Volume remains sluggish despite Goldman’s $250 million deal; some announced deals don’t print

By Emma Trincal

New York, Nov. 12 – Agents priced $459 million last week, a fair amount for the beginning of a month, according to data compiled by Prospect News. Only the early parts of January, February and March compared with these levels.

However, the data was skewed by the issuance of another large deal by a Goldman Sachs Group, Inc. subsidiary. Without this $250 million deal, volume would be at record lows, the data showed.

Recently some deals have been “pulled out,” some sources noted, which means that the deal was registered and announced but never got priced.

It’s unclear when the trend really started, but market participant credit investor unease with the current directionless market.

Structured note issuance volume for the year is up only 5% as of Friday with sales at $38.20 billion versus $36.39 billion last year, according to the data.

This decline is accompanied by a noticeable decrease in the number of offerings, falling 8% this year to 7,267 from 7,901 during the same period last year.

Pulling out

“We’re seeing a lot of deals that have been announced and are not getting done,” a sellsider said.

“If you want to sell a deal, you have to file with the SEC first. You cannot talk about it before the deal is registered.

“So people file and then it’s on a best-effort basis. If there is not enough interest, they pull out.”

Each filing, he said, costs between $2,500 and $5,000 in legal expenses.

But issuers have to file with the Securities and Exchange Commission first, according to securities laws, and incur the cost.

“Otherwise, they can’t get out and sell their deals,” he explained.

Issuers also have to comply with minimum sizes imposed by their treasury departments, which do not want to deal with deals that are too small.

“Some firms can do five-figure trades, but most of us have a $1 [million] to $5 million minimum set by the treasury,” he said.

“Meanwhile investors are sitting on the sidelines and firms are not getting enough, so deals get pulled out.”

Asked why the lack of interest on the part of investors, this sellsider said, “It’s hard to tell. Maybe the deals are overly complicated. Maybe investors are not comfortable. The markets are getting whipsawed.

“We just had a rally, but now the trend is down. A lot of retail investors, especially in stocks, have a tendency to sell low and buy high. Right now they’re not buying. They’re selling their holdings, and they will miss the rally on the upside.”

The S&P 500 index gained more than 8% in October, but this month the index has lost 2% and is trading sideways.

“Some firms don’t get enough, so they don’t price. They may file once, twice or even three times. But when you spend $10,000 in legal costs, it’s not worth it. You pull out. It’s happening a lot right now,” the sellsider said.

Nervousness

The S&P 500 was volatile most of last week, especially on Wednesday after Fed chairperson Janet Yellen said that a rate hike in December was a “live possibility.” On Friday a strong jobs report pushed stocks lower.

Matt Medeiros, president and chief executive of the Institute for Wealth Management, who has relationships with broker-dealers, said registered investment advisers are not very optimistic at this time.

“Investors are perplexed by the market. They are concerned about the slow growth, about the lack of leadership in any sector of the market,” Medeiros said.

“The pessimists are looking at a seven-year bull run without a major downtrend. We had a 15% correction, but we haven’t had a bear market.

“Investors are either on the sidelines or taking a very conservative approach to investing.

“We work with broker-dealers all over the country, and their reps who talk to RIAs give us that type of feedback.”

It’s the economy

A market participant said that investors are concerned about the global economic slowdown outside of the United States.

“In August, people got thrown for a loop. We didn’t have much volatility for a while. The correction broke a number of technical barriers, and even though we’ve corrected a few of them, people are still skittish,” he said.

“We’ve had a good run last month, but the corporate earnings are not super positive.

“The U.S. is the only place in the world that has a good economy. But the U.S. is not an island. We’re in a global economy.”

He added that more investors are anticipating some sort of recession.

“Investors believe we’re in for some rough patches, maybe not another 2008 but more like the long downward slide of 2001, 2002 and 2003.”

GS Finance piling on

A Goldman subsidiary priced $250 million of leveraged buffered notes linked to the S&P 500 index. The one-year leveraged buffered note issued by GS Finance Corp. offered 1.5 times the final index return, subject to an 11.92% cap. There was a 5% buffer on the downside.

It was the sixth deal to be issued by GS Finance so far this year, with three coming in the last month alone, including one for $350 million. The Goldman subsidiary has so far issued more than $1 billion in 2015. The one that priced last week and the three October offerings were the largest in size, ranging from $150 million to $350 million.

Those four last deals offered the same structure and were all tied to the S&P 500 index. The only differences were slight variations in the cap level.

“It’s for an institution, and I’m not sure why, but they wanted to do it in a different platform for this type of investor,” the market participant said, noting that Goldman Sachs was still the agent on the deal.

The fee was only 5 basis points, a level consistent with an institutional trade.

The second largest deal was Royal Bank of Canada’s $26.17 million of leveraged and capped notes linked to the Energy Select Sector SPDR Fund.

Brief trade

Goldman Sachs surprised market participants in other ways. The firm announced last week a deal remarkable for its duration.

Goldman Sachs announced 0% Topix index-linked notes with a maturity of only four to six weeks to be set at pricing. Goldman said it expects to sell the delta-one product at 100.16% to 101.16% of par.

“One month ... that’s short,” said an industry source.

“I don’t know why they’re doing that.

“I would presume somebody is trying to get ahead of some news. Or perhaps it’s done in relation to the expiration date of an option contract. It could be a host of reasons.”

The top agent last week was Goldman Sachs with $312 million in eight deals, or 68% of the total. It was followed by JPMorgan and RBC.

“...investors are sitting on the sidelines, and firms are not getting enough, so deals get pulled out.” – A sellsider

“I would presume somebody is trying to get ahead of some news.” – An industry source on Goldman’s planned four- to six-week deal

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