Issuance spiked in January as a result of December sales push, but investors are still skittish

By Emma Trincal

New York, Feb. 1 - January sales jumped nearly 50% from December, but sources said that the uptick is not really telling because most of January business is an extension of the marketing conducted for weeks in December.

The bigger picture, they said, is that investors remained on the sidelines in a choppy market that alternates between enthusiasm and fear, giving pause to bulls and bears alike.

Agents sold $1.30 billion in 272 non exchange-traded notes offerings in the week ended Friday, up 213.5% from $413 million priced in 125 deals the week before, according to data compiled by Prospect News.

As of Friday, the month-to-date volume was up 55.14% at $2.79 billion versus $1.80 billion during the same period of December.

On a year-to-date basis though, sales dropped to $2.79 billion last month up until Friday from $4.87 billion in Jan. 1 through Jan. 27 of last year, a 43% decline.

A market participant said a more accurate comparison would be between the block of December plus January versus the same pair of months a year before.

"Some of the larger retail shops may have had extended ticketing periods that may go back to mid-December or even the beginning of December," he said.

"Deals need time to be reviewed, analyzed and marketed properly. Advisers need to see what's in there for their clients, and investors need to understand them. It can take weeks."

Agents sold $4.63 billion in the combined months of December 2011 and January 2012, down 61.5% from $12.05 billion priced in December 2010 and January 2011.

Mixed market

These results may be disappointing given that current market conditions seem ideal for the sale of structured products.

"Credit is at a sweet spot right now," the market participant said.

"Spreads are not too wide as to make investors nervous and not too tight to the point of not offering [any] value."

The Dow Jones industrial average and the S&P 500 index recorded their best month since 1997. The Dow was up 3.4% and the S&P 500 4.4%

Still, many investors are confused as to how long the market can extend its gains, sources said.

"It's a good space for structured products as there is no real agreement on where the market direction is," the market participant said.

"You can create a lot of structures that enable investors to generate returns by just staying in the range."

One of them hit the market last week and received a strong welcome from investors and topped the list in largest deals.

Bank of America Corp. priced $86.7 million of 0% autocallable enhanced market-linked step-up notes with buffer due Jan. 27, 2014 linked to the S&P 500 index.

The notes will be automatically called at par of $10 plus 10% if the index closes at or above the initial index level on Jan. 23, 2013.

If not, investors will get the index return if the final index level is higher than the 120% step value. They will get a 20% digital payment if the index finishes higher than the 90% barrier but lower than the step value. Investors will lose 1% for every 1% that the index declines beyond 10%.

"This is the best start of the year in equities since 1997, but it certainly doesn't feel that way," a sellsider said.

"Investors are cautious. The continued concerns about Europe and the zero interest rates will weigh on sentiment.

"It's true that the indexes were up, but nobody is sure if the rally has legs."

Single stocks

Equity represented 77% of the total month to date versus 66% in December. Equity indexes grew the most. They increased 103.5% to $1.48 billion month to date, making for 53% of the total. Stocks recorded a $576 million volume and accounted for 20.5% of the total. But they grew by a slightly lower percentage, 65.5%.

"There is some risk aversion around single stocks," the sellsider said. "People prefer broad indexes.

"It's visible with the size of reverse convertibles. I bet than in any given month recently probably at least 85% of the reverse convertibles are less than $1 million."

The data confirmed the bet at least for last week.

Out of the 78 reverse convertibles that priced, 69 were under the $1 million size, or 88.5%, according to data compiled by Prospect News.

The top reverse convertible last week was Citigroup Funding Inc.'s $16.01 million of 12% annualized single observation Equity LinKed Securities due July 25, 2012 linked to the common stock of Las Vegas Sands Co. The barrier is 75% of the original share price.

"I don't know if issuers are aggressively marketing these deals as much as in the past. Don't forget reverse convertibles are under the regulators' radar. I don't know if these are products that people want to push too much right now," the sellsider said.

Risk, commodities

Commodities regained ground this month. They were up 35.5% from December in part due to a very large deal brought to market by Bank of America and based on the price of gold.

For some analysts, the so-called "risk-on" trade is back. Based on recent U.S. economic data showing growth and the hope that the European debt crisis is heading in the right direction, analysts have concluded that investors are now feeling more confident about risky assets such as equities and commodities.

"It's not about risk-on/risk-off," the market participant said.

"Investors are looking at each asset class and see if it's overbought or oversold."

After a strong correction between November and the end of December when gold prices fell close to 20% and a rally this year, some investors have decided that it is time to reinvest in the precious metal.

Bank of America Merrill Lynch sold HSBC USA Inc.'s $66.57 million of 0% Accelerated Return Notes due April 1, 2013 linked to the gold spot price, which was second largest deal of the week. It offers three-times upside leverage up to a 19.7% cap with no downside protection.

Leveraged return deals without any barrier or buffer regained momentum this month with 20 deals totaling $403 million, or 14.5% of the total.

Using again HSBC as the issuer, Bank of America Merrill Lynch priced a pure leveraged deal for $63.22 million. Linked to the S&P 500, it offers three-times leverage, a 15.5% cap on the upside and no downside protection.

HSBC issued the second, third and fourth top deals last week among 27 others. All three were sold by Merrill Lynch acting as the agent.

"HSBC is fairly new. But these names are going to change month to month. They get the funding levels from each issuer, and whoever provides the best levels, they'll go with," the sellsider said.

Bank of America was the top agent for the month with $1.11 billion sold in 52 deals between Jan. 1 and Jan. 27, which accounted for nearly 40% of the total.

It was followed by JPMorgan and UBS.

"It's a good space for structured products as there is no real agreement on where the market direction is." - A market participant

"It's true that the indexes were up [in January], but nobody is sure if the rally has legs." - A sellsider

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