Explosion of small deals, reverse convertibles, leveraged notes characterizes recent issuance

By Emma Trincal

New York, Feb. 3 - The last week of January saw a sharp rise in the number of deals - 378 versus 32 for the week before - closing a record month with $6 billion issued in total, the best in 18 months, according to data compiled by Prospect News.

There was almost 12 times more deals coming to market last week than during the week before.

Volume was $1.97 billion for the week alone, a 12.5% increase from $1.75 billion during the prior week.

The rise in volume was even more significant in that it did not incorporate a large exchange-traded notes deal as during the week of Jan. 18 to Jan. 22, when Barclays Bank plc priced $1.5 billion of its popular iPath S&P 500 VIX Short-Term Futures ETNs.

Record month-end volume

A New York structurer suggested that the figures of January's month-end should be compared to the last week of prior months, such as December, November and October, in order to assess the significance of an exceptionally robust January. A look at the final week for each of those prior months shows that nothing compares with January's growth.

Between Dec. 21 and Dec. 25, dealers priced $1.12 billion in 251 deals.

The volume was $1.10 billion during the last week of November in 273 deals.

From Oct. 26 to Oct. 30, $1.57 billion came to markets in 267 deals.

"The reason for the uptick in the number of deals is that it's typical at the end of the month to see every dealer pricing their deals," said this structurer. "Still, 378 deals are above average even for a month-end, and it's almost surprising that the notional was not higher."

Small reigns

The average deal size shrank during the week compared to the week before, according to data compiled by Prospect News. It was a week when small deals dominated issuance, sources said.

When excluding the large ETN priced by Barclays between Jan. 18 and Jan. 22, the average deal size was $7.56 million. Last week, this figure dropped to $5.20 million.

An unprecedented number of small reverse convertible deals hit the market during the week.

With $503 million reverse convertible notes issued last week in 270 deals, this particular structure accounted for a quarter of the week's total issuance volume and almost three-quarters of the total number of transactions.

"Reverse convertibles continue to be viable for investors," said the structurer. "There is also an expectation that Finra will put out a notice shortly, which may have had an impact on the momentum."

Barclays alone priced 173 reverse convertible deals, all on just one Tuesday.

"[Barclays has] pulled out a system where they can crank up a bunch of small deals," the structurer said. "A lot of firms have looked at this. Clearly it's working for Barclays. They like to do small reverse convertibles. They got it down to a system where they can minimize their fixed cost. I think [Royal Bank of Canada] and JPMorgan [Chase & Co.] used to be doing that too."

Sharp rise from December

The strength of issuance during the last week of January should be put in context with the month itself compared to December, said a New York sellsider.

"The last week of the month is the one when issuers close all their deals. But that's always the case. What matters here is the robust pace for the whole month compared to the month before," he said.

The exact issuance figure for January was $6.11 billion in 539 deals, almost 150% more than the $2.47 billion sold in December in 459 deals.

"I think the beginning of January was slow. But it definitely built up at the end of the month," this sellsider said.

According to data compiled by Prospect News, only 37% of the month's issuance was executed in the first half of the month, with the rest coming up after Jan. 15.

Positive sentiment

"It's really driven by investors' sentiment," the sellsider added. "People sense an opportunity in the market and as a result, you're seeing more and more investors piling up in the product. When there is more uncertainty or bearishness, people pull back."

This sellsider added, "Although the market was down somewhat, overall there is still a lot of interest in structured products. In addition, we're seeing some interesting deals, like the autocallable structures."

Most popular structure

Reverse convertibles were popular, but only came in second. The favorite structure of the week was leveraged return. Leveraged return notes with principal protection, partial protection or no protection represented $784 million in 65 deals and amounted to 40% of the issuance.

"It's definitely a fact that people like leveraged structures," said the structurer.

The sellsider said, "People like short-dated maturities, and issuers use leverage as a way to entice investors in structured product as opposed to direct investments. It's the way issuers create something attractive as an alternative to [exchange-traded funds]."

Big deals too

While the week was marked by the absence of large-sized ETNs, the market saw the pricing of big deals, with 23 transactions in excess of $20 million.

Bank of America Corp. priced nine out of the 15 largest deals, which propelled this agent to the top of the league tables for the week with $840 million sold in 18 deals for 42.76% of the market.

Bank of America priced on Wednesday the top deal of the month, with $115.63 million of 0% Accelerated Return Notes due March 25, 2011 linked to the S&P 500 index. It was a leveraged return structure with no downside protection as investors will get three times any index gain, subject to a 17.31% cap, with a full exposure to any index decline.

Bank of America also priced the third-largest deal with $74.05 million of 0% Strategic Accelerated Redemption Securities due Jan. 30, 2012 linked to the S&P 500 index. It was an autocallable structure.

According to sources, given their short duration and high potential payout upon a call, autocallable deals are becoming increasingly popular. In the Bank of American structure, the notes will be called at a premium of 7.9% per year if the index closes at or above its initial level on any of three observation dates.

Barclays was pushed down to second place and was far behind Bank of America with $463 million in 207 deals for 23.6% of the market.

The comparison between the two frontrunners shows that the rival banks followed two almost opposite business models, with Bank of America concentrating on a small number of large deals and Barclays issuing many more deals but of a much smaller size.

UBS moved up to the third slot, an impressive rise from the prior week when this agent was lagging behind its peers.

The landmark deal for UBS - and the second in size for the week - was its $100 million issue of 0% exchange-traded access securities due Jan. 30, 2040 linked to the S&P 500 Gold Hedged index, a new index that seeks to simulate the combined returns of an investment of equal dollar amounts in the S&P 500 Total Return index and long positions in near-term exchange-traded Comex gold futures contracts.

The index was introduced last year, and UBS is the first issuer to use it. This product was designed to provide a hedge against periodic declines in the value of the dollar, as expressed in the corresponding increases in the price of gold.

"Even though $100 million was put on the [prospectus] cover, this deal so far only has a $10 million market cap value," the structurer said.

"Other banks are lining up and will be using the new Gold Hedged index," he added. "But it will take a while."

JPMorgan recedes

One surprise was that JPMorgan's issuance number was well behind its peers, a contrast with the fact that this agent is usually among the top three, if not two.

During the week, JPMorgan was only in the sixth position with $73 million in 28 deals, for 3.72% of the market. JPMorgan was behind Citigroup - ranked No. 5 - and also behind Morgan Stanley, which occupied the fourth slot.

"This is a big surprise. They've really fallen off. This is a big fall off, and I don't have an explanation for that," said the structurer.

A possible explanation was the slowdown of JPMorgan's active distributing role last week.

During the week of Jan. 18 to Jan. 22, JPMorgan priced deals on the behalf of other issuers including Barclays, Credit Suisse, Nassau Branch, HSBC USA Inc. and Morgan Stanley. But last week the bank was only involved in selling its own and very few offerings, according to data compiled by Prospect News.

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