Issuance slows; top two deals linked to lesser-known European index amid euro zone theme

By Emma Trincal

New York, Nov.13 - Issuance declined sharply last week to $229 million, down 60% from the $748 million issued the week before, according to data compiled by Prospect News. Sources said the decline was a normal result of the monthly calendar cycle.

"Firms like Merrill are especially active on the second week of the month with one-off [deals] and on the fourth week," a sellsider said.

"The first week is kind of slow. That is not to say that the rest of the month will be slow."

First-time use

The week's largest deal was linked to a lesser-known index. It was JPMorgan Chase & Co.'s $37.13 million offering of 0% return notes due May 9, 2014 linked to the Stoxx Europe 600 Basic Resources index converted into dollars. The structure was a simple delta one on the downside and the upside.

J.P. Morgan Securities LLC was the agent.

It was the first time in Prospect News' records that this index has been used. Prospect News' data goes back to June 2005 for stocks and to January 2007 for all other asset class underliers.

The deal was almost immediately followed two days later on Thursday by Credit Suisse AG, London Branch's $25.2 million return notes due May 9, 2014 linked to the Stoxx Europe 600 Basic Resources index and the euro. This other deal, the second in size for the week and very similar in structure, also featured a one-to-one payout. The agent for it was Credit Suisse Securities (USA) LLC.

"We have seen a greater interest in the euro zone this year," the sellsider said.

"First comes the broader index, the Euro Stoxx 50. That's where investors gravitate around. But as the interest for the asset class is maturing, you begin to see [a] search for specific sectors or sub-indexes."

The Stoxx Europe 600 Basic Resources index is one of 19 Stoxx Europe 600 Supersector indexes that make up the Stoxx Europe 600 index. It includes companies in the basic resources supersector, which tracks companies operating in the forestry and paper sector, the industrial metals and mining sector and the mining sector.

European focus

"Here in the U.S., we have this American Renaissance investment theme. It's based on the view that the U.S. industrial sector is growing. We're seeing manufacturing moving back to the U.S. A lot of U.S. investors are playing this theme in their portfolio. I assume the same thing is happening with the euro zone. Investors are increasingly focusing on manufacturing for this region, which includes resources," the sellsider said.

Jim Delaney, portfolio manager at Market Strategies Management, agreed that European stocks are one of the leading investment themes recently.

"People are focusing on Europe," he said.

"In the U.S., people are talking about tapering while in the euro zone, they're still talking about an accommodative monetary policy. That's one factor.

"Then you have those legendary investors making a statement. Recently, Bill Gates took a very large stake in a Spanish company. This is one of those investors, like Warren Buffet, that people follow, especially when they make big bets.

"You have countries like Spain, Portugal that are so discounted, they offer solid value. Those countries are off the map. On a relative basis, people believe that Europe is going to accelerate more than the U.S."

The third largest deal was a stock-linked security also brought to market by Credit Suisse, $21.41 million of 2% equity-linked notes due Oct. 22, 2014 linked to Occidental Petroleum Corp. shares. This add-on brought the total deal size to $67.37 million, up from $45.96 million at pricing on Oct. 17. There was an over-allotment option for an additional $5.96 million of notes.

Stocks made for 39% of last week's volume versus 28% for indexes. Index-linked notes were larger in size with 14 products brought to market versus 74 notes linked to single stocks.

The year has been characterized by a strong bid on single stocks with the asset class up 16.75% from last year, growing to 22.41% of the total. In comparison, equity index notes have remained flat at 56% of the total volume, according to the data.

Year still up

The year-to-date flow continued to be encouraging with sales up 4.5% to $32.40 billion as of Nov. 9 from $31.01 billion in the same period last year. The volume increase was achieved in a slightly smaller number of offerings, down 1.5% to 7,003 from 6,893, the data showed.

"Our growth has a lot to do with this industry's ability to adapt to the market," the sellsider said.

"As pricing conditions are changing, products that used to be popular are becoming less popular, but other structures emerge. It takes a while for new products to take over, but it ultimately happens. If we're growing, it's because the industry itself is very adaptable to new market conditions. You are seeing compelling products, and at the end of the day, a lot is very driven by investors."

Leveraged deals with no downside protection have dominated the year with 20% of the total in 474 offerings totaling $6.49 billion. Buffered or barrier leveraged notes were next, totaling $5.95 billion in 956 deals, or 18.37% of the total. Closely following this category, autocallable reverse convertibles made a strong push this year, growing nearly 65% from last year to $5.57 billion, or 17.17% of the volume. Those products outnumbered leveraged notes with 2,111 offerings brought to market, according to the data.

JPMorgan and Credit Suisse led last week's league tables with $79 million and $67 million issued, respectively. UBS was third with $55 million.

"We have seen a greater interest in the euro zone this year." - A sellsider

"On a relative basis, people believe that Europe is going to accelerate more than the U.S." - Jim Delaney, portfolio manager at Market Strategies Management

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