Month starts slowly with sales at $283 million, but year-to-date growth is promising at 6.5%

By Emma Trincal

New York, Dec. 11 - Volume was modest last week at $283 million sold in 105 deals, but agents had their eyes on the total for 2013, which is showing an encouraging picture as the year nears its end. Issuance rose by 6.52% to $35.61 billion as of Dec. 7 from $33.43 billion during the same time last year, according to data compiled by Prospect News.

Volume was already up year over year by the end of November, but the trend has accelerated since then, probably due to more end-of-the-month deals being reported on the Securities and Exchange Commission website.

Bull momentum

"Issuance is picking up since the end of November partly because people feel more confident about the U.S. economy," said Jim Delaney, portfolio manager at Market Strategies Management.

"A clear sign of this was the good job report we had on Friday, reinforcing the view that the economy is starting to grow at a steadier pace, which will bring along the tapering of the QE program.

"Issuers want to push their deals before rates begin to rise. That's a strong incentive to bring deals to the market and to do it now.

"Just like people anticipated the general market to decline in 2013 or even go through a correction, which has not happened, people were pessimistic about this year's issuance in the structured notes market. It turns out the year is finishing up positive, which has a lot to do with renewed investor confidence and new money coming in."

The 6.52% uptick may not even represent the full picture in the structured products market. Prospect News includes in its figures all SEC-registered notes but excludes market-linked certificates of deposit, exchange-traded notes and lightly structured plain-vanilla fixed-income notes.

"It's unfortunate that nobody really keeps a tally of CDs," a sellsider said.

"The FDIC probably has this data, but they don't publish it. It would be interesting to know how this market has evolved since last year, particularly with people in conferences repeating all the time that money is moving from CDs to notes. I'd be curious to see if figures bore that out."

A modest week

Speculation about the timing of the anticipated Fed tapering may not necessarily drive investors to make new allocations, this sellsider said.

"People are wondering if the Fed tapering will come earlier, possibly in December as opposed to early 2014, which would lead to a steepening of the curve and rise in interest rates," he said.

"This may have slowed activity last week. Wondering if the market will react and how it will react may have given people an excuse to wait and see a little bit.

"Also, it was the first week of December. You don't see much going on in general until the end of the month."

Yet, last week's $283 million was less busy than the first week of November, which saw the pricing of 130 deals totaling $431 million, according to the data.

One big deal

Deals were less than $20 million in size last week except for the No. 1 offering, Goldman Sachs Group, Inc.'s $50 million of 0% leveraged index-linked notes due Dec. 18, 2014 tied to the S&P 500 index. It has a standard leveraged structure with a cap but no downside protection. The leverage factor is three; the cap was set at 16.35%.

"The idea was to capture the upside using leverage if you're not worried about the downside. This is the classic accelerated return note," the sellsider said.

Those deals have increased in notional this year, up nearly 33% to $7.01 billion from $5.29 billion last year. They make for nearly 20% of the total market versus 15.80% last year, according to the data.

Inversely, buffered or barrier leveraged notes have declined by nearly 6% this year to $6.51 billion from $6.90 billion.

"We've seen more leveraged notes with no downside protection this year. The market was bullish. People were confident and able to express their confidence in leveraged deals without any type of downside protection," the sellsider said.

Worst of, CPI

The second largest deal was an autocallable "worst-of" note using annual observation dates with an eye-catching call premium, sources said. It is structured around two highly correlated indexes, which according to sources is a positive trait as investors in those structures are long correlation.

The deal was Barclays Bank plc's $19.29 million of 0% annual autocallable notes due Nov. 25, 2016 linked to the lesser performing of the Euro Stoxx 50 index and the FTSE 100 index.

Unlike other "worst-of" notes, these offer some downside protection via an 80% final barrier. The notes will be called at par plus 14% per year if each index closes at or above its initial index level on any annual call valuation date.

The payout at maturity will be par unless the worst-performing index finishes below the 80% barrier level, in which case investors will be fully exposed to the decline of the worst-performing index.

"We're seeing a few worst-of, but it's not like we're seeing a ton of them," the sellsider said.

"Certainly they've started to become more visible during that period of difficulty for reverse convertibles. It was a way to give enough coupon for people reaching for yield while making the structure tied to indexes as opposed to stocks, which are more volatile."

Wells Fargo & Co. priced the third largest deal. It was an interest rate-based structure in the form of $15 million of floating-rate notes due Dec. 11, 2023 linked to the Consumer Price Index. Interest is payable monthly and equals the year-over-year change in the Consumer Price Index plus 85 basis points, subject to a floor of zero.

The payout at maturity will be par.

Wells Fargo Securities, LLC was the agent.

"There are not a lot of CPI deals," the sellsider said.

"I would think given the relatively low inflation, you'll continue to not see them very much, up to the point when people will be afraid of inflation and then of course it will be hard to put them together."

Interest-rates-linked notes have nearly quadrupled in volume this year while remaining small as a percentage of the total. Volume in this asset class has risen to $1.36 billion from $356 million last year. But their market share is less than 4% of the overall market versus 1% last year.

Fixed-to-floating Constant Maturity Swap spread notes are one of the most popular structures in this category.

Equity-linked notes have grown 10% in volume this year to $28.48 billion from $25.91 billion, driven mostly by higher demand for single-stock structures (up 17%), while the growth of equity index-lined notes has been slower, up 6.50%.

"The year 2013 was terrific for equities. A lot of this volume growth is the result of the strong bull run we had," Delaney said.

Goldman Sachs was the top agent last week with $63 million sold in six deals, or 22.44% of the total. It was followed by UBS and Barclays.

"Issuers want to push their deals before rates begin to rise." - Jim Delaney, portfolio manager at Market Strategies Management

"I would think given the relatively low inflation, you'll continue to not see them very much. ..." - A sellsider on CPI-linked deals

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