Volume nearly triples to $1.13 billion; investors get back to basics with equity indexes

By Emma Trincal

New York, June 29 - Agents enjoyed a busy week with $1.13 billion sold in 95 deals, a 171% jump from the $418 million sold during the prior week, according to preliminary data compiled by Prospect News.

These figures exclude exchange-traded notes.

June, given last week's healthy issuance, is now on pace to beat May's volume.

Sales as of June 25 totaled $2.24 billion, a 10.6% increase from the $2 billion sold during the same period last month.

Issuance year to date, however, is only up 3.84% from last year at $21.81 billion.

"Last week just really kicked in," a sellsider said. "This week took up half of the volume of the month.

"It was a lot of momentum going into the 4th of July weekend."

While the week ended June 24 is not technically the last one of the month, the proximity of the holidays may have pushed firms to issue and sell more, he explained.

"As we're getting closer to July 4th, perhaps people were punching it up for the week. It may be a run up right before the holidays," he said.

This sellsider said that sudden increases in sales on a week-to-week basis are difficult to interpret and may not indicate a trend.

"Usually when you have a busy week, the next one will be slower," he said.

"But since the next one is this week and since it's the last week of the month, I hope it won't be the case."

The bigger picture was encouraging, this sellsider noted.

"We're up from May. That's good," he said. "And year to year, it's not bad. We're much on par with last year."

Back to benchmarks

Investors put their money into equity index-linked notes last week, the data showed, a trend also visible for the month.

Single-stock deals continued to grow but not as rapidly.

Equity products in general made for 70% of total issuance last week.

Equity indexes grew by 250% to $549 million, amounting to nearly half of total volume.

Meanwhile, stocks represented less than 20% of the total with $219 million sold, a 51% increase from the prior week.

For the month, equity index-linked notes more than doubled in volume to $955 million from $467 million in May. Their market share grew to 43% from 23%.

Stocks, on the other hand, declined by 28% to $575 million from May, representing only 26% of the total for June so far versus 40% the month before.

"Equity indexes is where the business is going in general," the sellsider said. "Structured products are not a stock-picking industry."

He saw the trend as a positive.

"It's healthier for people to focus more on themes or sectors or broad-based indexes than on stocks."

Risk aversion in today's market characterized by weak economic data in the United States and Greek uncertainty in Europe also played a role, sources said.

"People go into indexes because it's safer than single stocks. There's less underlying risk," said Russell Catley, partner at Catley Lakeman Securities.

Other asset classes

All other asset classes increased in volume last week, especially rates and foreign exchange, which both saw their volume rise as two of the top 10 deals employed these asset classes for their underliers.

In the rates asset class, Bank of America Corp. priced $43 million of callable capped notes due June 27, 2031 linked to the 30-year and two-year Constant Maturity Swap rates with a 12% coupon for the first year. After that, the rate is four times the spread of the 30-year CMS rate over the two-year CMS rate minus a strike of 25 basis points, up to a maximum rate of 12%.

In the foreign exchange category, Barclays Bank plc priced $38.63 million of 0% return enhanced notes due Dec. 27, 2012 linked to the performance of a basket of BRIC currencies relative to the dollar.

Commodities grew more than two-fold last week to $105 million.

However, month to month, commodities issuance declined by 23% to $281 million.

The top commodities deal was issued by AB Svensk Exportkredit and sold by Bank of America Merrill Lynch. The $43.22 million of 0% Accelerated Return Notes due Aug. 24, 2012 linked to the PHLX Oil Service Sector index have a leverage factor of two with a 26% cap and no downside protection.

Structural trends reflected asset class preferences in equity: leveraged deals surged while traditional reverse convertibles declined, according to preliminary date compiled by Prospect News.

Leverage efficiency

Leveraged return with no buffer continued to dominate, making for nearly 30% of the total volume in 17 deals totaling $333 million last week. It was a strong departure from the prior week when this structure accounted for only 13% of the volume and $54 million worth of sales.

For the month, leveraged deals without protection continue to prevail, representing about 20% of the sales.

"Using more leverage doesn't mean you're more bullish. It only means that you're bullish up to a point," the sellsider said.

Some sources said that leverage reflects a maturation of the market and a more sophisticated investor base.

"The use of accelerated return through the use of derivatives is not a bad idea," said

Samson Koo, managing director, head of derivative products at Advisors Asset Management.

"It's a more efficient use of your risk-adjusted return, a more efficient use of your capital.

"However, people need to understand the risk that comes along with it."

Top deals

The first-, third- and fourth-largest deals last week were all equity index deals using a non-buffered leverage structure.

Barclays priced the top offering: $81.77 million of 0% Accelerated Return Notes due Aug. 31, 2012 linked to the S&P 500 index. Bank of America Merrill Lynch was the agent.

The notes give investors three-times leverage with a 15.78% cap and full exposure to losses.

Deutsche Bank AG, London Branch priced $49.2 million of 0% return enhanced notes due July 12, 2012 linked to the S&P 500 index, the third-largest deal. JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC were the agents.

The payout at maturity features double leverage with a 19.76% cap.

Finally, Bank of America priced $46.5 million of 0% Accelerated Return Notes due Aug. 31, 2012 linked to the Russell 2000 index with a payout at maturity of par plus triple any gain in the index, capped at 22.02%.

Reverse convertibles

Reverse convertible sales doubled last week but made up less of the market. They totaled $157 million, or 14% of the total, during the week ended Friday versus $76 million, or 18% of the total, the week before.

For the month, issuance of reverse convertibles fell by 40% to $309 million from $515 million in May.

"Reverse convertibles are really about stock-picking. And stock-picking is not an easy game," said the sellsider.

"A reverse convertible is a limited upside with unlimited downside.

"Maybe investors are getting a little bit more sophisticated, a little bit more strategic."

The top reverse convertible deal - and the No. 2 offering of the week - was brought to market by Citigroup Funding Inc., which priced $51.5 million of 7.5% Equity LinKed Securities due Dec. 21, 2011 linked to Dow Chemical Co. shares.

Bank of America Merrill Lynch was the top agent last week with 24 deals totaling $619 million, or 54.6% of the total.

It was followed by JPMorgan with $249 million, or 22% of the total, and by Morgan Stanley with $86 million, or 7.56% of the total.

Last week's top agent was JPMorgan.

"This week took up half of the volume of the month." - A sellsider

"People go into indexes because it's safer than single stocks." - Russell Catley, partner at Catley Lakeman Securities

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