Record deal makes for record week of $1.43 billion with signs pointing to an uptrend

By Emma Trincal

New York, May 23 - Issuance volume was skewed last week with the pricing of a nearly $1 billion deal, causing sales figures to soar. The good news was that even without it, volume grew on a week-over-week and month-over-month basis, according to data compiled by Prospect News.

However, for the year, sales are down 16% even when including last week's record pricing.

Agents sold $1,435,000,000 in the volatile week ended Friday, nearly four times the $369 million priced the week before.

The number of deals fell to 149 from 168.

This data include the "Fisher deal," UBS AG, London Branch's $946.2 million of 0% Fisher enhanced big cap growth securities due May 28, 2013 linked to the Russell 1000 Growth Index Total Return, which priced May 16.

Exchange-traded notes, plain-vanilla lightly structured rate-linked notes as well as certificates of deposits are not included in the data.

New kid

According to market participants, the deal was sold to Fisher Investments, a privately owned, independent money management firm based in Woodside, Calif., with billions of dollars under management for more than 25,000 private clients, and more than 100 large institutions, according to this company's website. The name of the institution was not mentioned in the prospectus, according to a 424B2 filing with the Securities and Exchange Commission.

The deal offered two-times leverage up and down on the underlying index.

Investors paid at maturity an adjustment factor equal to Libor plus 15 basis points.

Other features applied: the notes were putable, and they were callable at a certain downside threshold.

"This deal is an institution who designed this trade for its own clients," a New York structurer said.

"From what I understand those guys are close to the vest. They keep a low profile. It's some sort of Sanford Bernstein type of player.

"It's an asset manager doing this for their own account. If it was a pure institution, I mean, if they had made it for their own account, they would have swapped it," he said.

Fisher Investments was ranked No. 4 by Lipper in its Top 40 Money Managers rating for the last three years ended in December 2011 in the U.S. Large-cap Growth & Value Equity category.

A call to Fisher Investments seeking comments was not returned at press time.

"In my view, a trade like that could be allocated to thousands of clients' accounts," the structurer said.

"The name Fisher is new to me. But I don't think this deal would compete with existing private banks. Merrill wouldn't sell that. They don't like downside leverage with a trigger. They're not fans of that type of approach. Maybe it's for sophisticated accounts.

"At the same time, the fact that it was SEC registered leads me to believe that it's going to retail accounts," this structurer said.

But a sellsider at another firm was skeptical.

"It's very strange really. It's too big a size for retail clients in my opinion," this sellsider said.

"Even a Merrill Lynch or a JPMorgan, when they do their biggest deals, it's $200 million or $300 million. I can't imagine that you would have enough retail interest for a billion dollar deal. Maybe it's a mixture of the two.

"The product doesn't have distribution fees. So right there, it's definitely not the brokerage channel.

"Maybe it was put in the institution's portfolio for 5,000 different clients on a discretionary basis. They bought it and allocated it to their clients' accounts.

"This Fisher deal is fishy.

"The fact that it's registered with the SEC isn't something that I find weird. It's not a big deal. Most of UBS' deals are registered deals. I don't see any harm in doing this on a registered basis and there's no advantage to it either."

As previously reported and based on Prospect News data, the UBS Fisher deal represents the biggest equity-linked product ever sold in the United States with the exception of two single-stock-linked notes.

One, sold in September 2005, was Citigroup Funding Inc.'$989,479,000 mandatory exchangeable note tied to Genworth Financial Inc.

The other was a UBS's $2 billion mandatory exchangeable note tied to Time Warner Inc. which priced in February 2006.

Trending up

Volume was strong last week, even without the big UBS offering. The total excluding the deal was $489 million, a 32% increase from the week before.

On a month-to-date basis, total sales amounted to $2,141,000,000 in May compared to $980 million during the same period last year. Excluding last week's $946 million offering, sales have increased this month to $1,195,000,000, up 22%.

For the year to date, however, and even with last week's big deal, total volume fell by 16% to $15,164,000,000 from $18,071,000,000, according to the data.

A positive factor for last week was the volatility spike, sources said.

The VIX index moved up 26% from below 20 at the beginning of the week to above 25 on "Facebook Friday" hitting its highest level for the year.

On the same Friday, the S&P 500 hit its lowest point for the year since Jan. 3 and fell by more than 4% from the beginning of the week.

This new spike in market volatility made some structures more attractive, in particular reverse convertibles in which a coupon is obtained in selling a call option.

"Anytime volatility goes up, it's good for reverse convertibles," a market participant said.

Other big deals

Reverse convertible notes more than doubled in volume to $156 million last week from $69 million the week before.

On a monthly basis, this type of structure is up 7% in volume to $277 million, accounting for 13% of the volume.

Knock-out notes with contingent digital returns continued to be very popular.

Those structures offer a fixed or minimum return as well as some downside protection as long as some conditions are met.

The top deal in this category offered was a callable reverse convertible with a possible payout delivered as a contingent payment. The No. 2 in size for the week, it was brought to market by Barclays Bank plc in $52.24 million of contingent income autocallable securities due May 23, 2013 linked to the common stock of Apple Inc. Morgan Stanley was a dealer.

The contingent payment was 4.21% observable on a quarterly basis and triggered above an 80% level. The notes were called on the same periodic schedule if the stock price rose above its initial level. At maturity, investors were paid in Apple shares or cash if the 80% downside barrier was breached.

The third deal for the week was also a knock-out note.

JPMorgan Chase & Co. priced $30.23 million of 0% capped index knock-out notes due June 5, 2013 linked to the S&P 500 index.

The knock-out event was defined as a drop of the index by more than 23.5% from its initial level on any day.

Without a knock-out event, investors at maturity were guaranteed a minimum of 5% as a contingent minimum return or the index return if the benchmark closed higher.

If the knock-out occurred, investors were exposed to the index on the upside and downside.

In either case a 15% cap applied.

Given its blockbuster deal, UBS was significantly on top of the league tables last week with the pricing of $1,003,000,000 in 68 deals, or nearly 70% of the market.

Sources noted that UBS broke a pattern of selling little deals. When excluding the Fisher offering, the firm sold $57 million in 67 deals, which represents an average size of $850,000.

Following very much behind UBS was Barclays with $112 million and JPMorgan with $97 million.

"I praise UBS for doing this deal. It's a trade everybody would like to replicate," the structurer said.

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