April debuts in slow motion with $508 million priced; JPMorgan prices big stock-basket deal

By Emma Trincal

New York, April 9 - Agents sold $508 million in 107 deals in the week ended Friday, the first week of April. The volume was average for a first week of the month.

Last week's activity was slower than during the first weeks of respectively February ($630 million) and January ($580 million). But April kicked off on a better note than the $360 million volume that priced in the first week of March, according to the data.

The year 2014 so far is ahead of last year with $11.5 billion sold, a 15% increase from $10 billion last year as of April 4. The number of offerings has also grown 15% to 2,383 from 2,074.

Tax shock

"As far as the week goes, high-net-worth clients were stunned at their tax bills," an industry source said.

"People have to take money out to pay for significantly high tax bills. I wouldn't be surprised if volume was down for the next couple of weeks. We had a couple of deals that fell through because clients realized they had to pay some pretty big sums in taxes."

Investors avoiding making investment decisions during tax season is a well-known seasonal event in most markets. But its impact may not be felt the same way in all corners of the distribution, a market participant said.

"You might see less business due to taxes in retail, but that's not necessary the case elsewhere," he said.

Increased volatility, especially during Friday's flight from momentum stocks, may have also been a factor contributing to the reduced volume, according to the industry source.

"We've seen some activity in the biotech and technology sectors, which have been under pressure lately, especially Friday with the breakdown in the tech/biotech space. Clients are looking to hedge those high flyers, tech stocks and biotech stocks. Anything that has posted 30% to 60% in return in the past six months, clients want to do some protection on it or use autocallables," this source said.

Top deal

JPMorgan Chase & Co. led the action in the pricing of $48.64 million of 0% return notes due April 22, 2015 linked to a basket of 17 common stocks. It was the largest deal of the week and the fourth largest offering linked to a basket of stocks this year.

The equally weighted common stocks in the JPMorgan basket are AMC Networks Inc., Bed Bath & Beyond Inc., BioMarin Pharmaceutical Inc., Endo Health Solutions, First Republic Bank, HomeAway, Inc., Insulet Corp., Lions Gate Entertainment Corp., Mylan Inc., Qlik Technologies Inc., Rackspace Hosting, Inc., Rowan Cos. plc, Splunk Inc., Tenneco Inc., Trulia, Inc., Viacom Inc. and Weatherford International Ltd.

Notes linked to baskets of stocks have been the fastest-growing asset class this year, increasing 133% to $514 million, which may be the result of a few large deals.

Last month, JPMorgan priced a similar offering for $52.1 million of notes due April 15, 2015. The payout was linked to the same basket of stocks.

Baskets in vogue

The top two basket deals so far this year were larger offerings based on Raymond James equity research picks.

Bank of Montreal's $173.5 million issue linked to Raymond James Analysts' Best Picks for 2014 was the largest one. It priced in January and was followed by Bank of Nova Scotia's $70 million offering linked to the Raymond James Current Favorites Total Return index, which priced last month.

"We see those baskets of stocks deals, but it's hard to say if it's a trend really," a sellsider said.

"Some are based on equity research or highly visible research. That's the case with the Raymond James notes. They have a well-established team of stock-pickers.

"Others like this one are based on a basket put together by the issuer. There must be a reason why they pick those stocks. Their picks may be less advertised than the Raymond James picks, but I'm sure it's also based on some kind of internal research.

"Should people buy those deals? If these basket deals are a cheaper way for small investors to get access to a little stock portfolio, if they trust the stock-picking skills of the issuer, I don't see why not.

"But investors need to make sure that the fees are not prohibitive. Whether or not it's a good deal for them depends on how easy and cheap they can reproduce the trade by themselves."

The JPMorgan deal was a pure basket tracker with no leverage or downside protection.

"These deals are completely different from the option-based stuff that we're used to seeing in the structured notes market. It's pure access. You get exposure to 17 stocks with as little as $1,000 or $10,000. These products have been around for a while. Perhaps we're seeing some now because they have to be slightly more volatile than an index."

Autocallables still popular

Last week saw a smaller amount of autocallable reverse convertible deals with 7% of the total, according to the data.

"Volatility continues to fall, really," the sellsider said. "It hasn't been going up as much as people think, at least if you look at the long end. The S&P 500 is flat year to date. Stock prices fell at the end of January but have gone up since then. We haven't seen a massive selloff. We've had a bit of a selloff but nothing very significant.

"Autocall reverse convertibles offer a big coupon when volatility is high. As volatility continues to be under pressure, these trades continue to be worse and worse."

Yet for the year to date, autocallable reverse convertibles continue to prevail, amounting to nearly 20% of the volume in 897 deals. Their volume is up 34% from last year, according to the data. The subdued volatility may actually help, according to the market participant.

"Overall, I think lower volatility continues to be one of the main issues," he said.

"Single stocks, autocallables remain popular as a way of getting volatility. You can't get volatility on the SPX. The indices are still coming in pretty high. I think investors are showing a little bit of reluctance in entering into participation types of trades. What's more popular right now are short-term deals, single-stock plays."

Mixed bag for leverage

For the year to date, leverage with no protection is down 20% and represents 16% of the volume versus 22.5% last year. But leverage with partial downside protection (buffers or barriers) is up 22% and accounts for the equivalent market share as last year with 17% versus 16% in 2013.

Last week, however, saw investors bidding more strongly on unprotected leveraged notes. It was partly due to a big offering, the No. 2 in size for the week, which was Goldman Sachs Group, Inc.'s $37.73 million leveraged index-linked notes linked to S&P 500 index.

The structure offers 300% upside participation with a 21.75% cap.

JPMorgan priced the No. 4 deal, another large leveraged structure, with its $28.07 million of 0% capped enhanced participation equity notes due July 6, 2015 linked to the MSCI EAFE index. Akin to the Goldman Sachs deal, it offers three times leverage and full exposure to losses. The cap is 20.25%.

"That's the other side of the volatility story. Leverage [deals] price better because the cost of the call options is cheaper," the sellsider said.

"But you're buying the index at a high level, so there is a risk. The options may cost you less, but you still need the market to go up to make money on those deals. If there is a selloff, your upside leverage [and] unprotected downside are not going to help you."

JPMorgan was the top agent last week with $178 million sold in 22 deals or 34.93% of the total.

It was followed by Goldman Sachs and Morgan Stanley.

"High-net-worth clients were stunned at their tax bills." - An industry source

"We see those baskets of stocks deals, but it's hard to say if it's a trend really." - A sellsider

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