April begins with lower volume; time of month, holiday, sell-off put brakes on, sources say

By Emma Trincal

New York, April 11 - The shortened week, the sudden market sell-off and the start of the month were not conducive to a strong start in April, sources said. But it's too early in the month to draw conclusions, they added.

Agents sold $206 million in 95 deals last week, according to data compiled by Prospect News. The bond market closed early on the last day of the week for Good Friday, and the stock market was closed. Compared to $518 million sold in the same time in March, sales of non-exchange-traded notes fell by 61% month over month.

Agents so far this year have priced $10.32 billion as of Thursday, down 27% from the same period last year, the data shows.

On Tuesday, the Structured Products Association held its 8th Annual Distribution Conference in New York, but a sellsider downplayed the impact of the event on business activity.

"The desks are fairly well staffed. I don't think the SPA conference had anything to do with it," he said.

"Good Friday definitely had an impact, but perhaps the biggest factor was the sell-off."

Correction

The S&P 500 index reached it year-to-date high on Monday before falling for the rest of the week and the early part of this week.

"This sell-off had a negative impact on sentiment," the sellsider said. "People are more likely to wait.

"And it's also really the beginning of the month."

Issuance for the first week of April fell by about 60% compared to the same period last year.

"We've been noticing that issuance has been slower," a market participant said.

He agreed that the market decline last week was a blow to firms, forcing some issuers to retreat.

"With the strong sell-off, issuers have been hesitant to bring new issues out. Everyone is loaded with inventory. There's some hesitancy to print more. The market tumbled immediately after the Fed announcement [on Wednesday]. I think the dealer community was whipsawed. People are waiting for the end of the pullback," he said.

Deals were also smaller in size compared to last month. There was only one deal over $20 million that priced last week, compared with six in the first week of March.

JPMorgan tops

JPMorgan was the No. 1 agent last week. It priced 25% of the market volume with $51 million in eight deals.

"They do their deals weekly. They're pretty consistent," the sellsider said. "Their volume depends on a series of factors: what the market sentiment is, what their research is telling them, the notes that are maturing because that's where clients tend to reinvest."

The top offering was JPMorgan Chase & Co.'s $21.38 million of 0% notes due April 24, 2013 linked to a weighted basket of three international stock indexes. The basket included the Euro Stoxx 50 index with a 55% weight, the Topix index with a 23% weight and the FTSE 100 index with a 22% weight.

The two-times leverage factor, the 17.5% upside cap and the 10% buffer are all applied at the basket component level. A 1.111 times downside leverage factor is also applied at that level.

HSBC USA Inc. issued an $11.19 million offering of the same deal, the No. 4 transaction of the week. JPMorgan acted as the dealer.

"They sold the same product under two different names," the sellsider said.

"It could be a rollover, or it could be that clients liked the structure but wanted to do it with another credit if they're loaded with JPMorgan paper. So they did it with another issuer, in this case HSBC."

JPMorgan was also the agent for the second top deal, Barclays Bank plc's $14.43 million of 0% capped market plus notes due April 17, 2013 linked to palladium.

It is a knock-out product with an 80% barrier, a contingent minimum return of 7.55% and a maximum return of 17%. If the barrier is breached, investors are exposed to the commodity price decline from its initial level.

Deutsche Bank AG, London Branch priced the third largest offering, $12.33 million of currency-linked notes due April 17, 2013 linked to the performance of a basket including the Korean won, the Russian ruble and the Mexican peso against the dollar.

It is also a knock-out note with an 85% barrier and a 6.55% contingent minimum return. Again, JPMorgan was the agent.

"Research drives everything as far as sales," the market participant said, commenting on those top deals, most of which were marketed by JPMorgan.

"The market could be down, but if the house has a fairly strong conviction on a name or investment idea, it will drive demand.

"I think Barclay's palladium note and the Deutsche Bank product on currencies are probably also research driven," he said.

International exposure

One common thread among the top deals was international stock exposure, sources noted.

Goldman Sachs Group, Inc. for instance priced $10,622,000 of 0% leveraged buffered index fund-linked notes due April 11, 2016 tied to the iShares MSCI Emerging Markets index fund. The notes have a 121% participation rate and a 10% buffer with geared downside leverage.

"It's hard to find the motivation behind the deals that are popular, which last week had this international exposure theme," the market participant said.

"It could be because issuers are trying to use the correlations breakdown between some of the markets as pricing opportunities.

"The Asian market and the U.S. market show low levels of volatility. The VIX in the U.S. has been under 30 for the last couple of months. Volatility in Europe on the other hand is high.

"When you include Asian and U.S. benchmarks, you can price the options more efficiently by lowering the overall volatility. It helps with leverage as you're essentially buying a call spread.

"It can also be news driven. Some investors want exposure to Europe to pick the bottom. That's a more volatile play."

Leveraged notes with partial downside protection as well as knock-out deals were among the favorite structures with 28.5% and 28% of the volume, respectively, according to the data.

"There are popular structures," the market participant said.

"They give you a contingent protection or a buffer and on the upside, some leverage but capped or a digital return. These are low-volatility plays. It's based on the expectation that the market is going to be topping or moving range bound, so you're protecting some of the downside and you can monetize a small gain with some return enhancement feature."

Stocks

Compared to last month, reverse convertibles fared better than most structures, down only 4% month over month while almost all other types of structures declined sharply. Those products amounted to 30% of the total.

Single stocks month to month staged a strong comeback, doubling up in volume to $69 million from $35 million in the first week of March. They made for 33.5% of the total, more in percentage than equity indexes, which accounted for 29.75% of the total and declined from last month by 78%.

Talking about this relative strength seen with single-stock underlyings, the sellsider said, "It could be that reverse convertibles are done more frequently on the calendar than once a month. It's also research driven."

The search for yield may be a factor causing investors to look at reverse convertibles again, he noted.

"Yields have gone down. The five-year swap rates mid-March were at 1.45%. They're now at 1.17%. It could be that people are turning into reverse convertibles to get some kind of yield in the portfolio," he said.

The 65 stock-linked notes that priced last week remained very small in size, $1 million on average. The largest one was JPMorgan's $6.81 million of one-year autocallable notes linked to Anadarko Petroleum Corp.

"Good Friday definitely had an impact, but perhaps the biggest factor was the sell-off." - A sellsider

"Research drives everything as far as sales." - A market participant

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