March remains slow with clients diversifying away from S&P 500; yearly volume is up nearly 10%

By Emma Trincal

New York, March 19 - Volume continued to be relatively slow in the second week of March. Agents sold $232 million, a 35% drop from the previous week, according to data compiled by Prospect News.

The decline between the first 14 days of March and the same period in February is even more striking. Agents priced $591 million in the March period versus $1.45 billion during the February period.

However, figures remain encouraging on a year-to-date basis, with $8.43 billion sold this year as of March 14, a 9.55% increase compared to $7.70 billion sold last year, according to the data.

Because the past two-week period corresponds to the least active part of the month, sources said that the slowdown may or may not be a warning sign depending on what lies ahead at the end of the month.

A structurer suggested looking at issuance figures from mid-February to mid-March in order to "capture the month-end boost."

The result, he said, is "encouraging" as volume this year from Feb. 14 to March 14 amounted to $3.50 billion, a 3.35% increase from the same period last year, according to the data.

"Any time you look at numbers that doesn't include the month end when the big houses price their large offerings, even one deal can make a huge difference and you don't get the full picture," he said.

"To me, the real picture right now is that yes, there is a little bit of a slowing of the pace, but we're still up year to date by almost 10%, which isn't bad.

"I don't see drastic changes if you compare it to last year."

The beginning matters

But a market participant said that even slight changes in the issuance pace can make a difference at the end of any given year if they happen early on.

"Issuers are very active in the beginning of the year, including March, up to the first half really. This is when most of the volume is happening. When the summer comes, it slows things down. December is usually a slow month, and often November can be slow too," this market participant said.

"Generally you want to have good numbers for the beginning of the year. If the numbers come out weak, it's a little bit disappointing because it is when a lot of new initiatives are done. That's when you put yourself on the map.

"We're up nearly 10%, and that's fine. But as the year continues, the issuance pace will slow down. The fact that we're seeing already some weakness in the latest data may suggest that perhaps it's not as rosy as issuers may want it to be."

Two markets

This market participant pointed to two different types of issuance: the end and the middle of each month.

"The end of the month is when the big boys close their books. The mid-month action is when you see more of one-off deals. With figures weak last week, it looks like the activity that we have is becoming less diverse. We have fewer customized deals, and it seems like the market concentrates around the end of the month when the big banks are pricing their deals," he said.

"It may be good for Morgan Stanley or Merrill Lynch, but it might not be great for the smaller players who do a lot of their deals on a one-off basis in the middle of the month."

Fewer S&P notes

Another characteristic of last week, one that sources said was rather unusual, was decreasing interest in S&P 500 index-linked notes. Deals for the week overall were small in size, with the largest one at $22.88 million. But to reach the largest S&P 500 product, one had to go down to item No. 13 in last week's list of top offerings. This deal was Barclays Bank plc's $5.57 million offering of capped leveraged buffered index-linked notes with a March 17, 2016 maturity.

More visible on the top of the list were plays on single stocks, in particular airline and oil stocks. European equity and pure commodities were also in favor, according to the data.

Largest deals

BofA Merrill Lynch sold the largest deal of the week on the behalf of Credit Suisse AG, London Branch. It was $22,883,160 of 9.5% STEP Income Securities due March 27, 2015 linked to the common stock of Delta Air Lines, Inc. The step level is 109.5% of the initial price, and the step payment is 8.61%. Investors are exposed to losses.

The second deal, also sold by BofA Merrill Lynch, was Barclays' $17.58 million of 0% Strategic Accelerated Redemption Securities due March 27, 2015 linked to the American Depositary Receipts of Petroleo Brasileiro SA.

If Petrobras shares close at or above the initial share price on any of three observation dates, the notes will be called at par of $10 plus an annualized call premium of 26.42%. The observation dates are six, nine and 12 months after the pricing date.

If the notes are not called, investors will receive par for losses up to 5% and will be exposed to the any decline beyond 5%.

