Issuance rises, autocallables jump to nearly a third of total volume

By Emma Trincal

New York, June 23 - Agents resumed busily selling autocallables last week, pricing six transactions that amounted to 30% of the total volume, according to data compiled by Prospect News.

Issuance grew to $470 million, up 47% from the prior week's volume, and deals nearly doubled to 70 from 43.

"Autocallables are appealing. They provide attractive yield with short-dated maturities, even shorter after a call," a New York-based equity structurer said.

There were no exchange-traded notes priced last week.

Deals double

Excluding a $75 million ETN brought to market the week before by UBS AG, Jersey Branch, a week-to-week comparison showed that issuance nearly doubled in the week ended Friday from the week before.

Based on this measure, the average deal size remained stable at just under $6 million, the difference being the increase in the number of transactions, according to data compiled by Prospect News.

Pushed by the surge in autocallable sales, equity-linked notes reached almost 80% of the total volume last week versus half of the total the week before.

Most of the uptick in equity issuance came from single-stock deals, jumping to 23% of the total issuance size from 13%.

Top deal

The top deal of the week was an autocallable offering.

It came from Bank of America Corp., which priced $88.84 million of 0% Strategic Accelerated Redemption Securities due June 28, 2011 linked to the S&P 500 index. The call premium is 11.25% if the index closes at or above its initial level on any of the four observation dates.

Six autocallables

More than two-thirds of the autocallable issuance came from three transactions linked to the S&P 500 with Bank of America's Stars topping the list. Goldman Sachs Group, Inc. priced the two other index-linked autocallable offerings, both small at $5.52 million and $3 million.

But the trend of linking autocallable notes to a single stock continued with three deals totaling $46.67 million. The largest one was the fifth largest deal of the week and was priced by Royal Bank of Canada. This issuer, seen as new in the autocallable market, priced $18.65 million of 0% autocallable optimization securities with contingent protection due June 20, 2011 linked to the common stock of Microsoft Corp.

UBS AG, London Branch priced a $16.77 million deal linked to Merck & Co., Inc.

JPMorgan Chase & Co. priced an $11.26 million transaction tied to Apple Inc.

RBC's first foray

Several sources noticed the large autocallable deal brought to market by Royal Bank of Canada. While the name is known for reverse convertible issuance, those sources said that they had not noticed the presence of this agent in the autocallable market.

"This is the first autocallable I see from RBC," said the sellsider. "They had a great team that left. But they've hired a few months ago Arturo Bignardi, a trader from Barclays specializing in volatility products. That could explain."

Coupon advantage

Noticing that most reverse convertibles have a three-month term while autocallables tend to offer a one-year maturity, a sellsider said that assuming that an autocallable note gets called after three months, investors will do better with the autocallable than with the reverse convertible note, based on last week's levels.

"Autocallable coupons are higher than their reverse convertible counterparts. With a one-year maturity and a call every three months, you get more if it gets called," he said.

Getting money back

"Both structures are selling volatility. It's a win-win for the client and the issuer. The client gets his coupon and capital back. The bank will offer another one in three months," he added.

Lisa Smith, vice president with structuring firm Bankers Financial Services, said, "Investors are so uncertain about the market. They're scared to put their money out there too far. Autocallables can give you your principal back sooner."

Another advantage offered by autocallables versus reverse convertibles is the contingent protection, said the equity structurer.

"Investors can benefit from contingent protection. Assuming that there is no default, they're protected from a drop of 10% to 20% on a contingent basis," he said.

Noting that autocallable products sell volatility, this structurer added, "When you have a spike in index volatility, autocallables sell."

He agreed that U.S. investors are displaying a greater appetite than before for autocallables structured around a single stock even if index products continue to prevail, as they did last week.

"It's a recent trend imported from Europe. Some investors want exposure to one stock. It's an extension of the autocallable technology," the structurer said.

Timing volatility

Some market participants questioned whether the offering of autocallable products came at the best time.

"It's bad timing for autocallables. The market is overvalued, and you may not get your capital back," said the sellsider.

"You don't want to buy a note that sells volatility when stock prices are about to fall," he said.

Leverage, simplicity

Plain vanilla deals under leveraged structures continued to be attractive.

Leverage in particular rose again with $163 million of leveraged notes issued, or 35% of the total volume versus 11% the week before.

"Leverage is bought by the same bulls who believe the market is going to take off. I think people are distracted by the World Cup. They forgot about Greece, and they are unfocused," the sellsider said.

Smith said that the benefit of plain vanilla structures with or without leverage is simplicity and cost-efficiency.

"Issuers tell us that they want plain and simple structures they can sell to their retail customers," Smith said.

"It's hard to structure cost-effective products given banks' liquidity. Banks don't have loan demand. They don't need funding. They want plain simple so they can explain it to their customers, and they want exceptionally low cost."

The second-largest deal of the week was Barclays Bank plc's $50.17 million of 0% buffered return enhanced notes due July 15, 2011 linked to the S&P 500 index, an example of a big deal based on a simple structure.

The payout at maturity will be par plus double any index gain, subject to a maximum return of 16.86%. Investors will receive par if the index declines by 10% or less and will lose 1.1111% for every 1% that it declines beyond 10%. The agent for the deal was JPMorgan.

Currency hybrid

Currency-linked issuance continued to suffer from the spike in option costs, sources noted.

Currency-linked notes as a percentage of the total dropped to 6% last week from 9.3% the week before.

"The price of currency options is too high. It has reduced the supply of currency products," said Smith, adding that she has noticed the trend for a couple of months.

One issuer, though, found a way to give investors indirect exposure to currencies via a basket of five Asian stock indexes.

Barclays priced $22.93 million of 0% buffered return enhanced notes due July 15, 2011 linked to a basket of five indexes and their related currencies. The basket consists of the Hang Seng China Enterprises index, the Korea Composite Stock Price Index 200, the MSCI Taiwan index, the Hang Seng index and the MSCI Singapore index.

The return of each basket component will equal the index return multiplied by the return of the applicable local currency of the index relative to the dollar.

JPMorgan was also the distributor for this deal, the fourth-largest one of the week.

"By injecting an FX component in an equity deal, you can reduce the options cost and pay more participation," said the sellsider. "It's a double play on the currency appreciation against the dollar and the index appreciation. It's interesting."

Volatility hedge

Volatility swings continued to challenge investors unsure about future market movements. It led some to seek volatility hedges, sources said.

The most successful deal in this category and the third-largest transaction of the week came from Barclays, which priced $23 million of 0% notes due June 18, 2015 linked to the S&P 500 Dynamic Veqtor Total Return index.

This index, used for the first time in March, allocates dynamically between equity, volatility and cash, increasing the equity allocation when volatility declines and decreasing the proportion of the notional going into equity when volatility is on the rise.

While it's an innovative concept, some market participants doubted that retail investors are ready for this level of sophistication.

"I don't feel retail customers understand volatility. They're more scared about inflation because they can get their arms around it. I think volatility bets are for sophisticated investors," Smith said.

Merrill leads

The top agent last week was Merrill Lynch with $104 million priced in two deals, representing 22% of the volume. It was followed by JPMorgan, which priced 10 deals for 20.8% of the market, totaling $98 million. Goldman Sachs was No. 3 with $96 million sold in 11 deals amounting to 14.65% of the total.

"When you have a spike in index volatility, autocallables sell." - A New York-based equity structurer

"Issuers tell us that they want plain and simple structures they can sell to their retail customers." - Lisa Smith, vice president with structuring firm Bankers Financial Services

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