October structured product sales up 80% from September; last week muted, dominated by stocks

By Emma Trincal

New York, Oct. 17 - October structured product sales to date recorded an 80% increase from the Sept. 1-13 period despite a subdued volume last week, a week that was shortened by the Columbus Day weekend and rich in large single-stock deals, according to data compiled by Prospect News.

Sources warned that it's too soon to gauge what October will end up being in notional size and if it will surpass September. The last week in the calendar typically makes or breaks the month, they noted.

Agents sold $261 million last week, down 48% from the first week of the month. The number of offerings remained stable with 102 deals last week versus 107 during the week before.

Between Oct. 1 and Oct. 13, agents sold $765 million, up 80% from the same period in September during which sales amounted to $426 million.

However, September, which has turned out to be the third largest month of the year, with $3.23 billion priced, recorded the bulk of its volume at the end - 56% of the volume for that month was sold during the final week, according to the data.

Single-stock issuance drove the action last week in an unusual way, according to prior data. It represented 63.5% of the volume versus 29% for equity indexes. The average proportion for the year to date is 20% for stocks and 57% for equity indexes.

"It's hard to say why in such a short time horizon," a market participant said, commenting on the heavy push in stock-linked notes. "I didn't see a big change in the VIX although individual stock vol. situations may have been different."

Elections, earnings

The year-to-date figures, however, continued to disappoint compared to 2011.

Agents so far have sold $28.47 billion in 6,314 offerings, an 18% decline in volume from $34.56 billion priced last year in 5,433 deals.

"Quantity picks up toward the end of the month. But we're not heading toward new highs yet in terms of notional distribution. It's kind of cyclical," a distributor said, commenting on this month-to-date volume.

June and July have been the weakest months this year with $2.46 billion and $2.16 billion, respectively. The top two months have been March, with $4.15 billion, and May with $3.97 billion.

Stock revival

"Going through this election in November, we're probably not going to see wide swings in sales. After that, things may begin to settle down and we may see a revert back to more normal volume trends," the distributor said.

Stocks as an underlying asset have begun to recover in September. Their growth is visible on a month to month basis. During the Sept. 1-13 period, the volume of deals tied to this asset class was up 142% from the month before. It accounted to 37% of the volume versus 27% during the same time in September. Meanwhile equity indexes grew by 67% during the period and represented 48% of the total, narrowing the usual gap between the two asset classes in terms of market shares.

But this trend is only for the first half of the month and could just be "cyclical," a source said as equity indexes typically soar at the end of each month.

Other factors may explain the strong single-stock issuance seen last week, such as volatility and the kick-off of the earnings season, sources said. The VIX index was up significantly the day after Columbus Day even though it went down afterward. The S&P 500 finished the week down 1.85%.

Andrew Valentine Pool, main trader at Regatta Research & Money Management, said that the beginning of the earnings season may be one of the explanations.

"If there is any whispering going around, it creates volatility, and the more volatility, the better the option price. You can strike deals at a better premium," he said.

Pool agreed that the structured products market as a whole has been slowing down ahead of the elections.

"I've seen the pickup in stocks but overall volume has been pretty thin. We were concerned with the overall economic environment going into the elections. We were pretty light," he said. "With this type of uncertainty, I think October will probably be lagging."

A distributor also noticed the single-stock trends last week.

"I've seen many stocks and have been wondering what's behind it. I don't know exactly why but I've seen it. A couple of Apple deals came out. The name is big, it's very commercially recognized. When volatility picks up there, you'll see more of it," this distributor said.

Top deals, all stocks

The top five offerings were all tied to single stocks, according to the data.

The most-favored structures, which were used in those deals, were market-linked step income products, callable reverse convertibles and autocallables.

"With those top stock deals, you have to look at it on a case-by-case basis," said Pool.

"That Apple was the No. 1 doesn't surprise me. It's a very good name and tech stocks are up," he said.

Barclays Bank plc priced the No. 1 offering with its $43,054,000 of 8.5% STEP Income Securities due Oct. 25, 2013 linked to the common stock of Apple Inc.

If the price of Apple stock finished at or above the step level - 108.5% of the initial price - the payout at maturity would be par of $10.00 plus a payment of $1.09.

If the stock finished at or above the initial level but below the step level, the payout would be par. Investors would share in any losses.

Bank of America Merrill Lynch was the agent.

The second largest offering was a callable reverse convertible distributed by Morgan Stanley Smith Barney LLC. It was brought to market by Royal Bank of Canada, which priced $26.84 million of contingent income autocallable securities due Oct. 16, 2013 linked to the common stock of Las Vegas Sands Corp.

Investors received a contingent payment of 3.96% if Las Vegas Sands closed at or above 70% of the initial price on a quarterly determination date. If Las Vegas Sands stock closed at or above the initial share price on any of the quarters, the notes were called.

At maturity, if the notes were not called and the stock finished below the threshold, investors would be exposed to losses from the initial price and would get cash or shares reflecting the lower value of the stock.

Bank of America sold the third deal also issued by Barclays. It was a one-year autocallable note for $20.88 million tied to Freeport-McMoRan Copper & Gold Inc. shares. The annualized call premium was 22.4% payable during quarterly observation dates. There was a 10% buffer on the downside.

Barclays did another step income deal distributed by Merrill Lynch: It was $15,859,000 of 7.5% STEP Income Securities due Oct. 25, 2013 linked to the common stock of International Paper Co.

The step level was 107.5% of the initial price. The step payment was 4.2%. The buffer was 5%.

"International Paper is relatively high. It hasn't been that high in the past two years. If you're selling a put on the stock you get a pretty good premium," said Pool. "But I don't buy on the upswing. If it pops out, it could also keep going down."

The fifth largest deal was a $12.62 million callable reverse convertible issued by HSBC USA Inc. and tied to the stock of JPMorgan Chase & Co.

Bank of America was the top agent last week, selling $107 million in seven offerings, or 41.05% of the total.

It was followed by Royal Bank of Canada and JPMorgan.

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