In near-holiday mode, volume quiets down to $505 million, falls 20%

By Emma Trincal

New York, Dec. 22 - As the market prepared for the holidays, issuance fell to $505 million last week, down nearly 20% from the $623 million volume seen during the prior week, preliminary data compiled by Prospect News showed.

The number of deals remained stable at 69, compared to 71 the week before.

"It's so dead right now," said a New York sellsider. "People don't really have a strong view on anything."

Issuance was comparable to last year's equivalent week before Christmas when issuers priced $457 million in 59 deals. For market participants, the slowdown was to be expected.

Volatility down

Other factors, though, helped put a damper on sales, sources noted.

The equity market was flat, with the S&P 500 hardly moving. It rose slightly to 1,243 from 1,240.

Meanwhile, the Chicago Board Options Exchange Volatility index continued to fall. It declined 8% to 16.

With less volatility, some products offer less attractive terms and coupons.

"With volatility dropping off the cliff, it doesn't help," said a structurer. "I imagine it will be quiet this week and next week."

Agents did not issue any large exchange-traded notes offerings.

Stock deals

The two dominant structures were reverse convertibles and autocallables as single-stock deals (56% of the total) prevailed over equity index offerings (27%).

The average size of reverse convertible transactions increased significantly to $6.5 million from $1.8 million while agents - especially UBS AG, the leader for this structure - priced large autocallable notes offerings.

Since autocallables and reverse convertibles are structures that "sell volatility," their popularity at a time when volatility is down was not intuitively explainable. For some, market sentiment was key.

"Investors still seem to have a bullish view on equities for the next 12 months. Bullishness more than volatility is what drives autocallable issuance," the structurer said.

UBS has established itself as the leader in autocallable deals, pricing almost all of the deals last week, especially the biggest ones. In all, it sold eight out of the nine deals.

JPMorgan priced the other one, a $3 million offering tied to the price of copper on the behalf of Morgan Stanley.

UBS AG, London Branch priced $27.58 million of 8.55% autocallable notes due Dec. 22, 2011 linked to Ford Motor Co.

In addition, UBS sold on the behalf of HSBC USA Inc. two other autocallable deals, one linked to Monsanto Co. for $19.92 million, the other tied to Hartford Financial Services Group Inc.

Leveraged deals, in all categories, retreated last week to 10% of the total from 20%, a trend that sources said was not driven by volatility either since leverage tends to be more popular when volatility declines.

Majority in equities

Equities dominated the volume with $420 million, or 83%, of the total.

Commodities were the second most popular asset class with $43 million, or 8.5%, of the market, a $10 million decline from the week before.

One commodities deal stood out due to its size and simplicity: Eksportfinans ASA priced $24.66 million of 0% notes due Dec. 28, 2011 linked to five commodities futures contracts via Goldman Sachs & Co. The deal was lightly structured, offering neither leverage nor buffer. But it allowed investors to gain exposure to the asset class through a diversified basket comprising crude oil, copper, soybeans, platinum and cotton.

Simplicity reigns

The week was also marked by a trend toward more simplicity and the absence of complex structures or algorithmic indexes used as underliers among the top deals. Agents brought out some of their proven formulas and most successful deals to close the year.

The top deal, brought by Citigroup Funding Inc., was a note linked to the share price of a stock giving investors the option to be paid either in shares or cash.

Citigroup priced $99.84 million of 8.5% synthetic buy-write notes due Dec. 27, 2011 linked to the common stock of Bank of America Corp. There is a 20.5% cap.

Another example of simplicity was the second-largest deal of the week in which Goldman Sachs priced a $68 million add-on to its popular notes tied to Topix for Eksportfinans. The offering brought the total deal size to $174.16 million, up from $106.16 million. The payout at maturity is par plus the index return.

UBS' pricing of its two autocallable offerings linked to Ford, one for $27.58 million and the other for $8.03 million, is another example of agents finishing the year with deals that have established a solid track record of sales.

UBS was the No. 1 agent for the week with $167 million sold in 18 deals, or a third of the market. It was followed by Goldman Sachs and Citigroup.

So far this year, UBS has jumped from the sixth to the fourth slot in the league tables as of the end of last week, according to data compiled by Prospect News.

The week before, Goldman Sachs was first, followed by JPMorgan and Merrill Lynch.

"It's so dead right now." - A New York sellsider

"With volatility dropping off the cliff, it doesn't help." - A structurer

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