Issuance declines by 46% to $305 million, but sources remain confident that drop is seasonal

By Emma Trincal

New York, April 27 - Issuance volume, excluding exchange-traded notes, continued to fall last week in continuation with a trend seen throughout April, but sources said the decline was probably due to the holiday week.

"It's probably seasonal. Last week I was on holiday. A lot of my colleagues were on holiday. It was a short week," a market participant said.

Agents sold $305 million in 59 deals during the week ended Thursday. The market was closed on Friday. It compared with $565 million issued in 133 deals the week before, a 46% decline in volume. The reporting of some deals may have been delayed due to the holiday.

'Funny month'

"April is a funny month," a New York sellsider said. "You have the spring break, the Jewish holidays, a little bit of uncertainty in the market. It's a combination of factors for the perfect storm. The first quarter was relatively strong. March was pretty good for us. April a little softer. We'll see if May bounces back."

The market participant said that sales started to decelerate in March but that "the large drop was last week."

"My guess is that the same thing happened last year at the same time," he said.

Indeed, data compiled by Prospect News showed that non-ETN issuance dropped by 65% last year between the week preceding the Easter holiday and the prior week.

Still, some in the market are concerned with the slower pace recorded in this early stage of the second quarter.

"As a professional in this industry, I'd rather see more issuance. It is troubling," the market participant said.

"We had a very good first two months this year. Investors' dollars are not unlimited. It's reasonable that sales would slow down."

Big picture

Month-to-date figures show a reduced issuance speed this month compared to March. But for the year, 2011 remains better than last year so far, according to data compiled by Prospect News.

Non-ETN sales have dropped 8% so far this month compared to the same period last month. However, agents so far this year have sold $14.66 billion versus $13.58 billion last year, a 5% increase.

"We're still up this year compared to last year, and that's what matters," the market participant said.

Pure beta

Figures including ETN issuance revealed a much brighter picture last week.

ETN activity surged and was dominated by Barclays Bank plc's launch of 18 new iPath commodities ETNs, which began trading on Thursday. The notes were linked to Barclays Capital Pure Beta indexes, a series of proprietary indexes designed to give a more representative exposure to commodity returns by eliminating some of the market distortions associated with the roll of futures contracts. In addition, Barclays rolled out a new iPath Seasonal Natural Gas ETN.

The bank registered to sell from time to time up to $1.55 billion of all the 18 new Pure Beta series as well as $50 million of the new Seasonal Natural Gas ETNs.

Overall, structured products issuance including ETNs spiked to $1.91 billion.

"The lion's share was ETNs. But ETNs are a weird animal. It's on the shelf. It doesn't mean they sold," the market participant said.

Talking about the Barclays' new iPath series, the sellsider said, "It's another sign that ETNs are becoming more of a staple."

The market participant said that issuers have to constantly come up with new products.

"The first wave of commodity benchmark ETN has already been there for a while. Banks have to come up with new ideas, new products to justify issuance. You can't always sell the same products," he said.

Commodities bid

A main asset class trend last week was the strong growth of commodities issuance even if equity index-linked products continued to dominate.

Agents sold $77 million of commodities notes, or 25% of the non-ETN market, versus $14 million the week before, or 2.5% of the volume. These figures do not even reflect ETN issuance, which was almost entirely structured around commodity underliers.

"The increase in commodities is tied to the view of rising inflation. A lot of people are using commodities to express this view," the sellsider said.

"There is a need for exposure in commodities. You have fewer choices of investment vehicles in commodities than in the equity market. That's why structured products meet a real need for investors," the market participant said.

"Demand for commodities products will be there for a long time, and you'll see more commodities products coming up," he added.

Still bullish

Equity index products grew from 20% to 41% of the whole but did not push up much in volume ($125 million last week versus $113 million during the prior week).

The decline was significant for single-stock deals, which fell to $79 million, or 26%, from $251 million, or 44.5%.

"The drop in stock issuance is a tough one to explain," said the market participant. "Personally, I believe that it's easier for investors to look at markets or sectors rather than picking stocks."

That said, the overall sentiment among investors is bullish, he said, if one looks at volatility, down 13% last week as measured by the CBOE Volatility index, or VIX.

"The VIX has been declining. If you believe in the correlation between equity prices and volatility, you can argue that people are confident," the market participant said.

"The U.S. stock market has its ups and downs, and we've seen more global uncertainty. But the U.S. market didn't have a substantial downturn just because of the problems in the world."

Leveraged return deals with partial downside protection were the most favored structure last week, amounting to $109 million, or 36% of the total. Reverse convertibles totaling $64 million came next at 21% of the volume, according to data compiled by Prospect News.

Top deals

Credit Suisse AG, Nassau Branch's $80.46 million of 0% notes due May 2, 2012 linked to a basket of three buffered return enhanced components and their related currencies was the top non-ETN deal. JPMorgan, the agent for the deal, issued and sold earlier this month $20 million of notes with virtually the same structure.

The components of the underlying basket for the Credit Suisse notes were the Euro Stoxx 50 index with a 51% weight, the FTSE 100 index with a 25% weight and the Topix index with a 24% weight, as with the prior deal.

Another remake of a successful offering - and the No. 2 offering - was Deutsche Bank AG, London Branch's $46.5 million of floating-rate securities due May 23, 2012 linked to the Dow Jones - UBS Commodity Index Total Return.

The securities are putable at anytime for $1 million or more. The payout upon redemption or at maturity will be par plus triple the sum of the index return minus the TBill return minus the adjustment factor.

Earlier in April, AB Svensk Exportkredit priced $59.5 million of floating-rate notes due May 15, 2012 linked to the same index. Sold by Merrill Lynch, this offering had very similar terms.

The third deal was a reverse convertible. HSBC USA Inc. priced $17.54 million of 11% trigger yield optimization notes due April 30, 2012 linked to Las Vegas Sands Corp.

Overall, last week's offering were much smaller in size than the week before. Only six deals in excess of $10 million priced versus 38 the week before.

Aside from Barclays, which topped the league tables with its iPath series, JPMorgan was the No. 1 agent with $115 million sold in 11 deals, or 38% of the non-ETN volume. It was followed by Deutsche Bank with $46 million in one deal and UBS with $39 million in seven offerings.

"As a professional in this industry, I'd rather see more issuance. It is troubling." - A market participant

"The increase in commodities is tied to the view of rising inflation." - A New York sellsider

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