Volume doubles to $1.1 billion, deals triple in number but shrink in size

By Emma Trincal

New York, Sept. 1 - Volume, at $1.10 billion, more than doubled during the last full week of August while the number of deals tripled to 243, suggesting that agents sold smaller-sized offerings.

There were no large exchange-traded note issues priced during the week ended Friday, data compiled by Prospect News showed.

More deals

The issuance volume boost was seen as relative since it was the end of a sluggish month, sources said. In addition, it was essentially due to a sharp increase in the number of offerings, with deals becoming noticeably smaller on average, sources said.

Agents sold $529 million during the previous week, according to data compiled by Prospect News.

Compared to the last week of July, when agents printed $1.37 billion, August ended on a weaker note.

"The multiplication of deals is normal at the end of the month," a New York sellsider said. "But August was particularly slow. A lot of deals didn't get done, so everything was pushed at the end."

Small deals

The week ended Friday saw a fair amount of large deals, according to data compiled by Prospect News, with 35 deals in excess of $10 million, including one over $70 million and four over $50 million.

However, the average size deal last week fell to $4.53 million versus $6.37 million the week before. At the end of July, the average size was $7.43 million.

"What strikes me is that we have so many deals with such a small size," a New York structurer said. "The only big deals are those made by large dealers. Or you have the ETNs."

But behind those big offerings, this structurer saw a pattern of offerings shrinking in size, especially with reverse convertibles.

"We see sporadic, random offerings of reverse convertibles and buffered," he added, pointing to Barclays Bank plc "doing $1 million reverse convertibles" or JPMorgan Chase & Co. "doing $65,000 deals."

Merrill Lynch, the No. 1 agent last week, sold deals averaging $28 million. The average was $18 million for Morgan Stanley, data compiled by Prospect News showed. But for the most part, agents sold more deals with a small size. Barclays' average deal, for instance, was $1.10 million.

"Agents are trying to offer everything. Investors lose focus. They become lost in all these offerings," the structurer said, commenting on the overall reduction in size. "What works better is fewer deals, more focused offerings."

This does not mean that the week did not see large deals, quite the contrary, sources said.

But the large deals were sold by institutions that benefit from a strong internal distribution network, such as Bank of America selling through its Merrill Lynch franchise or Morgan Stanley through its Smith Barney brokers, they noted.

Private banks

The top 14 deals of the week were all priced by either Merrill Lynch (12 deals) or Morgan Stanley (two deals including the second-largest one for $63 million), according to data compiled by Prospect News.

"People realize the mistakes made in 2008-09. Letting Barclays buy Lehman and Bank of America merge with Merrill has created two monsters, which have captured nearly 60% of the market," the sellsider said.

"Issuers want to control their private banks and put pressure on them to sell the bank's product," he noted, adding that "it's definitely the case with Merrill."

"The U.S. market is saturated by U.S. banks. We're moving toward the Canadian model where all products are sold by Canadian banks," he added.

The structurer agreed with this view.

"There is some pressure from some investment banks to only sell their own deals. It may be a concern for investors," he said.

"Competition in issuing is as strong as ever. It's on the distribution side that some banks are pushing for internal distribution," he added.

Open architecture

The structurer said that open architecture - a distribution model in which a firm buys not just from its own parent but from others as well - has made progress but still faces resistance.

"A JPMorgan or an UBS can be applauded for a fairly consistent open architecture distribution. Others are not buying much from others. They've created the appearance of open architecture. In reality, they are primarily selling internally," he said, pointing to Morgan Stanley, Merrill Lynch and Barclays.

"It doesn't bode well with the end client. Investors need credit diversification, competitive pricing and a choice," he said.

"Open architecture has been a move in the right direction until recently. Now there's a concern that the trend has slowed."

Merrill Lynch in commodities

An example was the issuance of commodities-linked products last week.

While the asset class has not been in favor recently, Merrill Lynch sold three large commodities-linked offerings for $37.92 million, $32.21 million and $21.99 million.

Those deals contributed to a recovery of this asset class last week, with $120 million sold in total, or 11% of the volume, a sharp increase from the $40 million issued the week before, which had accounted for less than 8% of the sales.

