Nearly half a billion dollars of volume gives July a push; sources credit rally, confidence

By Emma Trincal

New York, July 24 - After a tepid first half of July, action picked up in the week ended Friday. Sources attributed the improved volume to investors' bullishness and the Fed-induced rally.

Agents sold $445 million in 106 deals, an 83% surge from the prior week's $244 million priced in 81 offerings, according to data compiled by Prospect News.

"We're seeing an improved market environment. The market is doing better as far as volume is concerned," a sellsider said.

"We're also seeing a broader interest in other asset classes. There's more confidence, more willingness to step outside the comfort zone."

The market rallied last week in reaction to dovish comments from Fed chairman Ben Bernanke during a testimony to the House Financial Services Committee. Both Treasuries and stocks rose after the testimony was released on Wednesday.

A good week

The week was also better than its counterpart in June - which was the third week of the month, ended June 22 - during which agents sold $361 million.

"July has been a pretty slow month. Notes issues have picked up in the last week or so. Terms are better on some of the deals. It's a combination of positive market sentiment and better pricing since many of the deals priced earlier and they are good-looking deals, which is a factor that definitely resonates with investors," a market participant said.

Yet, the first two weeks of July were sluggish, according to the data, in particular the first one with the Fourth of July holiday falling in the middle of the week, leading to a meager $175 million in sales for that four-day period. As a result, the month-to-date figures showed a 17.65% decline from June.

"To tell you the truth, I'm not seeing much going on," said an industry source.

"Things are quiet from what I see. If volume was higher last week, I'm not sure why. It was probably due to a particular trade.

"Hopefully, issuance levels will pick up in September."

The sellsider said that July is not over yet.

"It remains to be seen what the month to month is going to be. You have to look at the end of the month figures, and we don't know yet," he said.

However, the bigger picture revealed more encouraging data points: July to date is nearly the same as last year's $892 million during the same period of time. The decline in sales between this month as of July 20 and the same month last year is just 3%, according to the data.

On a year-to-date basis, volume is down 1.86%, a percentage of decline that has become less and less relevant for most sources. Sales this year accounted for nearly $20 billion ($19.98 billion), compared with $20.36 billion last year.

More stocks

Besides a surge in volume, last week was characterized by investors' heavier bid on stocks as well as on a broader range of equity indexes aside from the S&P 500 index, the data showed.

"Stocks are getting more attention. More deals are being done in stocks as opposed to indexes. It's probably the result of the market being bullish," the sellsider said.

Equity issuance reached 86% of the volume, up 150% from the week before.

All asset classes were up except rates, which declined by 85%.

"People are looking for opportunities. The S&P has rallied a lot. Investors are looking for action outside of the well-known, broad-based U.S. indexes, opting for single stocks, foreign equity or even other asset classes like commodities," the sellsider said.

The volume of single-stock-linked notes doubled last week to 37% of the total while equity index issuance tripled to nearly 50% of the total. Even commodity-based issuance increased to reach more than 8% of the total, up 47%.

"Stocks are more often used than before, and that's due to volatility," the industry source said.

Less S&P 500

Leveraged notes without downside protection were the most popular structure, amounting to 25% of last week's volume in just three deals. It was the result of the week's largest deal, $108.07 million of 0% return enhanced notes due Aug. 6, 2014 linked to the MSCI EAFE index sold by JPMorgan on the behalf of Deutsche Bank AG, London Branch. The notes offered two-times upside leverage with a 22.3% cap and a full exposure to any losses.

The MSCI EAFE index was used five times including, aside from this deal, in the No. 4 offering.

"The Deutsche Bank deal fits into that notion that confidence has definitely improved, leading investors to step outside of the comfort zone, which is basically S&P-based products with a buffer. They're ready to invest without necessarily getting any downside protection and are willing to venture into international equity," the sellsider said.

