Issuance flat at $480 million; top three deals feature commodities, rates amid equity concerns

By Emma Trincal

New York, Nov. 24 - Issuance volume was flat last week. The top three deals were linked to commodities or interest rates in a pre-Thanksgiving week marked by negative headlines.

Agents sold $480 million in 66 deals in the week ended Friday versus $493 million the week before. The prior-week total excludes two big exchange-traded notes totaling more than $400 million, according to preliminary data compiled by Prospect News. No large ETNs came to market last week.

"Issuance was actually better than I would have expected. The slower pace is seasonality related to the Thanksgiving holiday period. A lot of people were out. This week will certainly be less than last week," said Charlie O'Flaherty, principal at Third Reef Holdings and former head of retail structured products at Bank of Ireland.

On a month-over-month basis, last week was up 27% compared to the week of Oct. 18 during which $378 million priced.

Equities receded, amounting to 52% of the total with $249 million sold in 41 deals. Over the past few months, it was not rare to see equities-linked products making up 75% or sometimes 80% of the market, according to data compiled by Prospect News.

None of the top three deals were equity-related. Both the No. 1 and No. 3 deals of the week were commodities-based.

JPMorgan Chase & Co.'s $65 million daily liquidity notes linked to the Dow Jones - UBS Commodity Index 3 Month Forward Total Return topped the list.

The second-largest deal was a $30.2 million interest-rate product from Bank of America Corp.

Citigroup Funding Inc.'s $28 million issue of notes linked to the Dow Jones - UBS Commodity index was the third-largest offering.

Commodities transactions accounted for 28% of the week's issuance with $132 million, and rates products totaled nearly $90 million, or 20% of the total volume.

Brad Livingston, a distributor at Laidlaw & Co.'s Income Solutions Group, pointed to a relationship between the renewed interest in commodities and the relative pullback in equities.

"Commodity-linked structured products have had much more attractive participation rates and maturities compared to most equity-linked notes and CDs," he said.

"Commodities have begun another upward trend after coming off their mid-2008 highs."

More caution

For O'Flaherty, the push in commodities is due to global growth concerns.

"Europe is looking like it's going from bad to worse," said O'Flaherty.

"People are wondering if another shoe is going to drop. Recession fears are on the rise. It makes hard assets more appealing and equity less attractive."

The equity market continued to decline thorough the first half of last week to finally rally on Thursday and Friday. Overall, the S&P 500 was flat and the CBOE Volatility index, or VIX, dropped by more than 10%.

"With VIX coming down, you had less opportunities to issue equity, that's why you saw less of it," said O'Flaherty.

"There are more bad news in the market between Ireland last week and now Korea. People are definitely more cautious."

But a sellsider commenting on equity volume said that it's hard to see a trend on a week-to-week basis.

"Right now money is flowing into step-ups, and commodities notes look attractive," he said.

"But we'll see more interest in equity soon as people need to put their money somewhere. Regardless of the market, there's always a trade that can be done in equity.

"And those crowded step-ups and callable trades are running out of steam."

Leveraged buffered, revcons

As investors continued to fret over a possible continuation of the market correction observed during the first half of the month, they looked for equity structures that would give them added protection, sources said.

The most popular of these structures were leveraged buffered notes, which made for a quarter of the volume with $119 million sold in 11 deals.

Reverse convertibles were the second top structure with $93 million in 18 deals, almost 20% of the total.

"Reverse convertibles are really a bearish to very slightly bullish outlook. You capture the upside and stop some of the downside," said O'Flaherty.

"Appetite for leveraged buffer [notes] signals more risk-aversion. With all the negative news, I wouldn't feel bad to use a buffer."

Issuance of reverse convertibles picked up steam last week compared to the prior week. On the other hand, the strong push in autocallable issuance seen during the prior week was reversed last week, with this structure representing only $23 million, or 5% of the total.

"I think this has to do simply with closing dates," an industry source said, commenting on the reversed trend.

"I don't have a clear explanation," said O'Flaherty. "It may have to do with marketing as brokers can only focus on one product at a time."

Fed, steepeners

Range accrual notes represented the third most popular structure. They totaled $50 million, or nearly 10% of the weekly volume. Only three deals priced in this category, but two of them were large.

Bank of America priced $30.2 million of callable capped notes due Nov. 19, 2030 based on the 10-year and two-year Constant Maturity Swap rates. It was the second-largest deal of the week.

Citigroup priced $16.4 million of callable leveraged CMS spread notes based on the same spread due Nov. 19, 2030.

As the Federal Reserve Board earlier this month announced a second round of quantitative easing aimed at lowering yields on the long end of the curve, the question arose as of the timeliness of those steepeners that bet on higher long-term yields.

"These are retail deals. I don't imagine anybody in retail betting against the Fed," said O'Flaherty.

For others, the deals were timely because it is precisely because the Fed is trying to flatten the curve that investors would want to take advantage of those products.

"Steeper curves have been popular in the last couple of years, and people are trying to get in before the door closes," the sellsider said.

JPMorgan tops

JPMorgan, which sold the biggest deal of the week along with 13 others, was the top agent with $149 million priced, or nearly a third of the total volume.

It was followed by UBS, which priced $91 million in 10 deals, or 19% of the total.

Goldman Sachs was No. 3 with seven deals totaling $57 million, or 12% of the total.

So far this year, JPMorgan is the third agent and UBS is fifth.

"People are wondering if another shoe is going to drop." - Charlie O'Flaherty, principal at Third Reef Holdings and former head of retail structured products at Bank of Ireland

"Those crowded step-ups and callable trades are running out of steam." - A sellsider

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