Volume increases by nearly three-fold; Merrill Lynch re-emerges as top distributor, prices top deals

By Emma Trincal

New York, Aug. 4 - Issuance volume nearly tripled to $1.27 billion last week from $449 million the week before, and 167 deals closed versus 114, according to data compiled by Prospect News.

The dominant theme for the last week of July ended Friday was Merrill Lynch's active role in selling most of the top deals and its contribution to the bursting volume.

For the second week in a row, agents did not price any exchange-traded notes.

Yet, there was a multiplication of large deals, with Merrill Lynch pricing eight of the top 10 issues.

"We're seeing more issuance both in wealth management and in retail," a structurer said.

Some linked the solid issuance pace to Merrill Lynch's tendency to price the bulk of its sales toward the end of the month.

"Industry-wise, excluding Merrill Lynch, it's an OK month, not a superb month," said a New York sellsider.

Merrill Lynch's big deals

Thirty four deals in excess of $10 million sold last week versus 11 a week before, data compiled by Prospect News shows.

Seven out of those 34 deals surpassed $50 million in size, with one breaking the $100 million mark.

Merrill Lynch sold the top deal. It was Bank of America Corp.'s $104.76 million issue of 0% Capped Leveraged Index Return Notes due July 27, 2012 linked to the S&P 500 index, the MSCI EAFE index and the MSCI Emerging Markets index.

Merrill Lynch was also the agent for 20 of the 34 deals in excess of $10 million.

Merrill Lynch, not surprisingly, took the No. 1 slot in the weekly league table with $739 million sold in 21 deals, or 58% of the market.

Merrill Lynch sold Bank of America's deals but also a large number of offerings issued by others such as Eksportfinans ASA ($114 million), AB Svensk Exportkredit ($54 million) and Royal Bank of Canada ($24 million), according to data compiled by Prospect News.

Merrill Lynch's comeback

"Merrill Lynch used to be the top distributor before the credit crisis with $10 billion per year," the sellsider said. "They are now re-emerging as a big player."

The sellsider said that Merrill Lynch saw its sales slow down in the midst of the credit crisis as uncertainty around the direction and creditworthiness of Bank of America prevailed among investors.

"It looks like Bank of America's acquisition of Merrill Lynch has finally happened. They're really getting it together. They're well organized. They deserve credit for it," he said.

Most of Merrill Lynch's largest deals last week were based on the S&P 500.

One notable exception was deal No. 3l, Bank of America's $67.2 million of 0% Accelerated Return Notes due Sept. 30, 2011 linked to the Rogers International Commodity Index - Excess Return.

"Merrill Lynch already has a huge internal distribution channel. But they also distribute for many other issuers," the sellsider said.

"Either an issuer comes to market with its own deal. Or a distribution channel generates the inquiry and chooses the issuer," he said. "That's when a huge distribution network can dictate structures and generate the size," he added.

This sellsider said that he has been noticing the strengthened presence of Merrill Lynch over the past few months.

"Merrill Lynch is really re-emerging as a major distributor. They're approaching levels they did in the past," the sellsider said.

Citi and stocks

Citigroup took the second slot with $143 million sold in six deals for 10.5% of the volume.

Citigroup's impact was characterized by a limited number of large deals, with the three biggest ones each linked to a single stock.

Citigroup Funding Inc. priced $73 million of 9% annualized Equity LinKed Securities due Jan. 26, 2011 linked to Apple Inc. It was the second-largest deal of the week.

Using the same Equity LinKed Securities structure, its brand name for reverse convertibles, Citigroup also priced a $31.04 million deal linked to Boeing Co. shares and a $22.59 million deal linked to Barrick Gold Corp.

As the supply of single-stock issuance suggests, investors revealed a strong appetite for large-capitalization stocks, sources noted.

"People are more confident in large cap, where the money will go first," said the structurer. "It's harder to structure deals on small caps because of liquidity issues."

"Apple, Boeing are household names that definitely resonate with investors," said the sellsider.

"Big-stock deals are done around popular names. It can also be the result of the firm's research recommendations," he noted.

Maximizing leverage

Leveraged continued to be the most-favored structure with $348 million sold in 17 deals, or 27.35% of the total. Within this category, investors strongly preferred enhanced structures without any kind of buffer or barrier. Only one deal offered downside protection.

"The resurgence of leverage with no downside protection must signify that people are getting more confident," the structurer said. "At least, they must be very comfortable in their views."

"More protection limits upside," the sellsider said. "It's possible that for shorter maturities, people may want to get more upside," he added.

Besides reverse convertibles (18.5% of the volume) and autocallable notes (11.5%), another structure - range accrual notes - emerged with $86 million sold in four deals. It represented 6.75% of the total.

One large deal may partly explain this result with Morgan Stanley pricing an additional $15 million of CMS curve and S&P 500 index-linked range accrual notes due July 30, 2025, which brought the total deal size to $50 million, up from $35 million.

Equity dominates

Equity deals represented 70% of the volume with $882 million, slightly less than the 85% market share on record the week before.

Agents sold $170 million of commodities-linked deals for 13% of the total, an increase from the 2% seen the week before. Nine deals came to market versus four in the prior week.

Yet, sources did not see in these numbers a sign that the asset class was significantly recovering from a weakening trend seen for several weeks, if not months.

"The commodity story at the moment is on hold," the structurer said.

While fears of a double-dip recession have been declining, investors are now anticipating lower growth worldwide, he said.

"A low growth outlook is not an incentive for commodity issuance," he added.

A more indicative trend was the prevalence of Merrill Lynch, again, in distributing the largest offerings in the commodities-linked category, with 75% of the distribution for this asset class coming from this agent.

Besides the $67.2 million offering based on the Rogers commodity index, Merrill Lynch also sold Eksportfinans' $44.62 million of 0% Accelerated Return Notes due Oct. 4, 2011 based on the spot price of gold and a $27.67 million deal linked to the price of silver on the behalf of the same issuer.

Currency-linked notes issuance remained very sluggish with six deals amounting for $41 million, or 3%, of the volume.

Goldman Sachs Group, Inc.'s $18 million sale of currency-linked notes due Oct. 22, 2012 linked to the Mexican peso, Australian dollar, Norwegian krone, Indian rupee, Singapore dollar and Malaysian ringgit helped this asset class for the week.

Rate-linked notes issuance continued its prolonged decline with 3.5% of the volume despite Morgan Stanley's upsize of its CMS deal.

Mixed sentiment

Overall, investors continued to hang on to equity deals, sellsiders said, adding that it does not mean that optimism and risk-taking have resurfaced.

"The market sentiment is mixed right now," the sellsider said.

"Investors clearly see potential risk ahead. But rates are so low. It's hard to find principal-protection," he said.

"Investors are sitting on the fence and waiting. We're not seeing any major theme," he added.

"Merrill Lynch is really re-emerging as a major distributor." - A New York sellsider

"The resurgence of leverage with no downside protection must signify that people are getting more confident." - A structurer

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