May issuance drops 13% from April with investors shying away from equities

By Emma Trincal

New York, May 18 - Sales of structured notes have declined this month as investors remained on the sidelines, avoiding equity, according to data compiled from Prospect News.

On a month-to-month basis, May is now worse than April with $738 million of non exchange-traded notes sold in the first half of the month, down 13.3% from the same period the month before.

On a week-to-week basis, however, the week ended Friday was strong compared to the week before, as agents priced $459 million worth of non-ETN deals, a 65% boost in volume.

Including ETNs, sales were flat at $524 million last week versus $520 million the week before.

Equity pulls back

As a general trend and taking into account ETN issuance, investors pulled back from equities on a month-to-month basis, according to data compiled by Prospect News.

The equity asset class dropped by 77% month to date to $505 million from $2.192 billion.

"If you look at recent volumes, equity hasn't been doing much in the last couple of weeks," a New York sellsider said.

Noticing that the S&P 500 index is now at the same level than it was in mid-February, he added that, "It's kind of range bound. The decline in equity has to do with a decline in urgency.

"Equity is direction-driven and the market hasn't moved. It gives investors pause.

"There's no spark that leads people to say 'I have to be in the equity market right now.

"They're staying a little bit more on the sidelines."

The decline in equities is more visible on a monthly basis. But this asset class fell also last week as a percentage of the total - 65% versus 71%.

Stocks declined in proportion, accounting for 40.5% of the total versus 48% during the prior week. But equity-linked notes remained at the same level, representing about 23% of the issuance excluding ETNs.

The top deal of the month was a single-stock transaction for income-seekers.

Bank of America Corp. priced $55.24 million of 8.5% STEP Income Securities due May 25, 2012 linked to the common stock of Schlumberger Ltd.

Investors were to earn the interest plus a contingent coupon of 6.47% if the stock at maturity exceeded a 108.5% step level.

Commodities still hot

For the sellsider, part of the diminished appeal of equities was to be attributed to the strong commodities bid.

"This market is still a commodities story," he said. "While equities have gone down, commodities have gone up.

"Even some stock deals can be seen as pure commodities bets."

"The play on Schlumberger for instance is really a play on commodities," he said.

Non ETN commodities rose by 16% to $57 million last week.

Issuance suggests that investors' interest for this asset class remains healthy, the sellsider added.

"It's not at the level it was two months ago, but appetite for commodities is still fairly strong," he said.

"Commodities prices have been up and down. You have the headlines. Volatility creates interest. Investors want to find good entry points," the sellsider said.

"The sell-off has offered new opportunities. Any market move in an asset class will create action. People are readjusting their thinking."

The third-largest offering last week was a commodity ETN.

Barclays Bank plc priced an additional $50 million of its 0% iPath exchange-traded notes due June 24, 2038 linked to the Dow Jones - UBS Coffee Subindex Total Return.

The original $25 million of notes priced June 27, 2008. The total issue size is now $150 million.

Bargains-hunters emerge

Even the emergence earlier this month of short bets in some key commodities sectors, such as gold and silver, was seen as a positive by some investors.

"The recent volatility and price correction in commodities gave our clients a buying opportunity for commodities notes perceived as too rich before," said Philippe Comer, head of commodity investor structuring in the Americas at Barclays.

"Commodities continue to be attractive as a source of diversification and inflation hedge.

The recent correction in commodity prices allowed investors to buy at better prices," he said.

The negative impact of higher interest rates may be more of an issue for equity investors than it is for commodities buyers.

"The perspective of higher interest rates in the U.S. in my view is not going to impact commodities," Comer said.

"Commodities are driven by fundamentals. The commodity rally comes from emerging markets demand and those countries have already started tightening. Demand may have slowed down a bit but remains well supported."

Supply a factor

Another factor, which may have contributed to the slowdown in equity issuance could be supply, according to the New York sellsider.

"A lot of banks are not looking for funding right now," he said.

"Any equity deal with an attractive coupon is going to be a success. It's a question of whether issuers are willing to pay that. Banks can get cheaper funding on deposits than debt."

Interest rates

Interest rates made a push last week led by a single but large deal, the second in size for the week. The popularity of the offering suggested that the need to hedge against inflation remains a strong driver for some investors, sources said.

Morgan Stanley priced another $10,027,000 of fixed-to-floating-rate notes due May 17, 2023 linked to the Consumer Price Index, upsizing its issue to $39.97 million from $50 million.

The coupon is 5% for the first three years. After that, the rate will be equal to the year-over-year change in the Consumer Price Index plus 200 basis points, subject to a maximum interest rate of 8%.

With this deal, interest rate issuance accounted for 16% of the total, up from 5% the week before.

Income-generating structures

There was no particular dominant structure last week aside from leveraged deals with partial downside protection, which amounted to $46 million, nearly four times more than the previous week.

Most big deals did not fit into predefined categories, such as Bank of America's $55 million STEP Income on Schlumberger or Barclays' $29 million of 8% annualized income enhanced reverse exchangeable notes due Dec. 23, 2011 linked to the common stock of EMC Corp.

This last deal, in addition to the coupon, offered a payout at maturity equal to the final share price with a floor and a cap.

"It's hard to see trends in structures, but from what I've heard, you still see interest in income-generating products and notes that pay a minimum guaranteed return," the sellsider said.

"Sometimes, people try new structures. Other times, they revert back into the traditional ones.

"For sure, issuers are speaking to clients to get products more aligned with their views. You'll definitely continue to see innovation," he said.

JPMorgan led the league tables last week with $123 million sold in 27 deals, or nearly 27% of the total volume excluding ETNs. It was followed by Morgan Stanley with $64 million and Bank of America with $61 million.

Last week's top agent was UBS.

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