Agents priced $478 million, including the No. 2 deal of the year making for half of the volume

By Emma Trincal

New York, Nov. 27 - Volume was up 30% in the week preceding Thanksgiving compared to the prior week - to $478 million - but one large commodities-based offering brought to market by JPMorgan and the second largest deal year to date accounted for nearly half of the volume, according to data compiled by Prospect News. As a result, the data was skewed and harder to interpret, sources noted.

JPMorgan Chase & Co. priced $234.65 million of 0% return notes due Nov. 27, 2018 linked to the J.P. Morgan Enhanced Beta Select Backwardation Alternative Benchmark Total Return index, according to a 424B2 filing with the Securities and Exchange Commission.

It was the second largest deal of the year after Bank of America Corp.'s $284.5 million leveraged notes offering tied to the Dow Jones industrial average, which priced in June.

The JPMorgan deal was tied to a new proprietary index created in September by JPMorgan. It gives investors synthetic exposure only to the commodities among 22 that showed the greatest degree of backwardation.

Backwardation is a futures term that designates the positive shape of the rolling curve, which benefits investors the most as prices of the expiring underlying futures contracts are sold at higher prices than bought.

Pre-holiday week

Commodities were over-represented last week due to the unusually big offering. This asset class made for 54% of the total in just five deals. The four other commodities transactions were negligible: all together, they accounted for less than $25 million.

Stock-linked notes issuance dropped by 80% to represent less than 9% of the total while equity indexes rose 13.5%, making up 24% of the volume.

Without the giant JPMorgan deal, issuance would have been a third smaller than the prior week's $368 million.

The top agent was JPMorgan with 12 deals totaling $247 million, or 51.63% of the total volume. The second and third agents were UBS and Citigroup, respectively.

Meanwhile, the market continued to rally with the stocks hitting new highs. The S&P 500 closed above 1,800 for the first time at the end of the week on Nov. 23.

Busy month

The month to date was slightly slower than October so far as of Nov. 23, down 3.20% with $1.43 billion versus $1.47 billion in the same period last month, according to the data.

However, November fares well compared to a year ago with volume up 33% from $1.07 billion.

"We've been fairly busy this month. We were busy until the end of August. September was a little bit slow. Last week or so, we saw quite a lot of activity again," said Tom May, partner at Catley Lakeman Securities.

"We've often noticed that whenever kids are in school, the pace of business is more active.

"The market has an impact on volume of course, but real stuff too and we see a correlation between kids being in school and busy activity in issuance.

"People get everything done before Christmas, anything they need to do before the holidays.

"November historically is a fairly busy month."

The month is far from over, sources noted. The absence of a flurry of bigger deals coming from Bank of America in the week ended Nov. 23 indicates that the month will close in the short Thanksgiving week, sources said.

Year is up 5.57%

For the year, volume continues to exceed last year's numbers, up 5.57% to $33.40 billion from $31.64 billion last year.

The number of deals however remained very stable this year to 7,199 from 7,207.

"People need to make their numbers before the end of the year," a sellsider said. "We have a very smooth market with very low volatility.

"At this time of year, many portfolio managers are busy doing some window dressing.

"The S&P 500 is up more than 25% this year. Investors want to increase the equity allocation in their portfolio."

The appetite for stocks and mutual funds was also a visible trend this year in the structured notes market, he added.

So far this year, equity-linked issuance rose 8.65% to $26.58 billion from $24.46 billion, according to the data.

"One of the main reasons for that is the migration from bonds to stocks," the sellsider said.

"Bond yields are so low, what's the point of having a triple-A yielding 0.3% in your portfolio?

"We've seen a switch over the past few months from bonds into equities. There have been large outflows in the past six months from bond funds and money market funds into equity-based products and that includes not only traditional equity like stocks, mutual funds and ETFs but also equity-based structured products," he said.

Structured notes can be particularly appealing when they give investors alternative ways to get long only exposure to an asset class.

"We've seen a stabilization of this trend recently, but there are still inflows into equity, and a part of it, I suppose, goes into derivatives products tied to equity. That's often because you can get some sort of alternative payout or exposure," he said.

Referring to the large JPMorgan commodities deal, which priced Nov. 22, he said that: "This large derivative suggests that the client, most likely an institution, didn't see any value proposition in any commodity funds.

"The best way to get their commodity allocation in their view was to do it via a certificate."

Last week did not show any particular structure trend.

"Volatility is not that high. The short-volatility trade doesn't look as good as it did. But people are still doing stuff. Nothing exciting but nothing to be depressed about either," said May.

For the year, one of the most striking trends was the popularity of autocallable reverse convertibles. Those are notes that offer investors the opportunity of getting either a call or a contingent coupon based on different strike prices on pre-determined observation dates. The call usually is triggered when the underlying closes above its initial price while the coupon is obtained at a usually lower level. Unlike reverse convertibles, those products for the most part do not offer a fixed coupon. The barrier, which determines the amount of principal to be repaid at maturity, unlike most reverse convertibles, is usually final.

"We've seen many autocallable reverse convertibles this year. It was a very popular type of product," the sellsider said.

Agents this year priced $5.73 billion of such products, or 17.15% of the total. It was the fastest growing structure after the steepeners, up 66% from the $3.45 billion issued last year, according to the data compiled by Prospect News.

"It's huge. It's almost a fifth of all the volume," the sellsider said.

Top deals

One of the signs that the week was relatively slow was the divergence in size between the number one deal and those that followed.

The second largest offering was less than $20 million in size.

Deutsche Bank AG, London Branch priced $18.39 million of 0% trigger performance securities due Nov. 28, 2018 linked to the S&P 500 index with a 30% weight, the Euro Stoxx 50 index with a 30% weight and the MSCI Emerging Markets index with a 40% weight. Investors received 102.25% of the return at maturity and had a 50% barrier on the downside. UBS Financial Services Inc. was the agent.

The third deal was an interest-rate-linked product brought to market by Citigroup Inc. in its $16.75 million of callable leveraged CMS spread notes due Nov. 26, 2033 linked to the 30-year Constant Maturity Swap Rate and the five-year CMS rate.

The interest rate was 10% for the first year. After that, it was 4.5 times the spread of the 30-year CMS rate minus the five-year CMS rate, subject to a maximum interest rate of 10% per year. Interest was payable quarterly. The payout at maturity will be par. The notes were callable after two years.

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