Volume still strong at nearly $1 billion as July ends, August begins; big repeat deal seen

By Emma Trincal

New York, Aug. 6 – Volume was decent at nearly $1 billion last week, which included the junction of July and August.

Sales amounted to $992 million in the week of July 28 through Aug. 1, according to data compiled by Prospect News. In comparison, the previous week recorded $1.37 billion, but it was also the week when BofA Merrill Lynch closed its deals. In contrast, BofA Merrill Lynch priced only one offering last week, albeit a larger one of nearly $40 million.

“Business is driven at the end of the month, and July overlapped on last week. Call dates are around the end of a particular month. It may have contributed to the higher volume if things are getting called and people are rolling,” a sellsider said.

“Some issuers typically price and print at the end of the month, and we saw the rest of the market closing deals last week after them.”

July

For some, July was a strong month. Others felt the market was still sluggish.

“We had a big uptick in volatility at the end of July and beginning of August. July is typically a slow month,” the sellsider said.

“Our firm had a pretty good month in July. It might be the recruiting we’ve done internally. I think that in general, the fundamentals are positive. There is a wider adoption of products, especially when people are concerned about volatility and when they want to hedge themselves.”

But a distributor was more pessimistic.

“It’s so unbelievably quiet in comparison to what we’ve been used to in the past,” he said.

“We’ve maintained similar flows, but it’s far from stellar. It’s really a very slow summer and not just with structured products.

“When you have this combination of low rates and low volatility, it’s not good for traders, it’s not good for investment banks, it’s not good for investors and clients. No money changes hands, and no money is being made.”

The equity market rally was interrupted last week by a sell-off on Thursday and Friday, which increased volatility levels. Seven out of the top 10 offerings priced on those days, according to the data.

“Last week’s sell-off definitely helps. Anything that increases volatility, and not just the VIX, is helpful for pricing,” the distributor said.

“The big issuers need volatility to build bonds they can sell.

“If the market continues to rally, things are not likely to improve.”

The top agent last week was UBS, which priced 89 deals totaling $233 million, or 23.45% of the total. It was followed by JPMorgan, which sold $176 million in 50 offerings, or 17.75% of the market. The third agent was Morgan Stanley with 16.25% of the market in 24 deals totaling $162 million.

Replication on KBW

The top deal of the week, priced by Morgan Stanley, was intriguing, according to the distributor, as it came on the heels of two similar offerings that JPMorgan distributed the week before on the behalf of HSBC USA Inc. The size of those offerings and the less commonly used index employed in the structure were unusual, sources said.

Morgan Stanley priced on July 28 $40.5 million of 0% participation notes due Jan. 30, 2015 linked to the KBW Bank index. It was a delta one payout with an adjustment factor of 100.48%. Morgan Stanley & Co. LLC was the agent.

Three days before, JPMorgan priced two deals linked to the same index on the behalf of HSBC for $86.5 million and $30.8 million.

Despite the size of those offerings, the distributor, who works with retail clients, said he did not see them.

Open architecture or copycat

“Even if we had seen it, it’s not even something we would have posted. It’s part of Morgan Stanley’s internal distribution,” he said.

“These types of deals go to the private wealth management division of the JPMorgan or Morgan Stanley who distribute them internally.

“There are so many different ways those deals can be made. You could have a bank issuing under its own name but going to another asking them to handle the swap because they may have better swap levels, although that’s not going to be the case here.

“When agents distribute their products internally, they often like to use other issuers so that they don’t pitch their own stuff. That’s the benefit of open architecture, which JPMorgan did using HSBC. It’s always better from a compliance standpoint.”

The sellsider said a case of “copycat” execution could not be ruled out, although it was probably not the case.

“It could be a large institutional client who wanted to have the same structure but with different counterparties. They reached out to see if someone could replicate it,” he said.

“Even if a client only has a 15% bucket in structured notes, within that, they may want to diversify their credit exposure because it’s corporate debt. Like with any other bond portfolio, you want to spread that risk around.

“Not to say there isn’t a lot of copycatting going on. When something is successful, it doesn’t take long for someone to replicate it. But you may have a less cut-throat reason here that may explain these deals.”

Leverage, commodities

The second largest deal was BofA Merrill Lynch’s sole offering, Royal Bank of Canada’s $39.31 million of 0% Leveraged Index Return Notes due July 26, 2019 linked to the S&P 500 index. The notes offer 1.11 times leverage and no cap on the upside with a 15% buffer on the downside.

More buffered notes appeared on the top of the deal list last week, including the fourth largest deal, Wells Fargo & Co.’s $29.8 million of 0% buffered enhanced return securities due April 6, 2016 linked to the S&P 500 index. The upside is leveraged at a rate of 1.3 with an 18.46% cap. The structure features a 10% geared buffer on the downside with a 1.11 multiple applied beyond the buffer.

“When volatility picks up, you get new opportunities in pricing. This is when you start getting products that let you stay invested while allowing you to change your risk profile,” the sellsider said.

Commodities made a slight push last week with eight deals accounting for about 7% of the volume.

It was mostly due to the third largest offering, Deutsche Bank AG, London Branch’s $30.71 million of 0% review notes due Aug. 19, 2015 linked to WTI crude oil futures contracts. The structure is an autocallable with quarterly observation and an annualized premium of 11.25% if the futures price closes at or above the initial price and an 85% barrier at maturity. JPMorgan was the agent.

“It’s so unbelievably quiet in comparison to what we’ve been used to in the past.” – A distributor

“When something is successful, it doesn’t take long for someone to replicate it.” – A sellsider

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