Issuance up 8% for the month in pivotal week fueled by bullish confidence, stock picking

By Emma Trincal

New York, March 21 - Issuance volume was strong last week, and stocks made a comeback, two signs that a bullish sentiment is now prevailing amid signs of economic improvement and continued rising stock prices, sources said.

"The bulls are out there," a sellsider said. "There is less speculation and more confidence. You're looking at trend investing versus speculative volatility investing."

Higher volume

Investors have stayed out of the structured notes market in recent weeks because rich valuations made the entry points less attractive, but last week suggested a renewed interest in equity-linked products.

"People are picking up on a bullish trend. They want to be part of it. The bullish sentiment is very strong," the sellsider said.

"It's the old saying: When the taxi driver gives you stock tips, you know you're in a bull market."

Agents sold $622 million in 126 deals in the week ended Friday, compared with $424 million in 147 deals in the prior week, a 46.5% increase.

The week marked a turning point as it led to an upward trend on a month to month basis, the first of its kind in weeks.

Sales in March as of Friday amounted to $1.35 billion, up 8.15% from the same period in February.

"When investors believe that the bull market is sustainable, you'll always have more volume," the sellsider said.

But at $7.35 billion, sales for the year are still lagging the $10.92 billion priced during the same time last year, a decline of nearly one-third.

Those figures do not include exchange-traded notes or certificates of deposit.

Stock picking

Single-stock deals made a strong comeback last week.

According to the sellsider, the main driver behind this new trend - index-linked deals had been dominant - is again the same bullishness that gives stock pickers more confidence.

Agents sold $199 million of single stock-linked notes last week, up 175% from the prior week. This asset class represented nearly a third of the total last week versus 17% the week before, according to data compiled by Prospect News.

Equity index deals increased but by a much smaller percentage of 20%. They amounted to $282 million. Their market share declined to 45% from 55%.

This stock trend is specific to last week. On a monthly basis, equity indexes have increased by 20% while stock-linked notes issuance has dropped by 6%.

Rising stock prices are the main driver, the sellsider said.

The S&P 500 continued to rally last week. It was up 2.8% and crossed the 1,400 threshold for the first time this year on Thursday.

Simultaneously, the CBOE Volatility index, or VIX index, which measures implied volatility on S&P 500 options, was down. It ended the week below the 15 threshold. It closed on Tuesday at 14.47, its lowest point in the year to date.

Yields rose in the United States last week, another sign that the economic outlook is more positive and investor sentiment more upbeat, a source noted.

"Volatility on the S&P 500 is down at historical lows. It's always the case during a positive rally. It's the opposite of the market we saw in August and September, when the VIX spiked," the sellsider said.

In those conditions, how does one explain the surge in stock deals, which tend to offer better coupons in a down market?

Bullish optimism

"You always have two different scenarios with single-name deals," the sellsider said.

"First case, the pricing element prevails. Volatility spikes, and that gives you a higher coupon. Investors in this scenario choose to be locked in at a preferential price, hoping for an uptrend. If they're wrong, they rely on the higher coupon to add more protection. Those are the savvy investors. They're willing to take on risk.

"The second case is the bull trend, and that's where we are now. People go crazy over stocks again. They don't care so much about the coupon. They have less risk. They tend to go for shorter duration, otherwise they would limit the upside for too long."

Reverse convertible notes rose by 72% last week to $169 million from $98 million, a figure that incorporates reverse convertibles built around barriers, buffers or no protection and callable or not.

"Don't forget the sales aspect of things," the sellsider said, commenting on the upward trend for reverse convertibles.

"In a bull market, it's not difficult to sell a positive story. In a bear market, it's impossible."

In general, this sellsider noted, when appetite for single names is high, volume overall tends to rise.

"People who buy reverse convertibles or autocallables when volatility spikes lock in their coupon, take more risk. They're a minority. They're more traders and sophisticated investors. It's the bulls that buy high that really drive up volume," he said.

Top deals

HSBC USA Inc. priced the largest stock deal and the second largest issue last week with its $35.33 million of 7% coupon-bearing notes due April 1, 2013 linked to the common stock of Apple Inc.

Bank of America Merrill Lynch was the underwriter for this offering.

If the final price of Apple stock is greater than or equal to 92.4% of the initial value, the payout at maturity will be par. Otherwise, investors will lose 1% for every 1% that the final price is below the threshold.

"Apple is a different story," a structurer said. "While the price is way up, volatility on this name last week was very high. There's a risk premium. People don't really know if the stock is going to continue to go up indefinitely.

"Volatility on this stock is big. People want to buy protection even through the price trend is upward."

Autocallable structures were also on the rise last week. They grew more than four-fold to $124 million from $29 million. Their weight increased to 20% of the total volume from 6.75% the week before.

Out of the 12 autocallables that priced last week, five were linked to single stocks.

"People love autocall," the structurer said.

"The sellside likes them because after the call, they can repeat the issuance.

"It can be good for the client too. You've been called and the stock plunges. You're happy that you didn't stay in longer."

The top autocallable deal and the No. 5 issue of the week was brought to market by Barclays Bank plc and sold by Bank of America Merrill Lynch. It was a $28.11 million offering of 0% Strategic Accelerated Redemption Securities due April 3, 2013 linked to Freeport-McMoRan Copper & Gold Inc. shares. The annualized call premium is 21.2%, and the structure provides for a 10% buffer.

"Freeport has a high volatility," the structurer said. "It's a popular name for those who want exposure to gold, and it's one of the few stocks globally linked to gold."

Knock-out structures continued to be popular, as shown by the size of the top deal of the week.

Credit Suisse AG, Nassau Branch priced $41.63 million of 0% capped knock-out notes due April 4, 2013 linked to the S&P 500 index.

A knock-out event will occur if the index falls by more than the 20% from the initial level during the life of the notes.

If a knock-out event does not occur, the payout at maturity will be par plus the index return, subject to a contingent minimum return of 7.25%.

If a knock-out event occurs, the payout at maturity will be par plus the index return, with exposure to losses.

In either case, a 15% upside cap applies.

J.P. Morgan Securities LLC was the agent.

Bank of America Corp. priced the third largest offering, a $31.47 million issue of 0% autocallable market-linked step-up notes due March 27, 2015 linked to the S&P 500.

The notes will be called at par plus a premium if the index's closing level is greater than or equal to the initial level on either of two observation dates, one of which is set a year after issuance and the other just prior to maturity.

If the notes are not called and the final index return is positive, the payout at maturity will be par plus the greater of 61% and the index return. There is a 5% buffer.

Bank of America was the No. 1 agent last week, selling nine deals totaling $176 million, or 28.28% of the total. JPMorgan was next with 27.13% of the volume. It was followed by Goldman Sachs with a 13% market share.

"When investors believe that the bull market is sustainable, you'll always have more volume." - A sellsider

"People love autocall. The sellside likes them because after the call, they can repeat the issuance." - A structurer

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