Volume doubles; Morgan Stanley prices biggest deal of the year; Merrill Lynch prevails

By Emma Trincal

New York, Sept. 29 - Volume more than doubled to $1.25 billion in the week ended Friday from $600 million the week before, if one discounts the $2.5 billion ETN deal that hit the market during the prior week ended Sept. 17, according to data compiled by Prospect News.

Issuance last week was also marked by the sale of the biggest non-ETN deal of the year - a $270 million offering by Morgan Stanley of notes linked to the S&P 500 index.

Compared to a summer during which "not much was going on," sources said that the more than $1 billion issuance size seen last week was unusually strong, especially for a week without ETN pricing.

Back to school

"I think it's the fall. Once you get the kids back to school and the weather cooler, activity picks up," said Brad Livingston, a distributor in Laidlaw & Co.'s Income Solutions Group.

"It's the start of a new year. The summer was really slow. People are ready to invest again."

The economic environment characterized by low interest rates is also a factor, according to a market participant, who said that certificates of deposit and capital-protected notes have become "much tougher" for issuers to structure and less attractive for investors.

"Investors are looking for yields, and they're not finding them in CDs. With rates at their lowest point, there's a shift in the market pushing up sales of notes," the market participant said. "Being risk adverse won't give you enough yield. Investors are becoming more comfortable with notes."

There were also fewer deals last week - 71 versus 92 the week before. But the average size increased to $17.5 million from $6.50 million the week before.

A $270 million giant

The average size deal was skewed though by the sale of the biggest non-ETN deal of the year: Morgan Stanley's $270 million issue of callable notes with contingent coupon due Sept. 29, 2022 linked to the S&P 500.

However, offsetting this was the unusual number of large deals that priced last week: 30 were in excess of $10 million and seven of those had a size greater than $50 million, according to data compiled by Prospect News.

The Morgan Stanley deal offered a fixed coupon on the first year followed by a similar payment on the subsequent years as long as the S&P 500 closes above 750. The payout at maturity was par, leaving investors with only the main risk of not collecting their coupon, sources noted.

"It was a very nice deal. People really like the 7.5% fixed coupon for the first year and the fact that it's not callable for three years," said Livingston.

Sources were surprised by the size of the offering but understood why the deal would be so popular.

"People are looking for deals that can pay the highest coupon," the market participant said. "Hybrid products mixing fixed-income features with an equity payoff are popular right now."

The Morgan Stanley deal beat the record in size for traditional structured notes. It surpassed Credit Suisse AG, Nassau Branch's $257.19 million issue of autocallable index knock-out notes tied to the S&P 500, which came to market in April and was so far the top non-ETN deal of the year, according to data compiled by Prospect News.

Other trends included a strong comeback of commodity products, a new volatility-based product from Bank of America Corp. and in general, the dominant presence of Merrill Lynch, pricing one deal out of three as well as a great number of large-sized offerings.

More commodities, more gold

Commodities made a comeback under the banner of Bank of America, which sold the top deal in this category, with $59.53 million of Accelerated Return Notes linked to gold for AB Svensk Exportkredit.

"Commodities indexes have come up a little bit, and gold has been moving up," Livingston said.

"Advisers are still very negative on the U.S. economy, so they're putting money into commodities," he added.

Bank of America sold two other gold-linked offerings at a size of approximately $30 million each.

In addition, Bank of America priced two deals of $21 million each, one tied to the PHLX Oil Service Sector index and the other to the Rogers International Commodity Index - Excess Return.

Commodities as an underlying asset class sharply rose to 14.6% of issuance last week from less than 1% the week before. It led some market observers to think that the bearishness on the global economy, which puts a brake on commodity appetite, may have now receded, leaving more room for inflation fears, a bullish factor for commodities.

"People are still betting on the inflation protection," the market participant said. "Investors are looking for fixed-income products, and the other tool for that is gold. They want to participate to the gold rally and to get protection if gold tumbles."

Innovative volatility deal

The week, rich in newsworthy deals, also included an innovative structure in the form of a volatility product.

Jumping on the volatility bandwagon, which has turned profitable for some issuers like Barclays Bank plc, Bank of America used for the first time its Investable Volatility index as the underlying for a $65.11 million offering of 0% Strategic Return Notes due Sept. 25, 2015.

The index, while using the same methodology as the CBOE Volatility index - commonly known as the VIX - was designed to better track changes in volatility and at a lower holding cost. The innovation consists of using market prices of listed S&P 500 options on longer maturities averaging five months.

Twice more equity

Equity issuance more than doubled in absolute terms from $445 million to $939 million, but it accounted for the same share of the total volume, 75%, last week and the week before.

"Once again we're hearing rumbling that the markets are turning around," said Livingston. "The elections are coming up. The idea that there is going to be a shift in Congress is perceived as more bullish."

Absolute growth of equity deals was mostly attributable to equity indexes, whose volume increased by more than four-fold from $183 million to $761 million, doubling up in market share to 60% from 30% of the total volume, according to data compiled by Prospect News.

Deals linked to single stocks declined by half, but there were still large deals in this category.

The second-largest deal of the week, for instance, was HSBC USA Inc.'s $69.04 million of 10.34% yield optimization notes with contingent protection due Sept. 30, 2011 linked to the common stock of Bank of America. It was sold by UBS.

"It has to do with the prices. Some names allowed issuers to price big stock deals. Bank of America is viewed favorably as an institution that's going to be around and survive. With reverse convertibles, you don't need the stock to go up. You just need it to stay even," said Livingston.

Once again, leverage was the most popular structure last week, representing a third of total volume, almost evenly split between leveraged notes without protection (15 deals for $219 million) and partially protected leveraged notes ($191 million sold also in 15 deals.)

Merrill Lynch tops

Merrill Lynch was the top agent pricing a third of all deals and totaling $702 million in sales, which was more than 56% of total issuance volume.

Merrill Lynch's role in the pricing of big transactions was also notable, sources said.

Although the agent did not sell the top two deals, it sold 15 offerings out of the 19 deals in excess of $20 million.

Merrill Lynch was followed by Morgan Stanley, which priced, besides its $270 million transaction, another offering for $10 million, giving this agent 22.5% of the market share in just two deals.

JPMorgan followed somewhat further behind with $84 million in 14 deals for 6.70% of the total.

"People are looking for deals that can pay the highest coupon." - A market participant

"Advisers are still very negative on the U.S. economy, so they're putting money into commodities." - Brad Livingston, a distributor in Laidlaw & Co.'s Income Solutions Group.

© 2015 Prospect News.
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