Second week of the year retreats from New Year volume spike despite better market conditions

By Emma Trincal

New York, Jan. 18 - Sales of U.S. structured products declined by 70% in the second week of January compared to the first week, according to data compiled by Prospect News.

On a month to month basis, though, the first two weeks of the new year showed a healthier pace than the same period in December, with volume surging by 32.5% to $922 million from $696 million.

The advance appeared to have been skewed by a strong push occurring early in the first week of the year, according to the data, which excludes exchange-traded notes.

Agents priced $213 million in 56 deals last week versus $709 million in 76 offerings in the first week of the year.

Issuance drivers

These figures are in the context of a slowly recovering equity market and make predictions for what lies ahead for 2012 difficult to make, sources said.

"It's still early. We're seeing normal flows, not heavy or light," a sellsider said.

"I think the year is off to a good start. We had some degree of stability in the market. That's what we need this year ... not too much macro noise. It's very early to say what the year will bring, but if it continues like that, we should have solid equity returns," he said.

A market participant said that the volume was not necessarily a function of short-term moves in the overall market.

"It helps when stock prices go up, but to me, it's not one or two weeks of positive equity returns that's going to lead volume trends," the market participant said.

"The real driver this year will continue to be interest rates. The challenges in the structured products market will remain based on where rates are. If they continue to be low, issuers will have an easier time trying to encourage buyers to switch from CDs to notes. That should help."

The two-week pattern of the month intrigued the market participant.

"I am surprised we had such a big first week," he said.

"My guess is that the big bump up in volume in the first week of January was not the result of calendar deals but probably due to one-offs that had been contemplated by investors in December and didn't close at the time due to the vacation schedule and desk staffing.

"You probably had larger institutions as well. That's my guess."

Fewer big deals priced last week. Only six offerings in excess of $10 million priced versus 22 the week before, according to Prospect News data.

Figures on a year-to-date basis were not very encouraging either. They revealed a 53% decline in volume to $922 million this year from $1.95 billion at the same time last year.

Big basket deal

A stock basket deal was the week's largest issue, making equity the dominant asset class, the data showed.

Bank of Montreal priced $75.26 million of 0% senior medium-term notes, series B, due Jan. 23, 2013 linked to Raymond James Analysts' Best Picks for 2012.

The stocks were selected in December by the equity research department at Raymond James & Associates, Inc. The Raymond James analysts expect these stocks to sustain operational growth and price appreciation over a 12-month period.

The notes priced at 102.75.

Notes linked to a basket of stocks amounted to 36% of the total last week, ahead of single stocks (26%) and equity indexes (24.5%).

"This is a deal they do every year," the sellsider said. "I don't think it signals that equity baskets are on the rise. You can't see this deal as an indicator of a trend."

The top deal changed the league table, however. BMO Capital Markets Corp., an agent that is rarely on top, was propelled to No. 1 with $79 million sold in four deals, or 37.25% of the total.

"It's very much skewed by that one transaction," the market participant said.

BMO was followed by Barclays, which priced five offerings totaling $46 million, or 21.68% of the volume. JPMorgan took the third slot with $16 million, or 7.68% of the market, sold in six deals.

Interest-rates-linked notes amounted to 8.21% of the total due to another larger deal, the second in size for the week. It was Bank of America Corp.'s $16.49 million of 0% digital return notes due Jan. 13, 2014 linked to the 30-year Constant Maturity Swap rate.

Overall, equity as an underlying asset class declined by two-thirds last week to $184 million from $550 million, with equity indexes declining more (down 88.5%) than single stocks (down 44.5%).

In market share, stocks took precedence with nearly 26% of the total versus 24.5% for equity indexes.

It was the opposite trend for the month-to-date data, with equity up 85%. During that time, both stocks and indexes rose sharply, especially equity indexes, which were up 155% from December.

Reverse convertible comeback

Reverse convertibles continued to recover, and it was the main structural trend for the week. Their volume doubled to $32 million from $16 million the week. On a monthly basis, issuance of those products rose by 39%.

"It doesn't surprise me," the market participant said.

"This is really the kind of product where a positive equity tone will make people feel more comfortable, so it will help sales.

"Buying in a rally when volatility is on the decline may not be the most sophisticated thing to do. A better entry point would be after a negative price movement or a correction of some sort. But for investors, the comfort level is what matters, and you'll see sales go up when the market is up."

The largest reverse convertible offering - and third biggest deal of the week - was brought to market by Morgan Stanley. It priced $13.14 million of contingent income autocallable securities due Jan. 20, 2015 linked to the common stock of Apple Inc.

The structure is slightly different from a typical reverse convertible in that the coupon is contingent and also because the notes are callable. But the existence of a downside trigger and the absence of a call premium put the product in the reverse convertible category broadly.

If Apple stock closes at or above the downside threshold level - 75% of the initial share price - on a quarterly determination date, investors will receive a contingent payment of $0.2125 for each $10.00 note. Otherwise, no contingent payment will be made that quarter.

The call is triggered if the closing price is greater than or equal to the initial share price on any of the first 11 call dates.

If the notes are not called and the final share price is greater than or equal to the trigger, the payout at maturity will be par plus the contingent payment. Otherwise, the payout is a number of Apple shares equal to $10.00 divided by the initial share price or an equivalent cash amount at Morgan Stanley's option.

"It's still early. We're seeing normal flows, not heavy or light." - A sellsider

"[The recovery of reverse convertibles] doesn't surprise me." - A market participant

© 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.