Month-end leftovers bring issuance to $684 million; year builds momentum, up 6% over 2012

By Emma Trincal

New York, Nov. 6 - At the juncture of October closings and the start of a new month, agents sold $684 million in 168 deals in the week ended Friday, according to data compiled by Prospect News.

It was less than the $1.66 billion sold the week before, but sources noted that the bulk of October had been priced precisely between Oct. 21 and Oct. 25, the previous week.

The bigger picture was an improved year-to-date issuance volume. Agents have sold $32.50 billion in the year to date as of Nov. 2, a 6% increase from $30.67 billion during the same time last year, according to the data.

"Last week was in between two months, some sort of a mixed bag," a sellsider said.

"It carried over some of the end-of-the-month deals, but it was mostly the beginning of November.

"The only time pricing for October could have been done last week was Monday, Oct. 28.

"You can tell the week before was the busiest week. BofA was not present last week. They priced their deals on Oct. 24."

A ranking of all 44 weeks of the year to date showed that last week's volume was in the top half as the No. 17 week.

"We still had some leftover [deals] being done from the month, but closings took place mostly the week before. Volume slows down after advisers have been pushing," a distributor said.

A solid year

For sources, the main news was the issuance volume pickup for the year, which was seen as recent and encouraging.

"We're at a turning point," the sellsider said.

"We're hearing from the clients that we're at a key juncture. People who used to be on the sidelines are becoming more active. We're seeing greater participation, greater enthusiasm on the part of investors."

This sellsider ruled out the impact of exuberance or complacency on the part of investors.

"The markets are doing well, but I don't think we're overly optimistic," he said. "The market sentiment is positive, but it's not some pervasive optimism. It's not like investors are jumping up and down saying 'Let's make money.' It's more like people who so far were on the sidelines are now cautiously entering in the market."

For the distributor, the year would be by now "gangbuster" if only the summer had not put a brake on sales for several months.

"If we hadn't had this dramatic slowdown in the summer, issuance for the year would have been spectacular," he said.

"The beginning of the year was good. It was great for us.

"But the summer was horrible due to the rates moving up. The bond sell-off put a lot of agencies traders out of business. Moving rates crushed people. When you buy some paper when the 10-year Treasury is at 1.7% and it moves to 2.7%, no one is buying from you. People were losing millions of dollars. Everybody got inventories they couldn't sell."

Things began to improve last month, the distributor explained.

"The increase in rates started to benefit the structures but only slightly. I say slightly because while rates were going up, the money issuers needed to pay to borrow dropped. Funding levels got tighter," he said.

"The beneficial impact of higher rates in terms of putting together more attractive structures could have been very dramatic if it had not been almost negated by the tighter funding levels.

"Overall, yes, things are improving because inventories have finally cleared out and with higher rates you start to see better products. That has led to more volume."

Buffers

Most of the year has been characterized by a strong bid on leveraged notes without any downside protection, but last week showed the reverse trend.

In the year to date, leveraged notes with no downside protection have increased by nearly 40% while leveraged structures offering a buffer or a barrier have declined by 6.25%, according to the data. The structures accounted for a similar percentage of the total: 18% for partially protected notes and 20% for products involving full downside exposure.

Last week, leveraged notes with buffer or barriers were the dominant structure with 35% of the total sold. Non-protected enhanced product made for less than 7% of the volume.

"The fact that people do prefer buffers means there is still caution in the market," the sellsider said.

He cited two factors contributing to the inclusion of barriers or buffers in products.

"A lot depends on investors' preferences, but market conditions also play a key role too," he said.

"Whenever people can get a buffer, it's a big plus. Buffers are one of the big selling points of structured products. To the extent that they are possible, they are really helpful.

"The second aspect is pricing. Sometimes it's just too difficult to incorporate the buffers. It comes at such a high cost when it takes too much from the upside that it's just not feasible."

Higher volatility levels typically help issuers provide better buffers. But volatility on S&P 500 options as measured by the VIX index has remained "subdued," he said.

One way to "go around" the low volatility obstacle, he said, has been to use more volatile reference assets such as the Euro Stoxx 50 index or emerging market funds.

"With those types of indexes you can structure better downside protection on a relatively short duration," he said.

"Issuers have either used different underlyings on shorter-dated products or put buffers on S&P products with extended maturities."

The distributor mentioned the impact of interest rates levels.

"Why are people looking to protect themselves against the downside or search for additional protection? That's not an easy question to answer. When rates were really low and people were not rewarded for investing in bonds, they were willing to take on more risk and buy principal-at-risk notes often without any protection. But as rates have started to creep up, issuers may have felt the need to entice them with some downside protection," he said.

Another factor, he said, is the distribution of the products and who sells them.

"It's such a fickle group that buys principal-at-risk notes. It's mainly the private wealth management group, people at firms like UBS, Wells Fargo, Morgan Stanley," he said.

"Private wealth advisers are the ones that buy those buffered notes in bulk.

"Their buying habits will flow in lockstep with their thought process.

"If they think the market is heading lower, they'll need protection. If they see stock prices moving up, they will go with no buffers."

Top players

The top agent last week was UBS with $242 million sold in 88 deals, or 35.41% of the total. It was followed by Morgan Stanley and JPMorgan.

UBS AG, London Branch priced the No. 2 deal of last week, $25.41 million of 0% trigger performance securities due Oct. 31, 2018 linked to the Euro Stoxx 50 index. The payout at maturity will be par plus 163.52% of any gain in the index. Investors will receive par if the index falls by up to 25% and are fully exposed to the decline if the index falls below the 75% trigger level.

The top deal was a commodity-linked note offering brought to market by JPMorgan Chase & Co. It priced $51.55 million of 0% capped market plus notes due Jan. 7, 2015 linked to Brent crude oil. If the price of Brent crude finishes at or above 80% of the initial price, the payout at maturity will be par plus the greater of the 5% contingent minimum return and double any gain, up to a maximum return of 20%. Otherwise, investors will be fully exposed to losses.

"We're seeing greater participation, greater enthusiasm on the part of investors." - A sellsider

"If we hadn't had this dramatic slowdown in the summer, issuance for the year would have been spectacular." - A distributor

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