Week's issuance is feeblest of year so far, but 2013 volume still up; rates deals make a push

By Emma Trincal

New York, March 27 - The week ended Friday was the weakest of the year so far, according to data compiled by Prospect News. Agents sold $284 million of structured products in 105 deals, a nearly 52% decrease from the $589 million priced in 145 offerings the week before.

March volume as of the 23rd also softened compared to the same period in February. At $1.52 billion, the amount priced is a nearly 36% decline from $2.37 billion printed in February. The number of deals fell to 406 from 481.

However, on a year-to-date basis, sales have kept their lead over 2012 so far. The year's volume is $8.31 billion, up 4.57% from $7.95 billion for the same period in 2012, according to the data. On the other hand, fewer deals have priced, with the number of offerings down to 1,749 this year from 1,843 in 2012.

The biggest week so far in terms of volume was the one that began Feb. 17 with $1.21 billion sold in 164 deals, or 14.58% of the year-to-date volume. The second best week was in Jan. 20 with $1.12 billion sold in 139 deals, or 13.42% of the total.

March is key

"It looks like we're starting to see less momentum since March, although we're still up for the year," a structurer said.

"I blame Finra. I don't blame the rally that much. It's easy to say stocks are up, people are optimistic, they don't want structured notes anymore. It's not that simple. You can't explain everything with the market."

The structurer said that the momentum seen in January and February may begin to fade.

"Early in the year, a few firms happened to print a lot in the first and second months. But the industry is still not healthy because you still have a lot of firms that are not allowed to sell.

"Call it March madness. ...It's a good comparison. If you only have one guy who happens to be shooting the basket for the first five minutes, that's great, but this is not how the game is played. The other guys have to touch the ball, but they can't throw the ball in the basket.

"That's the same here. Some firms happened to print a lot for the first two months of the year, but the rest of the market was not following. The law of averages starts to haunt you, and it's not a rosy picture when the lead is narrowing.

"I really think those tight approval rules imposed by Finra are responsible for the shrinking volume, and I'm not alone.

"If the industry was allowed to sell what investors want to buy, we wouldn't have this problem. I don't know when things are going to change. We're fighting this battle every day."

A market participant said that March was not over yet.

"I'm not sure about March yet. Some firms are pricing [Wednesday]. We won't have a clear picture of what happens for March until next week," he said.

Interest rates bid

Interest rate deals represented the second largest asset class last week after equity indexes with $45 million sold in four offerings, or 16% of the total. For the month, this asset class, while still modest in size - it is 7.22% of the total - recorded the fastest rate of growth after commodities, up 68.5%. Agents sold $110 million in five deals, versus $65 million last month.

The growth trend for these interest rate products remained true on a year-to-date basis as those notes increased in volume by 130% to $294 million from $128 million last year.

The totals do not encompass lightly structured notes such as step-up notes, step-down notes, fixed-to-floating notes and capped floaters. The rates category itself does not include hybrid underliers mixing rates and equity such as range accrual notes built around the S&P 500.

"The difficulty our industry is facing in getting capital-at-risk products approved is probably why we're starting to see more rates deals. They're principal protected. It's easy to get approval even if it's a 15-year tenor," the structurer said.

"But as soon as you have risk, product committees are confused. The rules are not clear. The easiest thing to do is to say no. Then you go to a 15-year CMS spread where you use 14 years of coupon to get one. Not enough firms are opening up their platforms for product-at-risk structures. Some firms are even getting tighter: What they approved before, they take it back."

In terms of structures, leveraged notes remained prevalent. Leverage with no downside protection was the top structure for the year with $1.85 billion, or 22.25% of the volume.

Leveraged notes with a buffer or barrier represented 15.66% of the volume this year with $1.30 billion in sales.

The largest deal last week fell into that category and was brought to market by Credit Suisse AG, Nassau Branch. It was $20.26 million of 0% Buffered Accelerated Return Equity Securities due Sept. 23, 2015 linked to the S&P MidCap 400 index. The structure offered a 1.5 times leverage factor up to a 27.5% cap on the upside and a 10% buffer on the downside.

Top deals

Deals were small in size last week, with only two products in the $20 million size or greater category, compared with seven during the previous week.

The second-largest deal was a Goldman Sachs Group, Inc. rates-linked product in the form of $20 million of callable quarterly CMS spread notes due March 27, 2028 linked to the 30-year Constant Maturity Swap Rate and the five-year CMS rate. The interest rate was 9.25% in the first year. After that, the coupon was four times the spread of the 30-year CMS rate over the five-year CMS rate minus 20 basis points, subject to a maximum rate of 9.25% and a minimum rate of zero. Interest was payable quarterly, and the notes were callable after six months on any interest payment date. The payout at maturity was par.

Bank of Nova Scotia priced the third-largest deal with its $13.75 million of 0% series A buffered participation notes due March 23, 2015 linked to the Russell 2000 index, a digital note with a 11.65% contingent coupon paid at maturity if the index finished at or above 90% of the initial index level and a 10% buffer with a 1.1111% downside leverage factor beyond it.

Goldman Sachs priced another rate-linked product with its $10.5 million of callable quarterly CMS spread notes due March 22, 2028 also linked to the 30-year and five-year CMS rates. The terms were the same as the $20 million deal except for the first-year coupon, which was 9% instead of 9.25%.

Royal Bank of Canada sold $10 million of redeemable leveraged steepener notes due March 27, 2033 linked to the 30-year and two-year CMS rates. The coupon was 6% for the first year. After that, interest was equal to four times the spread between the two rates, subject to a cap of 6% and a floor of 0%. The notes were callable but not before Sept. 27, 2014.

Structures that were popular during the previous week lost their appeal last week. The "all reverse convertible" category, which includes traditional and autocallable reverse convertibles, made up almost half of the volume in the second week of March but declined by 80% last week to represent less than 20% of the sales.

Just like reverse convertible bets on single stocks were highly fashionable two weeks ago, the bid on rate structures may not last, a sellsider said.

"I'm not sure if the trend will be sustained. The demand seems to pick up out of nowhere," he said.

In the meantime, equity remained prevalent, and the year to date has seen a nearly 13% pickup in volume in this asset class to $6.56 billion from $5.82 billion, with most of the growth due to indexes. Equity-linked notes represent nearly 79% of the total this year versus 73% last year, according to the data.

The top agent last week was Goldman Sachs with $85 million sold in 10 deals, or 29.97% of the total. It was followed by Credit Suisse and Barclays.

"If the industry was allowed to sell what investors want to buy, we wouldn't have this problem." - A structurer

"I'm not sure if the trend will be sustained." - A sellsider on the pickup in interest rate products

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