Autocallable reverse convertibles were the second most popular structure last week, making for 21% of the volume. The top deal in this category, and the fifth-largest issue of last week, was Royal Bank of Canada's $19 million of contingent income autocallable securities due July 15, 2016 linked to MetLife, Inc. shares. They were distributed by Morgan Stanley Smith Barney LLC. The barrier level was 75% of the initial price, and a contingent payment of 2.425% was paid if the stock was at or above this threshold on a quarterly determination date. The notes were callable if the stock was above its initial level on any of the observation dates. The 75% level operated like a barrier at maturity.

"Morgan Stanley the issuer distributes within their own channel, but they also sell other names for the purpose of credit diversification. They've been using RBC credit for a while. A number of firms are using RBC because of course, as a Canadian bank, it has a very good credit," the sellsider said.

The same issuer, but this time with Bank of America as agent, priced a single-stock-based product and the No. 2 offering, a step income note, which was another popular structure seen in some of the top deals last week.

It was RBC's $45.25 million of 11% STEP Income Securities due July 25, 2014 linked to the performance of Whirlpool Corp. shares. Interest was payable quarterly.

If the price of Whirlpool shares finished at or above the step level - 111% of the initial price - the payout at maturity would be par of $10 plus 5.42%.

If the stock finished at or above the initial price but below the step level, the payout would be par. Investors were exposed to any losses.

Using a dual directional payout, another popular type of structure, JPMorgan sold on the behalf of Barclays Bank plc the top commodity-based product: $24.11 million of 0% dual directional notes due July 28, 2014 linked to WTI crude oil.

If the price of crude finished above the 78.5% trigger level, the payout at maturity was par plus the absolute value of the return. Otherwise, investors would be fully exposed to the decline if crude dropped below the 78.5% trigger.

The sellsider noted that not too many deals linked to a single commodity have been brought to market recently.

"This one shows that there is renewed confidence among investors leading people to look outside the mainstream investment space, and commodities is one example among others," he said.

The Barclays oil deal was the third in size last week, contributing to the increased volume in commodities. Only one other deal priced in this asset class, Deutsche Bank's $13.25 million tracker linked to the Deutsche Bank Liquid Commodity Index - Mean Reversion Plus Total Return.

Confidence versus volatility

Sources often noted that volume increases may arise from opposite factors such as higher volatility or a rally, saying that it is not always clear what drives investors' appetite for deals.

"Which one of the two factors - better pricing or confidence - has the biggest impact?" the sellsider said.

"It seems to me that the confidence factor dictates volume more than the pricing conditions. People benefit from better terms when the market is down simply because volatility goes up. But they feel more inclined to put their money to work during a rally.

"Right now, the market continues to move up. People understand that they may have missed the rally, but they believe that probably more is left. More is not necessarily the S&P. More could be other investments or even different asset classes such as commodities, European markets or foreign markets.

"We get a sense that the market is pushing people to take a little bit more risk. The best opportunities are probably the ones that have been overlooked in the last few months. Commodities have underperformed. Now it's picking up a little in volume."

Year trends

Investors' renewed interest in single stocks was not just last week's trend. Year to date, notes tied to this asset class have increased by nearly 12% to 23% of the total versus 20% last year. In contrast, equity index-linked volume is now down 3% but continues to represent just about the same part of the market in percentage at 54% versus 55% last year.

The fastest-growing asset class for the year has been rates, up 160% to $734 million, or 3.67% of the total, versus $282 million, or 1.39%, last year.

Commodities were hit the most, down 34.6% to $1.05 billion from $1.61 billion.

Baskets of stocks, while still a small asset class in percentage terms - they account for only 1.80% of the total - have increased 58% from last year.

JPMorgan was the top agent last week, pricing 22 offerings totaling $147 million, or a third of the total volume. It was followed by Bank of America and Barclays.

"It was probably due to a particular trade." - An industry source on the week's increase in volume

"It seems to me that the confidence factor dictates volume more than the pricing conditions." - A sellsider

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.