Volume falls 20% to $439 million as debt crises uncertainty mounts, summer runs its course

By Emma Trincal

New York, July 27 - Volume continued to slide last week in a slowdown attributed to the dog days of summer, the double debt crises and to some extent regulatory scrutiny weighing on stock deals, sources said.

Equity indexes surged while stock-linked deals tumbled and leveraged deals prevailed over other structures, according to data compiled by Prospect News.

Issuance volume fell 20% last week compared to the week before. Issuers sold $439 million in the week ended Friday versus $547 million during the prior week. These figures do not include exchange-traded notes.

For the month to date, volume retreated too. Issuance from July 1 through July 23 was $1.44 billion, a 31.5% decline from the $2 billion issued during the same period of June.

Volume is up 10.5% year to date, however, at $24.88 billion, compared with $22.53 billion in 2010.

Double whammy

"I've seen a slowdown since June. Perhaps people are simply going on vacation and there is nothing more to it," a market participant said.

"Seeing a slowdown in summer is not unusual. I've seen it many times before.

"People go away. They put off making investment decisions."

A sellsider said that summer is only part of the picture.

"It's a combination of the summer and the uncertainty with the debt crisis that's going on," this sellsider said.

"That's what creates fear with clients. And that's why we're not seeing clear trends.

"Both the debt crisis in Europe and the U.S. debt ceiling impasse are weighing on issuance. People are waiting to see how it will all play out."

Index boost

In a reverse from the week before, equity index-linked notes issuance strongly picked up last week, increasing 154% to $208 million from $82 million the week before.

Concurrently, single-stock deals collapsed, falling by two-thirds to $106 million from $316 million during the prior week.

This trend also contradicted the pattern of the entire month to date, which saw stock deals augment by 22% to $561 million while indexes declined by 50% to $445 million during that time.

But last week was different sources, noted.

"Last week, everyone was focusing on the debt ceiling," the sellsider said.

"Anytime you see macroeconomic issues taking precedence and investors worrying about the headlines, you'll see indexes gaining more traction.

"When people start to feel more comfortable with the direction of the market, they may go back to stocks."

The market participant said that the appeal of indexes has to do with the presumed lower volatility of the indexes.

"People take solace in underlying equity indexes because if the market takes a hit, the broad diversification of the index is likely to reduce risk," he said.

Rally

But part of the renewed interest in indexes may also have to do with some hurdles that are currently affecting stock deals, those sources noted.

They cited last week's rally and some of the headline risks associated with the sale of reverse convertibles as some of the factors that are hampering issuance of single-stock-linked products.

The market was up last week. The S&P 500 gained 3.4%, and the VIX index, which measures implied volatility on S&P options, fell more than 16% from 20.95 on Monday, its highest level in more than a month, to 17.52.

"With the rally, some of the reverse convertibles may not have been printed because the economics of the structure weren't there," the market participant said.

"If you talk about an 8% reverse convertible on a six month and get back to the investors with a 7.5% coupon, you may not have a deal anymore," he said.

When the market rallies, volatility declines, which makes the pricing of reverse convertibles less attractive because those deals are based on the sale of volatility in order to maximize the coupon offered to investors, he explained.

Under the radar

Another factor that may dampen issuance of stock-linked notes, according to sources, is the decline in reverse convertible issuance. Last week saw only $46 million of such structures in 14 deals.

Year to date, reverse convertibles have amounted to 14% of the total non-ETN issuance volume, compared with 18% during the same time in 2010, according to data compiled by Prospect News.

In terms of number of deals, 53% of all the non-ETN offerings last year were reverse convertibles. This year, only 37% of the deals fall into that category.

Finally, reverse convertibles amounted to 29% of all equity products last year, while this year, this number has dropped to 21%.

For some, regulators' scrutiny of the sales of reverse convertibles has a lot to do with the current slump.

Firms such as UBS, Morgan Stanley and Ameriprise are being investigated by regulators over those products, according to news reports, while others, such as Santander Securities, received fines in connection with the sales of these structures, according to the Financial Industry Regulatory Authority.

"Since reverse convertibles have become the focus of Finra, a lot of people want to limit their available offerings," said the market participant.

"It affects the entire advisory community. The compliance and legal departments within broker-dealers are starting to speak up and tell brokers to refrain from selling reverse convertibles.

"The more headlines those products get, the more you'll see a decline in purchases."

For the sellsider, the halt in reverse convertibles may just be temporary and may not have catastrophic implications.

"Education around those products has always been limited," he said.

"In the past, those notes were sold as fixed-income products while they really are equity-based. If that barrier breaches, you lose and you own the stock.

"The regulatory scrutiny has forced advisers to understand what they're selling. I think it's going to be beneficial for everyone."

The most popular structure last week was leverage, which is typically associated with index products.

Leveraged products accounted to a third of the total volume, while reverse convertibles made for only 10% of the total and autocallable notes for less than 8%.

Plain vanilla best-sellers

Among the top six deals, all were equity index based and four used leverage.

Goldman Sachs Group, Inc. topped the list with its $53.41 million offering of 0% index-linked trigger notes due Aug. 8, 2012 linked to the S&P 500 index. A trigger event will occur if the index closes below 80% of its initial level during the life of the notes. If a trigger event occurs, the payout at maturity will be par plus the index return. In the absence of a trigger event, investors will receive at maturity par plus the greater of the index return and a contingent minimum return of 3%.

Goldman Sachs also priced the No. 3 offering: $42.15 million of 0% leveraged index-linked notes linked to the S&P 500 featuring triple leverage without downside protection and a 21.75% cap.

Another sizable offering - the second largest one for the week - was brought by Deutsche Bank AG, London Branch, which sold $50 million of 0% S&P plus tracker notes due Aug. 23, 2013 linked to a basket of indexes that includes the S&P 500 Total Return index and the Deutsche Bank Equity Mean Reversion Alpha index (Emerald).

"Investors and advisers have identified opportunities using a combination of the S&P 500 index and mean reversion indexes," the market participant said.

"This is what the Deutsche Bank Emerald deal is. This structure has become very popular because investors use it to generate alpha," he said.

The fourth offering gives investors exposure to Asian indexes and equities. Credit Suisse AG, Nassau Branch priced $31.83 million of 0% buffered return enhanced notes due Aug. 8, 2012 linked to five non-equally weighted Asian indexes and their related currencies. The basket consisted of the Hang Seng China Enterprises index, the Kospi 200 index, the MSCI Taiwan index, the Hang Seng index and the MSCI Singapore index.

The two other top deals were linked to the Russell 2000 (Wells Fargo & Co.'s $26.75 million of enhanced growth securities) and to the Topix index (Deutsche Bank's $22 million of leveraged notes).

UBS' IPO ETN

On the exchange-traded notes front - not included in the above figures - UBS AG, London Branch introduced a new product with a pair of exchange-traded access securities: $10 million of 0% Internet IPO ETracs due July 19, 2041 linked to the UBS Internet IPO index and $10 million of the same product with a two-times leverage factor.

Created this month, the underlying index is designed to measure the performance of internet-related companies listed on the New York Stock Exchange or Nasdaq that have gone public within the last three years.

JPMorgan remained the top agent last week with 14 deals totaling $133 million, or 30.28% of the volume. It was followed by Barclays with $69 million in nine deals and UBS pricing 20 deals for a total of $65 million.

JPMorgan topped the league tables for the week before as well as for the month to date.

"Perhaps people are simply going on vacation and there is nothing more to it." - A market participant

"The regulatory scrutiny has forced advisers to understand what they're selling." - A sellsider

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