Equity issuance falls to less than 50% of volume; interest in commodities builds momentum

By Emma Trincal

New York, April 13 - Issuance continued to decline last week compared to the prior week and the month before. Equity and stock deals continued their decline while investors rushed into commodities, according to preliminary data compiled by Prospect News.

Weaker volume

Agents sold $377 million in 59 deals during the week ended Friday, down 60% from the week before. Excluding exchange-traded notes, volume fell by 56% to $345 million from $784 million the week before.

Strong volume declines are part of the monthly issuance cycle, sources said. Last week, the first week of April, was no exception.

But compared to the first week of March, last week's volume excluding ETNs was down 27%, according to data compiled by Prospect News.

"It's been quiet for a few weeks now," a New York sellsider said. "It doesn't look like April is going to be worse than March. Both March and April are slow compared to February."

Fear factors

This sellsider attributed the slower pace to the crisis in Japan, Middle East unrest and possibly the uncertainty around monetary and fiscal policies in Europe and in the United States.

"Perhaps the odds of a government shutdown frightened investors last week too," he said.

"Taxes are coming up. It may explain last week's volume. It's always a possibility," said Brad Livingston, a distributor at Laidlaw & Co.'s Income Solutions Group, who added that he has not perceived a noticeable slowdown in activity.

He believes advisers and investors alike have not been overly influenced by global events.

"I haven't had a single conversation with advisers about Japan," he said.

Equity less than half

More intriguing for some was the decline of equity deals last week. As a percentage of ex-ETN volume, equity dropped to less than half, or 45.8%, of volume totaling $158 million. It was a big drop from the $473 million of equity deals priced the week before, which amounted to 60%.

In the previous months, equity has routinely represented at least two-thirds if not three-quarters of the volume. During certain weeks, it even peaked at 85% of the sales, according to data compiled by Prospect News.

For the latest week, stock deals fell the most. They declined to $67 million, or 20% of the total, from $308 million sold the previous week, which represented 40% of the total.

"If volatility pulled back, that may have impacted the pricing on some equity deals," Livingston said, although he added, "I haven't heard any adviser say that they dramatically changed their allocation."

Commodities mania

In comparison, commodities pushed up to more than a third of the total volume at 35.6% from 8% the week before. Agents sold eight commodities deals totaling $123 million versus $66 million the prior week.

Since commodities are highly volatile, issuers may find it easier to price commodity notes in this market, said Livingston.

Eric Greschner, portfolio manager at Regatta Research & Money Management, thinks the trend is demand driven as he sees investors flocking into commodities.

"I honestly think that a lot of retail investors are late to the game," he said.

"Commodities are excessively valued. But individual investors are reallocating new money into commodities.

"We get phone calls for gold coins, silver coins, and that's from people who are fairly conservative."

One other sign of commodities appetite was the fact that investors sought exposure to the asset class through stock or exchange-traded fund deals, such as Morgan Stanley's $13 million notes linked to the Market Vectors Gold ETF or Deutsche Bank AG, London Branch's $14.5 million offering based on the price of Rio Tinto plc shares sold via JPMorgan.

Time for volatility hedges

For the sellsider, part of what may keep equity investors on the sidelines is volatility. He said that daily moves can be quite significant even if volatility, as measured by the CBOE Volatility index, ends up flat on a weekly basis as was the case last week.

"It's the moves in volatility that frighten investors," the sellsider said.

"It may be the time to consider volatility-control indexes or volatility-control structures.

"Those structures give you a volatility target. If volatility is below the target, you increase your investments in risky assets in order to reach the target. If the portfolio is above the target, you reduce your allocation to risky assets.

"Investors deleverage when the realized volatility spikes above the target and use extra leverage on the index if the realized volatility is below the target.

"It's a structure that keeps you in your volatility budget."

Rolling leveraged notes

Leverage without protection remained the top structure last week. Sources said the trend is not really related to the market. While leverage is easier to price when volatility declines, those structures have been popular when volatility increased as well.

Non-buffered and leveraged notes accounted for 31% of the ex-ETN total with $106 million sold in nine deals last week.

"It's the private bank channels rolling the same structures. People continue to buy those structures with a lot of leverage and no buffer regardless of what the market conditions are," the sellsider said.

"Private bank channels do the same structures all the time. Sophisticated investors would not dream of leveraging up in this market."

Livingston said that Merrill Lynch supplies a lot of those deals.

"Merrill used to sell tons of these. They do very well through their channels. Their reps are used to selling those notes. They understand them. Their clients are comfortable with that risk. And because they have short-term maturities, the brokers probably roll them over from last year," he said.

Autocallable deals did relatively well last week. Their market share picked up to 20.5% from 8%. In dollar amount, the increase was less significant - to $70 million from $63 million.

Livingston said that he saw "interesting" offerings, in particular certificates of deposit last week. He mentioned investors' interest for currency notes with a minimum return or CDs with high participation rates on the upside. JPMorgan introduced its four-year CDs linked to the J.P. Morgan Alternative Index Multi-Strategy 5, which Livingston said was the first time the index was used in a CD wrapper.

Top deals

Last week's top deals were small in size compared to previous weeks with only two deals in excess of $30 million and no deal above $60 million in size. Merrill Lynch sold the top three and JPMorgan the next two.

The largest offering was issued by AB Svensk Exportkredit, $59.5 million of floating-rate notes due May 15, 2012 linked to the Dow Jones - UBS Commodity Index Total Return 2 Month Forward.

Merrill Lynch sold the second largest deal for the same issuer with a $39.89 million issue of 0% Strategic Accelerated Redemption Securities due Dec. 2, 2011 linked to the front-month corn futures contract.

"That's got to be a one off. Somebody asked for that. With that type of underlying, chances are it's a reverse inquiry," said Livingston.

Bank of America Corp. priced $15.96 million of 0% Stars due April 17, 2012 linked to Microsoft Corp. shares. This deal, the No. 3 for the week, was an autocallable note with a 12.26% call premium.

Bank of America sold another well-liked stock deal, a $13.5 million autocallable tied to Apple Inc.

"Both Microsoft and Apple have been very popular names," said Livingston. "The interest for Apple deals remains high. It will continue to be high as long as they keep coming up with new products and new iPads."

Merrill Lynch tops

Merrill Lynch was the top agent last week with $165 million sold in 11 deals, or 43.65% of the total including ETNs.

It was followed by JPMorgan selling 19 deals totaling $90 million and Morgan Stanley pricing $34 million in six deals.

"I haven't had a single conversation with advisers about Japan." - Brad Livingston, a distributor at Laidlaw & Co.'s Income Solutions Group

"Sophisticated investors would not dream of leveraging up in this market." - A New York sellsider

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