Volume stays strong at $410 million; two large autocallable notes top issuance

By Emma Trincal

New York, April 14 - Issuance volume was steady last week, and autocallable deals took the lead to amount to almost half of the top 10 deals.

Agents brought to the U.S. market $410 million in the week ended April 9, about half the volume of the week before but still a solid flow for the early part of the month, a source said.

The two largest deals of the week were autocallable notes both priced by Goldman Sachs Group, Inc.

The bank led with the top deal, a $58.53 million issue of 0% autocallable index-linked notes due July 21, 2011 based on the S&P MidCap 400 index.

Agents sold about $135.44 million in autocallable notes last week, making up one-third of the volume, according to data compiled by Prospect News.

Autocallable mania

"Reverse convertibles have been around for a long time. But autocallables are now becoming more important," said a New York sellsider.

"Not every firm is doing it. But those who do have had a tremendous success," he added.

Goldman Sachs priced the second-largest deal with $44.1 million of 0% autocallable underlier notes due May 12, 2011 based on the performance of the Euro Stoxx 50, FTSE 100 and Topix indexes.

Equity remained the dominant asset class with $301 million priced in 27 deals, or approximately three-quarters of the volume, according to data compiled by Prospect News.

However, the breakdown between stock deals and equity index-linked notes revealed an increasing appetite for single stocks (27% of the volume) when compared to prior weeks even as index-based transactions continued to dominate issuance (43%), according to data compiled by Prospect News.

Single stock, not reverse

Another trait of the week was the fact that not all single-stock deals were done in a reverse convertible format.

In fact, sources noted that several among the top 10 deals were single stock-linked notes that used an alternative structure than the traditional reverse convertible.

One example was Bank of America Corp.'s $29.96 million of 9% STEP Income Securities due April 21, 2011 based on Schlumberger Ltd. shares. The structure gave investors a 9% coupon payable quarterly. In addition, the notes gave investors a potential 4.15% step payment if the underlying stock was to rise above the step level - 109% of the initial share price.

"The STEP is hybrid between an autocallable and a reverse convertible," said the sellsider.

Another example was the use of a single stock for the underlying of an autocallable deal, a trend that is not typical as those structures mostly use indexes as their reference asset, this sellsider said.

HSBC USA Inc. priced $17.32 million of 0% autocallable optimization securities with contingent protection due April 14, 2011 linked to the common stock of Apple Inc. The call is triggered if Apple stock closes at or above its initial share price on any of 12 monthly observation dates, triggering an annualized call premium of 19.2%.

The Bank of America STEP deal and the HSBC USA autocallable structure linked to Apple were the fourth- and seventh-largest transactions of the week, amounting to sizes rarely matched by straightforward reverse convertible deals, sources noted.

However, those deals shared some of the characteristics of reverse convertibles in that they are volatility plays, one market participant said.

"Volatility matters," said Jakob Bronebakk, associate partner at Jubilee Financial Products, a structured products boutique. "Whenever the investor is selling volatility, single-stock deals are always more attractive because you can get a higher coupon."

Commodities wane

Based on the amount of commodity-linked notes issuance - $29 million in six deals, or 7% of the total - investor appetite for commodities has apparently fallen.

The largest one of those was $25 million of floating-rate notes due May 17, 2011 linked to the Dow Jones - UBS Commodity Index Total Return priced by Morgan Stanley & Co. Inc. for AB Svensk Exportkredit.

Yet, nearly one out of every two reverse convertible transactions was linked to a commodity stock, according to data compiled by Prospect News.

Moreover, some of the biggest single-stock deals were linked to commodity names, such as Bank of America's STEP Income Securities tied to Schlumberger or JPMorgan Chase & Co.'s $31.24 million of 12.15% yield optimization notes due April 14, 2011 linked to Consol Energy Inc.

Issuers used other well-known commodity names as underliers such as Newmont Mining Corp., which Citigroup Funding Inc. utilized for its $13.28 million of 8% Equity LinKed Securities due Oct. 20, 2010.

"Maybe investors feel that commodities have had a good run and doing a single-stock deal on a commodity name is a more conservative way to play it," the sellsider said.

For others, volatility was the main factor.

"Commodity stocks are often very volatile," said Bronebakk. "If you do a reverse convertible on a commodity stock, it will give you an attractive-looking coupon. Investors may think it's a good deal."

But Bronebakk said that he did not believe that commodity stock-linked deals were an efficient way to gain exposure to commodities as an asset class.

"Reverse convertibles don't participate to the upside so if you're bullish on commodities, it would be a poor choice. It's the technical that are driving it," he said.

S&P MidCap appeal

One other trend for the week was the rising interest in the S&P MidCap 400 compared to the S&P 500 benchmark.

Sources had diverging views on how to interpret the trend and whether it marked a bias revealing a preference for smaller-capitalization stocks.

But data compiled by Prospect News showed that there were three times more notes linked to the S&P MidCap 400 than to the S&P 500 index.

Issuers priced $28 million in four deals linked to the S&P 500 index, or 6.82% of the volume, versus $84.53 million in three deals linked to the S&P MidCap 400.

"I'm not surprised to see more mid-cap deals. The U.S. small-cap market is liquid enough to trade," said Bronebakk. "It could also be a sign of hurdle behavior. People are a little bit like sheep; they see a deal and they do it."

"I wonder if it's driven by one institutional customer. I can't imagine this coming from retail investors. Mid-cap stocks are not that popular among retail investors," said the sellsider.

Noting that some of those deals involved JPMorgan's distribution network, this sellsider added that, "Maybe JPMorgan has put a large allocation to midcap and they use structured products to get exposure to it," he said.

Goldman tops

The top agent for the week was Goldman Sachs, which priced the two largest deals and a total of $172 million representing approximately 42% of the volume.

"Reverse convertibles have been around for a long time. But autocallables are now becoming more important." - A New York sellsider

"I'm not surprised to see more mid-cap deals." - Jakob Bronebakk, associate partner at structured products boutique Jubilee Financial Products

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