Sales weaken to $392 million amid uncertainty; BMO's megadeal on Raymond James picks saves day

By Emma Trincal

New York, Jan. 22 - The year so far has started relatively slowly, sources said, with volume often the result of one large offering.

Last week was no exception. Agents sold $392 million in 114 deals, a 30% decline from the prior week, according to data compiled by Prospect News. Forty three percent of last week's volume came from a single transaction, a Bank of Montreal offering linked to Raymond James stock picks, a deal that is priced twice a year in December and January.

For the month as of Jan. 18, agents have priced $1.13 billion in 287 deals. It's an 18.85% decline from the same period last month and a 36.45% drop from the $1.77 billion that priced during the same time a year ago, the data showed.

Earlier this year, a single commodity-linked offering was one of the factors firming up an otherwise meager volume in a short two-day week. It was a $60 million deal brought to market by Barclays Bank plc and linked to the price of palladium. The deal made up more than a third of the total during that short week.

So slow

"It's not slow: It's the worst! It's horrible!" a sellsider said about last week.

"Usually, January is pretty strong. I guess people think they can mess up a little bit longer and that they have 11 months to make it up.

"We've seen it a couple of weeks ago, a big deal. Last week was the BMO offering. That's been the trading pattern recently. It's a big deal that saves the party. You have a very slow volume, but a larger offering makes things look a bit better. But the reality is it's not great. It's been slow, and I have no idea why it's so slow."

Last week was much worse than the previous week, sources said. The trend is true on a year-over-year comparison.

Compared to the week of Jan. 13 last year (the equivalent of the second week of the month), volume was down 45% last week. On the other hand, sales this year during the week of Jan. 5 (the first full week of the year) exceeded the volume of the week of Jan. 6, 2013 by 16%.

No direction

"There's a bit of uncertainty on the market direction. Just based on what we've seen in equities so far this year, the market has been rather flat. There is not much consensus right now," a structurer said.

"The S&P 500 started on a more vigorous note last year. If you look at the same period, the index was already up, while for now we're flat and even slightly negative.

"There was a clearer direction, a more bullish trend to it.

"Since the beginning of the year, the market has been trading up and down, overall pretty flat with a couple of days of sell-off," he said, pointing to Jan. 13 when the S&P 500 dropped 1.35% on the day.

"We didn't see that last January," he said.

"It's too soon to read too much into it. Maybe the uncertainty in the market has led some people to hold off. It'd be best to wait until the end of the month though."

Stock mania still on

Meanwhile, the appetite for stocks has grown unabated, in continuation of a trend already seen during the previous week.

Single-stock underliers represented 37.35% of the volume last week versus 6.10% for equity indexes.

Equity indexes the week before accounted for 36.10% of the total. Even if equity index notes tend to hit the market at the end of the month only, a 6% market share for this asset class is unusually low, according to data compiled by Prospect News.

Equity exchange-traded notes picked up in volume, accounting for 8.36% of the total in five offerings. But the top category was "stock baskets" with 46.31% of the total in just three deals. Naturally, it was the result of the largest deal of the week.

BMO's $168.86 million

This deal was Bank of Montreal's $168.86 million of 0% senior medium-term notes, series B, due Jan. 28, 2015 linked to Raymond James Analysts' Best Picks for 2014.

The picks are Advance Auto Parts, Inc., Antero Resources Corp., Apple Inc., Cameron International Corp., Comcast Corp., Copa Holdings, SA, Ctrip.com International, Ltd., Intuit Inc., JPMorgan Chase & Co., Newell Rubbermaid Inc., Praxair, Inc., Quintiles Transnational Holdings, Inc. and Salesforce.com, Inc. Each stock has an equal weighting in the basket.

The stocks were selected in December by the equity research department at Raymond James & Associates, Inc. The Raymond James analysts' goal in selecting the Best Picks for 2014 was to identify stocks that will be able to sustain operational growth and price appreciation over a 12-month period.

The notes priced at 102.75. The 2.75% premium went to Raymond James, the distributor of the notes, according to the prospectus. Investors receive the return of the basket on a one-to-one basis minus a redemption adjustment amount of 25 basis points.

"It's a big deal," a distributor said.

The deal was actually slightly smaller in size than Bank of Montreal's $185 million of 0% senior medium-term notes, series B, due Dec. 19, 2014 linked to the same underlying basket that priced in December.

Seeking alpha

"People are looking for stocks to generate some alpha. Implied vols are really low. It's hard to come up with marketable structures," the structurer said.

"Implied volatility has come down since the end of the third quarter. At the time, we had more volatility and better pricing.

"While volatility has picked up a little bit, it hasn't been enough because the market has continued to rally. There is also a gap between the structures you see and what the market is doing.

"People are gravitating toward stocks because they're trying to monetize the higher volatility, which you're going to find more with single stocks than with indexes."

Short-term volatility spikes are not sufficient to change the trend, he said.

"Last week on Monday, volatility was up. But a one-day surge like that isn't long enough to allow firms to monetize the vol. Structured notes sell mostly in the retail space, and you need persistent levels of volatility increase.

"Those products are not that responsive if volatility is up in one day. You might see more of that with institutional clients when they do a one-off but not so much with calendar deals. Those require longer marketing periods."

The distributor also noted the disappointing volume so far this year.

"It's a bit slow, but things could change before the end of the month," he said.

"There's not a lot of activity.

"Clients like the shorter maturities. They would prefer a one- or two-year term in general. The three-year or a four-year that we're seeing are much tougher sales. We haven't seen a lot of shorter deals, and since it's what clients want, at least on my end, it may be one of the factors."

Market sentiment was also invoked.

Long tenors

"A lot of people think that the market in general may be at its peak and ready to fall out," he noted.

"2013 was obviously a very good year. I don't think we'll see these kinds of returns for 2014, although we'll see some upward appreciation in the market but not as much.

"If the market stays flat, we may see more absolute return structures as well as a lot more buffers because people are going to demand more downside protection."

Top offerings

The second largest deal of the week was Goldman Sachs Group, Inc.'s $35 million of 8% equity-linked notes due Jan. 12, 2015 linked to the common stock of Macy's Inc. Interest is payable monthly.

The same issuer priced the third largest deal using a similar structure, $31 million of 8% equity-linked notes due Jan. 14, 2015 linked to the common stock of Citigroup Inc.

BofA Merrill Lynch sold on the behalf of Deutsche Bank AG, London Branch $24.58 million of 9% STEP Income Securities due Jan. 30, 2015 linked to the common stock of United Rentals, Inc. It was the No. 4 offering.

The step level is 109% of the initial price. If the stock price finishes above this level, investors will receive an additional payment of 4.61%. Above the initial share price but below the step level, investors will receive par. If the stock return is negative, investors will be fully exposed to the losses.

The fifth deal was a buffered note. Barclays' $14.75 million of 0% capped leveraged buffered index-linked notes due Sept. 17, 2015 tied to the MSCI EAFE index offer 1.5 times leverage on the upside up to a 12.9% cap with a 10% buffer on the downside including some downside leverage beyond the buffer at a rate of 1.111.

The top agent last week was BMO Capital Markets with its top deal making for 44% of the total. It was followed by Goldman Sachs and Barclays.

"That's been the trading pattern recently. It's a big deal that saves the party." - A sellsider

"It's a bit slow, but things could change before the end of the month." - A distributor

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