Issuance quintuples; increase in volatility pushing demand for plain-vanilla, U.S. deals

By Emma Trincal

New York, May 5 - Issuance surged in the last week of April while the market was rocked by bad news from Europe, raising fear, volatility and demand for U.S. equity products and plain-vanilla structures.

U.S. agents priced $2.18 billion in 402 deals in the week ended Friday, reaching levels not seen since the last week of January. The volume was nearly five times that seen the week before when 44 deals priced totaling $450 million, according to data compiled by Prospect News.

About a quarter of the volume came from Barclays Bank plc, which priced an additional $500 million of its iPath S&P 500 VIX Short-Term Futures exchange-traded notes due Jan. 30, 2019.

Without taking into account this ETN, issuance remains high and almost quadrupled from the week before.

Strong April

While volume always spikes at the end of each month, sources noted that the end of April was particularly strong.

Agents sold $1.87 billion in the last full week of March and $1.88 billion in the last week of February. Last week's levels only compared with the last week of January when $2.11 billion priced, according to data compiled by Prospect News.

Currency weakens

Despite the variety of asset classes and rich volume, sources noted that currency-linked deals continue to lag behind even if investors' appetite for bearish bets on the euro remains unabated.

Agents priced $97 million in nine currency deals for only 4.4% of the total during last week.

"We see fewer currency deals. It's surprising given what's happening in Greece and the euro," said a sellsider in New York.

Currency issuance amounted to $136 million in April in only 15 deals.

By comparison and for the same asset class, agents sold $242 million in 26 deals in March and $231 million in 23 deals in February.

The largest currency deals that priced last week continued to be bets against the euro, a trade that has grown in popularity since fears around the eurozone debt crisis started to intensify.

"Demand is still strong for bearish notes on the euro. But products don't get done. It's too expensive," said the sellsider.

"Volatility has spiked so much that any trade requiring taking options positions on currencies right now is costly," he said.

He noted that the implied volatility on the three-month at the money euro-dollar contract had climbed to 13.48% from 10.24% on April 13, up almost by a third in just three weeks.

Volatility plays

With volatility on the rise, investors have been looking for simple structures and ways to hedge downside risk, sources said.

One approach is to invest in volatility products, said a structurer in New York.

The top deal of the week was Barclays' $500 million iPath S&P500 VIX ETNs, perhaps one of the most successful structures for the bank. It has already sold $8 billion since inception in January 2009 and including last week's pricing.

"When markets are in turmoil, volatility becomes attractive," said this structurer. "The market falls and people want to hedge with volatility. The VIX will continue to be appealing."

Goldman headlines

Another characteristic of last week was the pullback of Goldman Sachs Group, Inc. despite its strong push in April and in 2010 in general.

Goldman only priced seven deals last week for $20 million, which is only 0.92% of the market.

In addition, Goldman deals last week were all small in size except for a $14 million issue of floating-rate notes due Aug. 22, 2011 linked to the S&P Diversified Trends Indicator - Total Return.

For an agent that has reached the top-five club, Goldman's ranking for the week was seen as a slide as it dropped to the eleventh slot in the league table, behind Credit Suisse, Royal Bank of Canada and Deutsche Bank, some market participants noted.

Not surprisingly, Barclays was first, followed by Merrill Lynch and JPMorgan.

Goldman's ranking contrasts with the fourth position it has held for April with 14% of that month's total issuance.

During the first four months of the year, Goldman has positioned itself as No. 5 with nearly 8% of the total issuance.

"I think Goldman suffered from the headlines. It was probably more difficult to sell Goldman paper last week than it was two weeks before," said the structurer.

Yet overall and for the year, Goldman's progress has been noticeable, this competitor said.

"We see Goldman much more present this year than last year. They're really making a focused push in structured products. It used to be a sporadic, niche market for them. Not anymore," he said.

"They can sell a lot given their private banking and their network of external distributors," he added.

U.S. benchmarks, simple

With uncertainty in the global markets and volatility spiking, investors have been flocking to U.S. equity deals and plain-vanilla structures, sources noted.

Products priced across all asset classes with equity maintaining its unsurpassed lead at $1.15 billion and 33 deals. This represents 53% of the volume and 82% of all the deals.

"It's always been like that. Equity prevails in the U.S. structured products market," said the structurer. "But it's even more so now with low interest rates. CDs don't have much to offer."

As an example of a successful offering based on U.S. equity benchmarks with a simple structure, JPMorgan Chase & Co. sold the second-largest deal with $87.7 million of 0% return enhanced notes due Nov. 1, 2010 based on the S&P 500 index. The payout at maturity will be par plus 1.5 times any index gain, up to a maximum return of 13.5%. Investors will be exposed to any losses.

Investors continue to look for yields too either via reverse convertibles or autocallables.

HSBC's big autocallable

Only one large autocallable offering priced last week for $73.31 million. The 0% autocallable optimization securities with contingent protection due May 2, 2011 linked to the common stock of Bank of America Corp. represented the third-largest deal. The issuer was HSBC USA Inc., and UBS Financial Services Inc. was the agent.

The notes offered a 19.08% call premium and a 30% buffer.

"HSBC is a new name in autocallable. Usually it's mostly JPMorgan," said the structurer.

HSBC's presence in this market appears to be recent, at least for this year, based on data compiled by Prospect News - although the deal followed another large one that priced earlier in April.

It was a $17.31 million offering of autocallable notes linked to the common stock of Apple Inc. with UBS also part of the deal as the agent.

Royal Bank of Canada remains a modest agent in the league table with only 2% of the market shares last week. But the bank came out with the fourth-largest deal, a $65.11 million offering of leveraged notes due June 24, 2011 linked to the S&P 500, another sign that plain-vanilla and U.S. stocks are in favor.

Equity indexes and single stocks were in parity with $586 million and $570 million issued in these two categories, respectively.

As always, the 280 single-stock deals outnumbered the 50 equity index-linked transactions as single-stock transactions tend to be small in size. But some issuers came out with unusually large reverse convertibles.

Morgan Stanley, for instance, priced $52 million of 9.5% Equity LinKed Securities due Oct. 25, 2010 based on the performance of Weatherford International Ltd. stock.

"We see fewer currency deals. It's surprising given what's happening in Greece and the euro." -A sellsider in New York

"I think Goldman suffered from the headlines." - A New York structurer

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