian bank rated AA- by Standard & Poor's. Bank of Nova Scotia priced $27.29 million of 0% series A participation notes due May 17, 2013 linked to the Topix index. It was the third largest deal last week.

Scotia Capital (USA) Inc., the bank's broker-dealer arm in the United States, was involved in the distribution with Goldman Sachs & Co. as dealer.

The notes priced at 100.9% of par. The payout at maturity will be par plus the index return with full exposure to losses.

"I haven't seen Scotia, but I can understand why Goldman would be partnering with them," the sellsider said.

"I think Morgan Stanley is doing a similar thing with Lloyds. They'll be coming up with a dual range accrual this month. A lot of investors have too much concentration and they're looking for diversification."

"Scotia so far has been invisible," the market participant said. "It's possible that Goldman would be looking for new issuers. They are already using Royal Bank of Canada. It's just like Bank of America using Barclays. They're probably using the name for credit diversification since they lost Eksportfinans."

"A new name is always good. Scotia does not underwrite it, but they probably want to sell the note completely," an industry source said.

Goldman Sachs issued a very similar deal: $35.16 million of 0% equity index-linked notes due May 17, 2013 linked to the Topix. The notes priced at a discount of 99.5% of par. It was the second largest offering last week.

Goldman Sachs was the top agent last week pricing $120 million in 14 deals, or 26.73% of the total. It was followed by JPMorgan and Bank of America.

"Rates are so low, anytime you can pick up 3% or 3½%, people are jumping on it frantically." - A market participant

"A new name is always good." - An industry source on Bank of Nova Scotia's entry into the market

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