Bullish momentum continues to support volume; issuance up 1.53% for year

By Emma Trincal

New York, Aug. 7 - The week ended Friday was at the junction of two months, but volume held on relatively well, sources said, pointing to the fact that the month of July really closed during the prior week.

Agents sold $679 million last week, compared with $1.5 billion the week before, according to data compiled by Prospect News. The number of deals fell to 151 from 211.

However, the hybrid week - which included the last three days of July and the first two of August - did fare well compared to other weeks this year, ranking No. 12 in volume with 3% of the annual notional. The best week this year was the week of June 23 with $1.85 billion, or 8.32% of the yearly volume, according to the data.

"The regular calendar closed the previous week [ended July 26] because you had T+3 falling at the very end of the month. That's typical. So looking at some of the big deals of last week, I'm going to say it was probably some one-offs or perhaps deals that had been worked on previously," said Guy Gregoire, former syndicate manager at Pershing.

Year up

For the year to date as of Aug. 3, volume rose by 1.53% to $22.24 billion from $21.91 billion last year.

The number of deals dropped 4% to 4,716 from 4,914 during the same time.

"We've seen big tickets at the beginning of the month, but the volume intra-month is not fantastic. There have been a lot of little deals, but volume comes from bigger products like steepeners, which are responsible for a lot of the issuance pickup," a sellsider said.

Volatility levels still don't explain the sustained demand for structured notes, said Tom May, partner at Catley Lakeman Securities, who cites the bullish momentum as a more likely cause.

"Volatility hasn't been picking up. The longer-dated volatility has not picked up as much as you would think," May said.

"A lot of traditional buyers of volatility - banks, hedge funds, big insurance companies - are not buying right now. They're reluctant to buy volatility at elevated levels. This has kept a lid on longer-dated volatility.

"And yet, despite the fact that terms are not as good as they were two years ago, stock prices have been going up, people have done well, they've been called in the last couple of years, you haven't seen any big negative credit event, and so people are happy to go back.

"The market is up. People feel more confident."

On Thursday, the S&P 500 moved above the 1,700 level just prior to the close, reaching another all-time high.

Dual directional, commodities

The largest deal last week was brought to market by Morgan Stanley, which priced $51.1 million of 0% dual directional trigger Performance Leveraged Upside Securities due July 31, 2018 linked to the S&P 500 index. The deal featured a 1.1 times leverage factor with no cap on the upside. On the downside, if the index finished above the 65% trigger level, investors would receive the absolute value of the index return. Otherwise, they would be exposed to losses from the initial index level.

Commodities surged last week by nearly two-fold to $85 million, or 12.54% of the total, an unusual move driven in part by two oil-based deals in excess of $20 million.

The top commodities deal and the No. 2 in size last week was JPMorgan Chase & Co.'s $41.68 million of 0% capped market plus notes due Aug. 13, 2014 linked to a Brent crude oil futures contract. If the price of Brent finished at or above 80% of the initial price, the payout at maturity was par plus the greater of the Brent return and the 4.6% contingent minimum return, up to a maximum return of 15%. Otherwise, investors would be fully exposed to losses.

Separately, Barclays Bank plc priced $22.75 million of 0% contingent buffer enhanced notes due Aug. 13, 2014 linked to WTI crude oil. It was the No. 7 deal of the week. JPMorgan was the agent.

"It's a play on the oil curve. The curve has changed shape. It was in contango; now it's in backwardation. It happened about four weeks ago. That gives you a little bit more to work with in terms of pricing," the sellsider said.

But commodities remain out of favor.

For the year, this asset class has declined by 30% and represents about 5.5% of the total issued volume versus nearly 8% last year, according to Prospect News data.

"Investors in commodities notes still have the memory of what happened to the Dow Jones UBS index. They may have bought their notes three years ago and the products have not matured yet. They are pretty nervous right now," the sellsider said.

Since its last peak in April 2011, the Dow Jones - UBS Commodity index has lost 30%. It is down 20% over the past two years.

Yield generators

Autocallable reverse convertibles represented the most popular structure last week, accounting for nearly a quarter, or 24%, of the volume sold in 50 deals.

The third largest deal of the week, which fell into that category, was JPMorgan's $33.65 million of contingent income autocallable securities due Aug. 5, 2014 linked to Las Vegas Sands Corp. shares.

The notes paid a contingent quarterly coupon of 2.5875%, equivalent to 10.35% per year, if Las Vegas Sands stock closed at or above a 75% downside threshold level on any quarterly observation date. If on that date the stock was at or above its initial value, the notes were called at par plus the contingent coupon. If the notes were not called and Las Vegas Sands stock finished at or above the 75% trigger level, the payout at maturity would be par plus the contingent payment. Otherwise, investors would receive a number of shares of Las Vegas Sands stock or their cash value, hence being exposed to the full loss.

The appeal of autocallable reverse convertibles was directly related to the surge in single-stock-linked notes this year, sources said, commenting on the year-to-date figures.

The volume of single-stock-linked notes grew by 15% this year ,and baskets of stocks saw their size increase by 51%, according to data compiled by Prospect News.

Those were the two asset classes, with the exception of rates, to see an increase. Issuance of equity-linked products was stagnate at $12.26 billion this year, compared to $12.21 billion last year, keeping approximately the same 55% market share as last year.

Equity as a whole is up nearly 5% this year to $17.61 billion. It represents 79.17% of the total volume versus 76.66% last year.

"Stocks are up because that's the way you get the coupon," the sellsider said.

"People want the yield, and they want a bigger cushion. You need the volatility of a single stock in order to do that," he added.

"Single stocks tend to be more of a bullish play," Gregoire said.

Reinventing revcons

Simultaneously, the most impressive growth in terms of structures comes from autocallable reverse convertibles, whose volume this year nearly doubled to $3.69 billion from $1.91 billion. The number of deals rose by 36% to 1,383 from 1,014 last year. This structure type is now the second most important one after leverage, according to the data.

"I think it's a ripple effect of the reverse convertible structure," Gregoire said.

"Given the negative publicity around the pure reverse convertibles, I think that's how the marketplace has sought to come up with a different solution, to the extent that this structure is easier to understand, easier to explain, more targeted. If the regulators are concerned with some of the optically high coupons, this is more like an equity-like substitute."

Rates for the year represent the fastest-growing asset class even if the size of these deals remains small as a percentage of the total sales.

Rate-linked notes are up nearly 200% to $855 million, or 3.84% of the total, from $289 million, or 1.32%, of the market last year, according to the data.

"We had a fairly quiet year last year, so in comparison we're looking good this year," the sellsider said.

"The curve is steepening. There are talks about the Fed tapering off its bond purchases.

"It's a very compelling story if the back-end is selling off.

"The curve has steepened, but on a forward basis, pricing still looks attractive."

The top agent last week was UBS with the pricing of 56 deals totaling $164 million, or 24% of the volume.

This agent's deals were small in size except for four in the $10 million and up size range. The largest was a $22.2 million offering of trigger performance securities linked to the Euro Stoxx 50 index sold on the behalf of Deutsche Bank AG, London Branch.

The No. 2 agent was Morgan Stanley followed by JPMorgan.

"Stocks are up because that's the way you get the coupon." - A sellsider

"I think it's a ripple effect of the reverse convertible structure." - Guy Gregoire, former syndicate manager at Pershing, on the growth of autocallable reverse convertibles

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