The structurer attributed Merrill Lynch's success with a not-so-popular asset class to the strength of its distribution.

"Selling commodities externally would be tough because external distribution is driven by what the market is doing. Retail clients are not bullish on commodities because the market has not done well. But internal distribution is easier. It's more influenced by what analysts have to say than by the market," he said.

The structurer credited Merrill Lynch for its sales capacity.

"Merrill has always had a leadership role in distribution. They're well organized. They have their own research. They've done so well selling their own deals, there's no pressure to embrace open architecture. They're quite happy the way they are," he said.

The deals in the commodities category last week were AB Svensk Exportkredit's $37.92 million of 0% Accelerated Return Notes due Nov. 1, 2011 linked to the Rogers International Commodity Index - Excess Return with triple leverage, Bank of America Corp.'s $32.21 million of 0% Capped Leveraged Index Return Notes due Sept. 5, 2012 linked to the gold spot price with double leverage and Bank of America's $21.99 million of 0% Capped Leveraged Index Return Notes due Aug. 31, 2012 based on the PHLX Gold and Silver Sector index with a two-times leverage factor.

Leverage is back

Equities deals regained momentum, up from $343 million to $810 million and representing 73.5% of the total versus 65% the week before.

Leverage deals made a noticeable comeback, especially for structures offering some protection, which grew to a third of total issuance from 13% the week before. Overall, leveraged notes - with or without a buffer - represented almost half of the volume with $493 million in 62 deals.

Sources attributed the trend to the fact that the market lost some ground in August, enabling some to bet on its recovery or at least to hope that downside barriers would not be breached.

"People see opportunities to re-enter the market at these levels. And with a partial downside protection, why not?" the sellsider said.

"The market is so range-bound, people want leverage. They want the upside."

The top deal of the week was a leveraged buffered note linked to a basket of equity indexes.

Bank of America priced $73.05 million of 0% Capped Leveraged Index Return Notes due Aug. 31, 2012 linked to the S&P 500 index with a 45% weight, the MSCI EAFE index with a 27.5% weight and the MSCI Emerging Markets index with a 27.5% weight.

The payout at maturity will be par of $10 plus double any basket gain, subject to a maximum return of 23%. Investors will receive par if the basket declines by 15% or less and will lose 1% for every 1% that it declines beyond 15%.

Other structures

Reverse convertibles, not surprisingly as they price toward month-end, came next with $237 million in 124 deals. In proportion of the total volume, though, reverse convertible issuance decreased to 21.50% from 27%, confirming the appetite for growth through leverage.

The top reverse convertible deal was a play on a financial stock, a popular type of underlying for those structures.

Morgan Stanley priced $63 million of 10% annualized Equity LinKed Securities due Feb. 22, 2011 linked to the common stock of Wells Fargo & Co.

The payout at maturity will be par of $10 unless Wells Fargo stock closes at or below the threshold price - 80% of the initial share price - during the life of the notes, in which case the payout will be a number of Wells Fargo shares equal to $10 divided by the initial share price or, at the issuer's option, the value of those shares in cash.

The appeal of range accrual notes somehow diminished with only $42 million sold in four deals, or 3.80% of the total versus 27% the week before.

In a separate category, the week saw the pricing of a large-sized principal-protected deal, a type of structure that has become rarer due to the low levels of interest rates.

Bank of America priced $26.12 million of 0% Market Index Target-Term Securities due Sept. 1, 2015 linked to the Dow Jones Industrial Average.

The payout at maturity will be par of $10 plus any index gain, subject to a cap of 47.69%. If the index falls, the payout will be par.

Merrill Lynch was the top agent with more than half of the issuance and nabbing 51% of the market share.

It was followed by UBS, which sold $147 million in 24 deals, or 13.35% of the total. UBS sold two reverse convertibles over $10 million each as well as $13.23 million of 0% autocallable notes due Sept. 2, 2011 linked to Hewlett-Packard Co. on the behalf of HSBC USA Inc.

Morgan Stanley was the third agent with $144 million in eight deals and 13% of the market.

"Agents are trying to offer everything. Investors lose focus." - A New York structurer

"The market is so range-bound, people want leverage. They want the upside." - A New York sellsider

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