Volume falls 7% for year to $16.78 billion; stock deals increase; not-so-common deals top week

By Emma Trincal

New York, June 19 - Issuance continued its downward trend for the year to date, according to data compiled by Prospect News, and a couple of non-typical deals topped the list of issues priced last week.

Agents in the second week of June sold $352 million, a 13.6% decline compared to the $407 million priced the week before, according to the data available as of Tuesday evening.

During the first half of June, sales dropped by 7.7% to $759 million from $822 million during the same period in May.

Sales have declined by 7% to $16.78 billion this year as of June 15 from $18.05 billion during the comparable period last year, and the number of offerings has fallen by 7.6% to 3,631 from 3,930, according to the data.

"We'll continue to go lower in volume as we move into the summer and probably until September or October. It's going to be a slow summer," a sellsider said.

For this sellsider, the current geopolitical instability has so far failed to have a direct impact on volatility, which remains at levels lower than the historical average.

The VIX index rose to 18.6 last week on Wednesday but finished at 15.6 on Friday. The S&P 500 index, however, ended down 1% after a Japanese equity market sell-off disrupted the rally mid-week.

"Although there is a lot of instability worldwide - we have political unrest in Greece, Turkey, a civil war in Syria and now big protests in Brazil - I don't see anything that will really move the world. This instability is not enough to spike volatility," he said.

"What may move volatility is the Fed. The moment Bernanke exits the Fed will be a test for the market. But I don't see how the future governor would reverse the program put in place.

"People stay invested. They're not deploying new money. I don't see any large global movement of investors rushing in or rushing out of the market, which is the only factor that could trigger volatility.

"You see a lot of rollovers. But what's missing is new money."

A market participant said that although volume was down, the structured products market is evolving in the right direction with new-comers "embracing" the products.

"We know that we're down in volume. Last year, we were already down compared to 2011. Now, we're down 7%," he said.

"But everything is relative. Only a few weeks ago, we were down 10% for the year. Now it's 7% down. That's encouraging. There is a decline. It is what it is. But it doesn't mean that it's going to last forever."

Sales of structured notes excluding exchange-traded notes amounted to $35.21 billion last year, a 15% decline from the $41.33 billion priced in 2011, according to the data, which excludes plain-vanilla fixed-income notes such as fixed-to-floaters or step-ups.

"What I find encouraging is the fact that we are seeing more institutional investors using structured products. Obviously, that doesn't offset the volume decline. But at some point, it may," he added.

"From talking to people and from what I read, I see that ETFs are growing at a very fast pace. If that's the case, their growth is going to challenge structured products. There will be more notional going into ETFs rather than structured products. Obviously, it's not a good thing for the industry.

"The good news, however, is that institutional investors are embracing the use of structured products. Hopefully, this new trend will limit part of the decline that we've already seen and maybe put an end to it or even reverse it.

"When sophisticated investors understand that there are things they can do with structured products that they couldn't do with ETFs, I think things will improve significantly.

"I have hope for this industry."

Stocks, leverage up

Single-stock deals are up 10% for the year and make for 23% of the total volume. Equity index-linked notes have fallen by the same percentage to account for 53% of the total. The gap between the two equity asset classes is now narrower than before, the data showed.

In the meantime, the volume of interest-rates-linked notes has doubled so far this year even if the asset class is still a very small component of the market at 3.5% of the total volume versus 1.5% last year.

The most popular structure for the year remains leverage with no downside protection, up 27% in volume and amounting to 21% of the total, compared with 15.5% last year.

The second most widely issued product is autocallable reverse convertibles, which have seen their volume double from last year. Their market share has increased from 8% last year to 17% in 2013.

"People are looking for income, and the autocall is a way for the issuer to add more yield," the sellsider said.

Finally, leveraged notes with partial downside protection offered through a barrier or a buffer are down 25% in volume from last year. The third most common structure, buffered or barrier notes represent only 15.5% of the total, according to the data.

The two largest deals last week were rather atypical in their structures.

The first one was a fully principal-protected note, a type of structure that has become rarer than in the past due to the difficulty in pricing the zero-coupon bonds in a low interest rate environment, sources said.

Two atypical deals

Bank of America Corp. priced $32.94 million of 0% Market Index Target-Term Securities due June 26, 2020 linked to the Dow Jones industrial average. Investors will receive par plus any gain in the index subject to a maximum return of 106%. If the index falls, the payout will be par.

"People are eager to get principal protection," the market participant said.

Wells Fargo & Co. priced the No. 2 deal, a stock-based product, with its $28.9 million of 0% optionally exchangeable securities due June 10, 2020 exchangeable for the common stock of International Paper Co.

Beginning July 19, each security will be exchangeable at any time at the option of its holder for 16.316 International Paper shares. The issuer can settle exchanges in International Paper stock or cash.

After three years, the securities become callable at any time. The redemption price is the greater of par and parity. Parity on any day equals the exchange ratio multiplied by the closing share price.

"It doesn't look like a typical structured product," the market participant said.

"It's not your typical payout. It's more like a convertible bond. You can exchange it for the stock. If the stock goes up, you would exchange it. If it doesn't go up, you wouldn't. This looks like an institutional deal probably, something done for an investor who wants to have optionality on this particular stock."

The third-largest product used the No. 1 structure seen so far this year: leverage with no downside protection.

Barclays Bank plc priced $25.18 million of 0% Accelerated Return Notes due July 3, 2014 linked to the common stock of Facebook, Inc. BofA Merrill Lynch was the agent.

The payout at maturity will be par plus triple any increase in the stock, subject to a 32.75% cap, with full exposure to any decline.

"I have seen more pure leverage plays on stocks lately. I think it's good that people embrace leverage with stocks through the use of structured products," the market participant said.

The top rates play last week, and the fourth-largest offering of the week, was brought to market by Goldman Sachs Group, Inc., which priced $20 million of 15-year callable quarterly CMS spread notes due June 19, 2028 linked to the 30-year Constant Maturity Swap rate and the five-year CMS rate.

Interest is 9% during the first year. After that, the coupon is four times the spread of the 30-year CMS rate over the five-year CMS rate, subject to a maximum rate of 9%. The payout at maturity will be par.

The notes are callable at par on any interest payment date beginning Dec. 19, 2013.

Exchange-traded funds as an underlying asset class were popular last week, accounting for 6.3% of the total priced in 10 deals totaling $22 million versus $2 million of such deals the week before.

Royal Bank of Canada priced $14.96 million of digital notes with a 10% buffer due Feb. 18, 2015 linked to a basket of equally weighted funds. The underlying funds were Energy Select Sector SPDR fund, the Industrial Select Sector SPDR fund, the Materials Select Sector SPDR fund and the Technology Select Sector SPDR fund.

Bank of America was the top agent last week, pricing $68 million in three offerings for 19.27% of the total. It was followed by Royal Bank of Canada and UBS.

"You see a lot of rollovers. But what's missing is new money." - A sellsider

"I have seen more pure leverage plays on stocks lately." - A market participant

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