Bank of Montreal's $100 million deal brings unexpected lift for month, week

By Emma Trincal

New York, Dec. 19 - Sales of structured products for the month to date rose from the previous month, something that hasn't happened in a long time, thanks to an annual and popular deal. The Bank of Montreal's $100 million offering was welcomed by market participants but may not give an accurate picture of the seasonal activity, sources said.

Each year in December, analysts at Raymond James announce their best picks, with returns expected to be above 15%. Following the announcement, Bank of Montreal issues annually a note tied to an equally weighted basket of the stocks.

Agents this month (as of Dec. 15), sold $665 million, a 9.27% increase from the same period last month, which saw the pricing of $608 million, according to data compiled by Prospect News.

A fluke

Sales rose by 6.5% last week to $343 million from $322 million the week before. The uptick has not been the norm of late except when a big offering hits the market as it was the case last week.

"If you put aside this big deal, last week was relatively slow as a result of the calendar around the Christmas holidays," said Guy Gregoire, former syndicate manager at Pershing in charge of structured products distribution.

"Deals may close either at the end of this week or probably the day after Christmas, on the 26th, in order to settle on the 31st.

"Because it's the holiday season, the selling period will be shorter," he said.

Last year, Bank of Montreal priced $90 million of a deal built around the same research concept. It employed a different basket with 13 stocks consisting of Raymond James' best picks for 2012.

"They usually put on this deal in December. It's my understanding that it's sold internally to Raymond James customers. Obviously the deal is very popular. Investors value the research-based basket. It's kind of an annuity business for Raymond James," Gregoire said.

"The bigger size this year suggests that they've had good rollovers and obviously new customers involved."

The formula

BMO Capital Markets Corp. was the agent for Bank of Montreal's $100 million of 0% senior medium-term notes, series B, due Dec. 23, 2013 linked to Raymond James Analysts' Best Picks for 2013.

The underlying stocks were AmerisourceBergen Corp., Altera Corp., Bed Bath & Beyond Inc., Ctrip.com International, Ltd., Equinix, Inc., Jabil Circuit, Inc., Nuance Communications, Inc., Protective Life Corp., Trinity Industries, Inc., Tractor Supply Co. and Zions Bancorp.

"Their formula is quite successful. They use a highly popular research franchise with Raymond James and on the issuance side, they choose a highly rated bank, which is Bank of Montreal as a their counterparty risk. It makes the deal twice attractive to the customer who likes the research and the name of the issuer," said Gregoire.

Not surprisingly, BMO took 30.5% of the market share, according to the data. This agent sold only five deals totaling $104 million.

"You would think it should be a replicable model. There are a number of independent firms that have their own list of best picks. The mere size of the Raymond James deal is a clear indication that research-based products are in demand," noted Gregoire.

Narrower gap

A sellsider said that sales figures last week were not indicative of any trend.

"It's at the end of the year that Raymond James prints this big issue. They may even do more in the next couple of weeks. So it's part of the news; it's part of what was done last week. But it's seasonal. It happens every year at the same time," this sellsider said.

"The weekly and monthly issuance volumes are somewhat skewed with a big deal like that. The real picture is that we're at the end of the year and that as we move closer to the holidays, business is slow. This was just a spike," he said.

Volume is still down year to date, the data show. Agents priced $33.72 billion this year as of Friday from $40.32 billion during the same time last year, a 16.37% decline.

One consoling factor was the reduction of the gap between the two years when comparing the numbers from a few months or even weeks ago, according to the data.

For instance, at the end of August, year-to-date volume was down 22% from the previous year. A month ago, the gap was reduced to 19%. It is now a 16.5% drop approximately.

"In retrospect, the numbers are getting closer, which is a good thing. It shows that volume somehow held up. That's one thing to be cheerful about at this time of year," the sellsider said.

Equity's resilience

Equity-linked sales held better than one may have expected, according to the data showing a 3.95% decline to $26.12 billion from last year. This was due to the solid growth of equity index products, up 13.5% to $18.8 billion for 55.75% of the total. Such growth partly offset the decline in single-stock deals, down 31.75% to $6.9 billion, or 20.5% of the total, according to the data.

"My take on the decline of stock deals would be the low volatility levels. With a VIX at 15, reverse convertible issuance has been hit significantly," said Gregoire.

To be sure, traditional reverse convertible products have declined by 65% year to date even if their callable counterparts have doubled in volume.

All other asset classes except for equity indexes have declined this year. Plain vanilla fixed-income products, such as step-ups, fixed-to-floating notes and capped floaters, while having grown significantly, are listed separately and are not included in these totals.

Commodities for instance, accounting for $4.6 billion last year, have dropped by $37% to $2.9 billion this year.

"The decline in commodities was driven by the performance of the asset class," the sellsider said.

From the end of February to the end of June, the S&P GSCI dropped by 20%. That may have spooked quite a few investors. As a result, we haven't seen much action in commodities in 2012.

"In general, people haven't had a lot of conviction or enthusiasm this year," he said.

A relatively large commodities-linked offering hit the market last week however.

Deutsche Bank AG, London Branch priced $38.8 million of securities due Jan. 29, 2014 linked to the Dow Jones - UBS Commodity Index Total Return. The notes were putable and tracked the index with three times leverage on both the upside and the downside.

On the structure side, digital notes have been on the rise this year, making for 14% of the total.

These products organized around a trigger price offer in the absence of a trigger event either a fixed coupon or a smaller coupon with upside participation up to a cap, giving investors some range of participation above the coupon. When the barrier is breached, however, investors are fully exposed to losses.

"It's almost a reverse convertible, but instead of a monthly coupon, you get a coupon based on the underlying performance. Obviously, there is more risk associated with the trade. When a customer buys a reverse convertible, he is in a better shape than someone who buys the stock outright due to the fixed coupon.

With digital notes, there's no fixed coupon. You either get it or you don't. It's a stronger directional bet.

"But the return potential is high and that's the appeal for some investors who want an attractive coupon. You take more risk in the hope that the index won't go down by too much. In this kind of rate environment, the ability to have a 10% or 15% return in one year looks sexy compared to other products," he said.

The second agent last week was Goldman Sachs with $58 million priced in 13 deals for 16.82% of the total.

This agent sold the third deal in size, a digital structure with a $16.42 million index-linked trigger notes due Jan. 2, 2014 tied to the S&P 500 index. If the index level fell by more than 20% during the life of notes, investors would get par plus the index return either positive or negative. Otherwise, the payout was par plus the greater of the index return and 3.55%. In both cases, the return was capped at 15%.

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