The third deal, distributed by JPMorgan, was HSBC USA Inc.'s $16.98 million of 0% knock-out buffer notes due Sept. 21, 2015 linked to the MSCI Europe index. The deal has a final knock-out barrier of 82.5% and no leverage and no cap.

"We see a lot of deals tied to the European equity market simply because there is a lot of focus and research around Europe right now, so those notes provide access to an asset class that is increasingly popular," the structurer said.

"In structured products, pricing is also a factor. The dividend yield on the Euro Stoxx 50 is 3.5% versus 1.9% for the S&P. If it's easier to price a European deal and the research supports it, you'll get more of them.

"And then you have the access factor. It's harder for people to buy European stocks individually. The structured note provides access."

Oil, commodities

JPMorgan also distributed the No. 4 deal, which was based on oil.

Barclays priced $12.12 million of 0% contingent buffer enhanced notes due May 26, 2015 linked to futures contracts on WTI crude oil. If the price of WTI crude finishes at or above the 79.3% barrier level, the payout at maturity will be par plus 10%, for a fixed payment of $1,100 per $1,000 principal amount of notes. Otherwise, investors will be fully exposed to any losses.

"We've seen deals on oil stocks. It's likely that geopolitical tensions around Ukraine and Russia had something to do with it," the structurer said.

Commodities as an underlying asset class made for 10% of last week's volume, according to the data.

"You're seeing more bullish calls on commodities from research at various firms," the structurer said.

"For a while, people were bearish on commodities because of the oversupply issue, but it looks like inventories may now be depleted. The commodities benchmark is up for the year."

BofA Merrill Lynch brought the top commodities deal and the fifth largest issue of the week, AB Svensk Exportkredit's $11 million of floating-rate notes due April 20, 2015 linked to the Dow Jones - UBS Commodity Index Total Return.

The coupon, reset quarterly and payable at maturity, is equal to Libor flat.

The payout at maturity will be three times the index return minus the Treasury bill yield and a fee.

The notes are putable at any time if requested by all holders and callable if the index closes at 15% or more below its initial level.

Chasing volatility

Six out of the top deals were linked to single stocks. For the week, single stocks accounted for 44% of the total and equity indexes represented 31.5%. The yearly average is 29% and 52% for stocks and equity indexes, respectively.

"The greater emphasis on single stocks is also driven by pricing factors," the structurer said.

"Whenever you create a principal-at-risk structure, it's easier to do it based on a stock than on an index because single stocks have a higher volatility than indexes. If the volatility is high, the barrier or the buffer is going to look more attractive. If you do a leveraged capped note, the cap will also look more attractive given the higher premium you'll get from the option."

A broader market

Deals linked to the S&P 500 index as of March 14 this year have dropped to $1 billion, a 37% decrease from last year, according to data compiled by Prospect News.

"It seems to be different from what we've seen for the last couple of years when the main interest was on the U.S. benchmark. But in a sense, it's a good thing for the market," the market participant said.

"Clients have now a much broader interest in the market. They're not just using structured notes as a way to access the main index. They're branching out to foreign indexes, commodities as well as ADRs. It shows that they have a greater comfort to encompass a broader scope of underlying. For the industry, it's good thing.

"Investors no longer have to stick with just the S&P. They choose from a greater array of asset classes and securities."

He also pointed to pricing considerations.

"When you're working with more underlyings, better payoffs are available too because some underlyings work better with certain structures," he added.

"Some underlying assets like ADRs may have higher volatility. Or perhaps some indexes have higher dividends. It enables you to do more interesting structures.

"As well as if you look at commodities, the shape of the commodities futures curve may allow you to create things you wouldn't be able to do with equities.

"So while the volume seems a little slow, it looks like we're seeing much richer offerings."

"Generally you want to have good numbers for the beginning of the year." - A market participant

"You're seeing more bullish calls on commodities from research at various firms." - A structurer

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