Issuance up more than two-fold at $1.33 billion in short holiday week with more, bigger deals

By Emma Trincal

New York, Dec. 1 - Issuance more than doubled last week to $1.33 billion from $614 million despite the week being condensed to four days by Thanksgiving.

Thanksgiving week tends to be busy because it's close to both the end of the month and the end of the year, sources said.

Volume was characterized by an outpouring of offerings. During the week that ended Friday, 233 deals priced versus 90 the week before, according to preliminary data compiled by Prospect News.

"November was a good month," a sellsider said. "But I wouldn't attribute it to last week because volume is always huge at the end of a month."

"A lot of deals closed last week, a lot of monthly stuff came out," said Thomas E. Livingston, director of structured products with Halliday Financial Group.

"I suspect the next two weeks will be busy," he added.

"After Dec. 15, people start planning for the next year or take vacations.

"Our business is usually very busy from September to mid-December. That's the busiest time of the year."

But this year appeared to be unusually eventful.

Between the pre-holiday week and Thanksgiving week of last year, for instance, issuance volume did not increase but rather decreased by a third to $1.1 billion.

The Fed and equity

The bid for equity made a strong comeback. This asset class accounted for 74% of the volume, or $986 million. That was a nearly three-fold growth in volume over the previous week, when $339 million sold for what amounted to 55% of the market.

Some saw behind this trend macro-economic forces at play, such as the recent quantitative easing round announced by the Fed in an effort to lower long-term rates and to make stocks more attractive to investors.

"The Fed is trying to re-inflate the economy, pushing people into equity," said Livingston.

"What the Fed has done lately is to put a floor under equity. Now where the floor is, we're not really sure. But if the Fed is successful, stocks will move higher.

"A lot of people are underweight equity. Structured products investing is a way to participate in equities while taking some of the risk off the table."

Leverage is hot

A related trend was investors' willingness to take on risk.

Leverage without protection was the top structure with $276 million sold in 19 deals, or nearly 21% of the volume, a sign that investors grew more confident, sources said.

"People feel a little bit more comfortable with risk," the sellsider said. "They're tiptoeing back in to the market. The feeling is that the market will bounce at the bottom and won't go down further."

"From a risk-management perspective, leverage makes a lot of sense," said Livingston.

"Investors in structured products are pretty smart folks. They may want to draw down their equity exposure while keeping the same type of returns if the market performs as expected.

"There's downside risk, but if you own equity, you're willing to take risk.

"You can have three times leverage on the upside and no downside leverage. And that's valuable."

One deal out of two

Reverse convertible issuance was strong, rising to $248 million from $100 million during the week ended Nov. 19.

"We did a fair amount of reverse convertibles last month," said Livingston.

However, reverse convertibles were only the second most popular structure, and the average size of such deals was small at about $2 million.

The tendency for reverse convertibles to pile up at month-end combined with a volatility uptick contributed to a multiplication of reverse convertible deals. One hundred and sixteen of those priced last week, which means that one deal out of two fell into that category.

The S&P 500 index ended the week down less than 1% while the CBOE Volatility index, or VIX, jumped 22% to 22 from 18, indicating that investors remain jittery, sources said.

"Every time volatility increases, the economics of reverse convertibles change," said Livingston. "When volatility is high, the saying goes, it's time to buy."

"There's conflicting data here," the sellsider said. "The VIX is bouncing back and forth. Investors are a little bit less risk-adverse. Yet, there's still a fair amount of uncertainty."

Citigroup Funding Inc. alone kept the flow of reverse convertibles vigorous. It priced three large deals in this category at $60.66 million, $43.5 million and $27.97 million linked to Wells Fargo & Co., Schlumberger Ltd. and Yahoo! Inc., respectively.

Interest-rates products issuance declined to $9 million from $60 million. Livingston said that the trend was related to the popularity of equities-linked deals. This category of products does not include step-up and fixed-to-floating notes.

"The Fed statement has shifted money away from rates. The equity side has moved up. I don't know if it's the right thing to be doing, but people are doing it," said Livingston.

Bigger deals

The number of larger deals went up last week, according to data compiled by Prospect News. Agents priced 15 deals in excess of $25 million, compared with only four during the prior week.

The top one was JPMorgan Chase & Co.'s $142.77 million add-on to its exchange-traded notes linked to the Alerian MLP index, which brought the total issue size to $1.19 billion.

The second-largest deal was a step-up equity issue offered by Bank of America Corp. for $74.12 million and linked to the Dow Jones Industrial Average.

Merrill Lynch priced the largest leveraged, non-buffered note in a $65.18 million issue of Accelerated Return Notes linked to the S&P 500 index for AB Svensk Exportkredit.

Finally, Citigroup priced the top stock deal of the week, its $60.66 million issue of 9.5% reverse convertibles linked to Wells Fargo.

Merrill Lynch tops

Merrill Lynch was the top agent last week, which is not unusual for the firm at the end of the monthly cycle. It brought $561 million in 21 deals, or 42% of the volume. It was followed by JPMorgan with $199 million in 35 deals, or a 15% market share. UBS took the third slot, pricing 20 deals totaling $163 million, or more than 12% of the total volume.

JPMorgan was the top agent the week before, and UBS held the second position.

"November was a good month." - A sellsider

"I suspect the next two weeks will be busy." - Thomas E. Livingston, director of structured products with Halliday Financial Group

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