New year starts on a good note amid fiscal cliff deal, rally, renewed confidence, sources say

By Emma Trincal

New York, Jan. 9 - Issuance pace and deal sizes were encouraging in the first week of the year, according to sources and to data compiled by Prospect News.

"We're off to a good start. It feels good. It's too early to tell if it will last, but levels are good," a market participant said.

Agents sold $433 million in 63 offerings in the week ended Friday, which holds up fairly well with the $473 million level seen in the Christmas week, which wrapped up the year, sources said - especially given the fact that early monthly cycles tend to be slow.

"You may have seen some of the end-of-the-month deals of December pushed over. That happens," the market participant noted.

Another sign of strength was the number of big offerings, according to data compiled by Prospect News.

The number of deals that hit the market last week was roughly half the 125 deals that priced during the prior week, but their large sizes made up for their fewer number, limiting the volume gap typically observed between the end and the beginning of a monthly cycle. Sales last week were down by just 8.5% from the week before.

"You also have the black-out. Banks are reporting their earnings in the middle of January. It's possible that many clients will get their deals priced in the first two weeks of January. It may be impacting some of the issuance volume for the early part of this month," the market participant said.

Not so fast

But other sources were more cautious, complaining about the difficulty in pushing new products and noting that a lot of last week's sales came from rollovers.

"To me, the relative strength of last week is more of an indication that December was weak and that people weren't doing anything then," a distributor said.

"Last week so many people were out, nothing was getting off the ground.

"It's a supply and demand issue. On the supply side, any newly created product flow was not pushed. People were still out.

"This week [starting Jan. 6] is really the first one because you have no holidays."

The effects of last week's surging stock prices were mixed, according to sources.

Some market participants did not necessarily find the rally to be supportive of sales as the fiscal cliff deal in Congress pushed down volatility levels while government bond yields rose.

"The rates sell-off at the beginning of the year was good and bad. Good because it happened at the beginning of the year when people are still carrying inventory but bad because firms were shying from printing new deals. There were not a lot of new products as bonds have been clearing," a sellsider said.

"It was the same with equity. With volatility dropping from 20 to 14, it's been tough to price new deals not just because of the rally but because of the crushed volatility.

"This low-vol trend may not last though. If we continue with the sell-off, it will be helpful. Hopefully, we'll see volatility picking up again," he said.

Good signs

But signs indicated that in sheer volume, last week's action was encouraging overall, some sources said.

Agents sold four deals in excess of $35 million, with the top one reaching $69 million in size, the data showed. This compared to one deal in that size range the week before. Bank of America priced 10 out of the top 11 offerings, with JPMorgan selling the fourth-biggest deal.

On a month-to-date basis, the first five days of January amounted to five times the volume seen during the same period in early December, with $84 million.

Finally, leverage was king last week as it made for two-thirds of the volume. Agents brought $235 million of these in only eight offerings, which confirmed, according to sources, the fact that Bank of America may have delayed its end-of-the-month big-ticket sales to bring some of its big deals into the New Year.

Two-thirds of the leveraged notes offered no downside protection, which may be indicative of renewed confidence on the part of investors, some said.

The year started on a positive note after a tax deal passed the House of Representatives on the night of Dec. 31, prompting a global stock rally, with the Dow Jones industrial average closing up 2.5% on Wednesday.

On Friday, the S&P 500 index reached a new record high at 1,457. More than half of the structured notes deals priced on Friday.

Money moves

"I don't know if the action was driven by the rally," the distributor said.

"I think it's more that investors had something to stand on as far as Washington finally making a decision on the fiscal cliff. The end of uncertainty allowed some people to move back into the market."

Another factor was the large reserve of available funds, he added.

"Any time the money is sitting on the sidelines, you have the opportunity that it may come back in spurts.

"As the end investor waits - I'm talking about pensions, wealth managers - as there is a buildup of cash on the sidelines, at some point you need to see some sort of pick up."

Finally, the rally had a positive impact in moving money out of low-risk assets, such as Treasuries, into riskier asset classes, such as stocks, high-yield bonds and structured notes, he said.

"When there's fear, everybody flocks to Treasuries in the so-called flight to quality," he explained.

"As fear receded last week, and we've seen that with the Treasury sell-off, people went back into the stock market and riskier assets, including structured products," he said.

Bank of America tops

Bank of America was the top agent. It sold $307 million, or 71% of the total, in 11 offerings.

JPMorgan was second with 12 deals totaling $73 million, or 17% of the market. UBS was the third agent with less than 5% of the total.

A little bit less than two-thirds of last week's pricing was done with equity indexes underliers, according to the data. Single stocks accounted for less than 7% of the total.

Bank of America Corp. priced the top issue, $69.05 million of 0% Accelerated Return Notes due Jan. 9, 2015 linked to the S&P 500 index. The structure offered three-times leverage on the upside up to a 19.05% cap and full downside exposure.

The firm also issued and sold the second-largest offering, $37.73 million of 0% market-linked step-up notes due Jan. 26, 2015 linked to the S&P 500, which is one of the signature products of Bank of America.

If the index finished at or above the step-up value - 117.65% of the initial level - the payout at maturity would be par plus the index gain. If the index finished below the step-up level but at or above the initial level, the payout would be par plus the step-up return of 17.65%. There was no downside protection.

Bank of America was the agent for HSBC USA Inc.'s $35.79 million of capped Leveraged Index Return Notes due Jan. 9, 2015 linked to the PHLX Housing Sector index, which was the third-largest offering last week. The product featured double leverage on the upside up to a maximum return of 20.52% as well as a 10% buffer on the downside.

JPMorgan Chase & Co. did a big commodities-linked offering with its $35 million of 0% capped return enhanced notes due Jan. 7, 2014 linked to gold.

Bank of America priced the biggest product linked to stocks, $27.03 million of 0% Accelerated Return Notes due Jan. 9, 2015 tied to a basket of three equally weighted stocks: Citigroup Inc., American International Group, Inc. and Goldman Sachs Group, Inc. Investors enjoyed a three-times leverage factor on the upside without downside protection. The upside cap was 36.5%.

"It's too early to tell if it will last, but levels are good." - A market participant

"As fear receded last week ... people went back into the stock market and riskier assets, including structured products." - A distributor

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