Europe clouds market sentiment, dampening new issue volume; equity investors rush to the exits

By Emma Trincal

New York, Oct. 26 - Structured product investors retreated from equity last week, pushing down multi-asset class issuance levels by nearly a third, according to data compiled by Prospect News.

Agents sold 95 deals excluding exchange-traded notes in the week ended Friday for a total of $551 million.

It was a 31.3% decline from the $801 million amount sold the week before in 147 offerings.

Equities pullback

Notes linked to equity fell as a percentage of the total, amounting to only 39% of the total, versus 61.5% the week before.

The equities asset class includes indexes, stocks, baskets of stocks and exchange-traded funds.

Equity levels are rarely below 50%, based on data compiled by Prospect News, and the 39% mark represents a significant low, especially for a week falling in the second half of the month.

Equity issuance volume fell to $215 million from $493 million, a 56.5% drop in volume week to week.

Equity index-linked notes felt the most pain, falling 66.7% to $141 million from $422 million. In market share, their decline was to 25.5% of the total volume from 66.5% in the prior week.

Stocks grew only 5.5% to $74 million from $70 million the week before.

Euro crisis

Global macroeconomic factors and the uncertainty over policymakers' ability to resolve the European debt crisis were to blame, according to sources.

"If you look at the outflows of equity mutual funds over the last couple of months, obviously people are still risk averse," said Bruce Kavanaugh, a distributor with Pacer Financial Inc., which concentrates its activity on the wholesale side of the ETN market.

"Clients and advisers are still waiting for more clarity on Europe.

"While we continue to see decent earnings from a fundamental basis in the U.S., Europe still clouds the picture."

The number of deals over $10 million in size fell last week to 13 from 21 the week before, according to data compiled by Prospect News, another sign pointing to the thinner market.

One exception in the equity asset class: deals linked to ETFs, which surged last week from $154 million to $231 million, making for 42% of the total volume, which is unusually high, according to data compiled by Prospect News.

A structurer said that the appetite for ETFs did not reflect a particular trend. Merely, it was the result of a few larger-sized deals tapping into this class of assets.

Three out of the top five deals that priced last week were based on ETFs, the data shows.

Timing the rebound

The market rallied last week, with the S&P 500 index up more than 2%.

But the structurer said that it was probably not enough to reverse the market sentiment, which, in his view, remains bearish as the lack of appetite for equity-linked notes seems to indicate.

"People are skeptical about the way the European governments are going to fix the crisis," he said.

"The market is completely driven by political factors, and nobody knows what's going to come out of these talks.

"There's been a rally in equities since the beginning of October. Don't ask me why.

"And people are reluctant to buy now as they expect a pullback in the markets.

"Either they're afraid or they don't want to miss the bounce back. So they're waiting."

Equities were not the only asset to decline.

Issues linked to commodities fell by 56% to $33 million last week from $75 million the week before.

"The euro zone crisis is dampening sentiment, making people bearish, and everything is correlated," the structurer said.

"Equities are pulling back, but commodities are pulling back too because everything moves together.

"Managing money is difficult for everyone right now."

Currency was one of the few asset classes, aside from equity ETFs, that did well last week.

Volume for foreign exchange-linked notes rose by six-fold to $66 million from $10 million, giving the asset class 12% of the market share last week.

A notable FX deal was Eksportfinans ASA's $27.07 million of 0% currency-linked notes due Nov. 27, 2012 linked to the performance of the Chinese renminbi relative to the dollar and sold by Goldman Sachs & Co.

In general, though, one of the main factors pushing down volume was the re-emergence of concerns over counterparty risk due to the European debt crisis that has a direct impact on banks, the structurer said.

"When you buy structured notes, you take banks' credit risk. People don't want to do that right now," he said.

On a monthly basis, though, volume held up from Oct. 1 to Oct. 21. Agents sold $1.84 billion in 352 deals during the period, up 38% from the same period last year when 421 deals closed for a total of $1.34 billion.

Volume year to date is up nearly 15% at $35.66 billion, compared to $31.05 billion last year.

Structures

Leveraged notes with partial downside protection remained the dominant structure last week, accounting for 37% of the total, on par with its 41% market share for the month.

The structure declined in volume for the week to $204 million from $386 million.

But on a monthly basis, investors rushed into those structures, buying $759 million, a nearly four-fold growth from last month when only $195 million of such deals priced.

Reverse convertibles continued their decline last week, down 48% to $28 million, on par with the monthly trend. This type of product fell by 37% in the month to date to $99 million from $156 million in September.

Autocallable notes picked up. However, they remained small in notional, with $45 million sold last week in seven deals versus $7 million the week before sold in just one offering.

Top deals

Goldman Sachs Group, Inc. priced the top deal with $90.41 million of 0% leveraged buffered index fund-linked notes due Nov. 5, 2012 tied to the iShares MSCI Emerging Markets index fund.

The payout at maturity will be two times any fund gain, capped at 24.3%. Investors benefit from a 10% buffer but are subject to a 1.1111% loss for each 1% drop beyond it.

HSBC USA Inc. priced the No. 2 offering with $63.4 million of 0% dual index upside notes due Nov. 7, 2012 linked to the S&P 500 index and the Euro Stoxx 50 index. JPMorgan was the agent.

The payout formula is the lesser of (a) the return of the S&P 500 index and (b) 10%, plus the greater of (a) the Euro Stoxx 50 return minus 6.35% and (b) zero. The notes are not principal protected.

The third largest deal was brought to market by Deutsche Bank AG, London Branch, which priced $49.13 million of 0% buffered return enhanced notes due Nov. 7, 2012 linked to the iShares MSCI Emerging Markets index fund. JPMorgan was the agent.

The payout at maturity will be double any increase in the ETF's share price, capped at 24.3%. If the share price falls by 10% or less, investors will receive par. Beyond that 10% buffer, they lose 1.1111% for every 1% drop.

The iShares MSCI Emerging Markets index fund is still popular among investors despite a sharp decline of 16.5% year to date, said Kavanaugh.

"You have to look at the continuous growth of those countries in terms of GDP, China, India and Brazil. ... That's where the growth will be in the next couple of years," he said.

The fourth largest deal, also tied to an ETF, came from UBS AG, London Branch.

The bank priced $38.44 million of 0% trigger autocallable optimization securities due Oct. 27, 2016 linked to the SPDR S&P 500 ETF Trust.

The annualized call return is 10.75%, and the observation dates occur quarterly. There is a 50% barrier on the downside for the payout at maturity.

Goldman Sachs topped the league tables last week with $205 million in 11 deals, or 37.1% of the market. It was followed by HSBC and by JPMorgan.

JPMorgan was the top agent the week before.

"Clients and advisers are still waiting for more clarity on Europe." - Bruce Kavanaugh, a distributor with Pacer Financial Inc.

"When you buy structured notes, you take banks' credit risk. People don't want to do that right now." - A structurer

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