May kicks off on good note with $446 million priced in 112 offerings; agents sell repeat deals

By Emma Trincal

New York, May 13 – The first week of May was rather strong for a start of the month. In fact, it had the best volume on record for a first week since January with $446 million sold in 112 offerings, according to data compiled by Prospect News.

The market was characterized by a number of repeat deals that have proven to sell well in the past and by a majority of the volume in single stocks, which is uncommon based on the data as equity indexes make for nearly two-thirds of the volume on a year-to-date basis.

Topix tops

Goldman Sachs Group, Inc. priced the top deal with $50 million of 0% notes due Aug. 12, 2015 linked to the Topix index. The issue price was 100.64% of par. The structure was delta one.

Goldman has sold this product once a month on average with six deals since the beginning of the year totaling $132 million, according to the data. Last week’s $50 million offering was its biggest for the year so far.

The notes are a repeat deal: over the past five years, Goldman has issued and sold most of the $2 billion of equity-linked notes tied to the Topix index, the data showed. Nearly 100 Topix-linked offerings have been brought to market during that time.

“I suppose it’s because there is no ETF on the Topix, so someone needs a note on it,” an industry source said.

There is indeed no ETF that tracks the Topix index directly in the United States, a broker said.

The two widely used Japanese ETFs are the iShares Japan Large-Cap ETF, which tracks the S&P/Topix 150 index, and the iShares MSCI Japan ETF, which seeks to replicate the MSCI Japan index.

A very popular basket

Another example of a repeat deal brought to market last week but seen month after month was the pricing by several agents of notes linked to a basket that consists of the same international indexes built around the same weightings.

The notes are either tracker notes or leveraged return products.

The basket comprises the Euro Stoxx 50 index (37% weight), the FTSE 100 index (23% weight), the Topix index (23% weight), the Swiss Market index (9% weight) and the S&P/ASX 200 index (8% weight).

Last week, only $16.74 million priced based on this basket with Goldman leading the series in size.

But the product has been repeated so many times this year that it now has reached $877 million in volume in 90 offerings year to date, the data showed.

The top issuers have been Barclays Bank plc and Goldman Sachs, but the product has also been brought to market by Credit Suisse AG, London Branch, Deutsche Bank AG, London Branch and Royal Bank of Canada in smaller sizes.

Barclays priced the largest one in February with $89.11 million of leveraged notes.

Goldman Sachs did $80.03 million the month before.

JPMorgan Chase & Co. was another big issuer and agent with $36.23 million in March. But most of those deals are small and distributed across different firms.

Europe-centric

“We haven’t seen that one in our retail stream. We haven’t seen this appetite for this kind of exposure, at least not yet,” said a sellsider.

He noted the European skew in the basket with the euro zone, the United Kingdom and Switzerland together making for nearly 70% of the allocation.

“For a year now we’ve been recommending the Euro Stoxx as a way to get exposure to Europe. That has worked well, especially with the European Central Bank’s QE. To the extent that the euro zone improves, Switzerland and the U.K. could benefit from QE as well,” this sellsider said.

“I know that for us, the focus is on the euro zone only.”

He said the basket was probably research-driven.

“Somebody put together this basket and said, I think these weightings are appropriate,” he said.

He does not believe that money is flowing out of the S&P 500 index at this point.

“Investors are not necessarily worried about the U.S. markets. We don’t hear that the U.S. market is overvalued but more that it’s fully valued and that there are options elsewhere. So that’s one way to play it.”

A market participant looking at the top size of the deals linked to this international basket this year said, “I believe it’s either JPMorgan or Goldman Sachs doing it for a large customer. They’re spreading the credit risk around different issuers.

“My gut feeling is that it’s for Goldman Sachs Asset Management, but it’s only a guess.”

Open architecture

An industry source said the fact that several firms have issued the deal and that it has been repeated so often is a clear indication of open architecture.

“I’m sure it’s for one client only, a big client like a fund manager, an asset manager or the private bank of JPMorgan,” he said.

“They just don’t want the agent to be the issuer all the time. They want to diversify.

“People are getting a bit nervous about the S&P. They should. It’s probably going to be a hot summer with a lot of volatility. I am not sure that international markets are immune to a market correction though.”

The bond sell-off, rising Treasury yields and mounting concerns about Greek debt helped volatility reach higher levels last week, which in turn made single-stock structures more compelling as short volatility plays, sources said.

Stocks dwarf indexes

Exceptionally, issuance volume from single-stock deals exceeded the size of equity index-linked notes with a market share of 47.35% versus 44.71%, respectively, according to the data.

The year-to-date average is 19% for stocks and 65.50% for equity indexes.

The top two single-stock products used the same popular name.

Bank of America Corp. priced $40 million of 8% floored participation one-year notes linked to Apple Inc. It was the No. 2 offering of the week.

Separately, Morgan Stanley priced $31.4 of contingent income autocallable securities due May 11, 2018 linked to Apple also with a 9.05% contingent payment, making this offering the third one in size.

JPMorgan priced two Biogen Idec Inc. notes for $17 million and $11 million.

Investors also looked for volatility in some riskier sectors such as biotechnology and energy, according to the data, with deals priced on Amgen Inc., Gilead Sciences, Inc., Halliburton Co., Anadarko Petroleum Corp. and Valero Energy Corp.

Single-stock deals were for the most part reverse convertibles or autocallable contingent coupon notes, the data showed.

Playing it safe

“Maybe it’s more not about people looking for individual stocks but about people wanting income instead of growth and getting it from single-stock structures,” the sellsider said.

“We see the same thing, and some of those coupons are pretty high. The more risk you take, the higher the return.

“But we try to tell our clients to focus more on conservative structures. We don’t think investors weigh heavily enough the risk that those reverse convertibles or contingent coupon deals are producing.

“There’s the risk of losing the coupon payment like the phoenix structure. In most cases there is a protection barrier that puts your principal at risk, but that hopefully is at a low threshold.

“Our approach is to use indexes instead of single stocks in our income notes.

“When you believe that equity markets are fully valued, when you don’t expect a significant increase, a way to hedge that is to get exposure to the indexes through an income note that has a large coupon and a defensive barrier.

“You’re not going to get a 12% or 15% coupon since you’re not selling the volatility of a single stock. But you’re getting a 6% to 8% coupon, and your barrier is deeper and your risk lower. That’s the trade-off.”

Goldman Sachs was the top agent last week with $123 million sold in 11 deals, or 27.7% of the total.

It was followed by JPMorgan and UBS.

“I suppose it’s because there is no ETF on the Topix.” – An industry source on Goldman’s repeating Topix-linked deals

“People are getting a bit nervous about the S&P. They should.” – An industry source

© 2015 Prospect News.
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