Issuance drops to $204 million in early-month cycle amid rising risk aversion, slow summer

By Emma Trincal

New York, July 7 - Issuance was thin last week with $204 million sold by U.S. agents, half of which came from an exchange-traded note add-on.

The main mood, sources said, was risk aversion. This was characterized by a pullback in equity products and a reduced use of leverage, data compiled by Prospect News showed.

Risk-taking retreats

"Double-dip recession fears is what everybody is talking about right now," said Jim Delaney, portfolio manager at Market Strategies Management. "Risk-taking is in retreat."

"It's been pretty quiet for us. We're seeing a lot of risk aversion," said Jakob Bronebakk, associate partner at Jubilee Financial Products, a structuring boutique.

"It's hard to pinpoint a single thing. But the leftover of the European crisis combined with the uncertainty around a double-dip recession and the fact that the summer is traditionally quiet, all these factors contribute to the risk aversion," Bronebakk added.

Slow summer

Agents sold $204 million in 41 deals during the week ended Friday, a strong decline from the $1.19 billion sold in 310 deals the week before.

"People are waiting for the summer to end, and it's pretty dead," a New York sellsider said. "Volume fell. It was an early-month cycle, not a month-end cycle."

It was also the week preceding the Fourth of July weekend, sources noted, a factor that significantly contributed to the sluggish volume.

Half in one deal

UBS AG, Jersey Branch priced half of the volume with a large ETN offering: $100 million of E-Tracs due April 2, 2040 linked to the Alerian MLP Infrastructure index.

The index provides an enhanced liquid subset of master limited partnerships that includes only midstream energy transportation and storage assets and selects companies that are infrastructure hard-asset focused.

"Investors recognize the value of MLPs, and ETNs are a very efficient way to get exposure to MLPs," a structurer said, commenting on this deal.

When excluding the $100 million ETN deal from the issuance, volume was a meager $104 million in 40 deals, a 91% decline from the previous week.

The average deal size declined as well, falling to $2.6 million from $3.8 million the week before.

"Clients are on the defensive. They worry about a sell-off," the sellsider said.

Bearish signs

Several signs indicated that investors were indeed retreating to less-risky strategies, according to data compiled by Prospect News.

The first one was the strong decrease in equity-linked notes as a percentage of the total issuance, falling by nearly a half from 65% of the volume the week before to only 36% last week and totaling $74 million.

"People are in a little cloud with the World Cup. But problems remain the same. The European debt will have to be paid. More taxes will come. Investors are beginning to fear a double-dip recession," the sellsider added.

Secondly, investors' appetite for enhanced deals was also reduced with leveraged structures falling to 13% of the total volume from 32%. The sellsider said that he was not surprised by the figure.

"Implied volatility is on the rise. People fear a market sell-off. When investors turn more bearish, they shy away from leverage," he said.

Reverse convertibles also declined but less dramatically. They were 16% of the total, compared with 22% the week before.

"Volatility is back up a little bit but not at the May levels," Bronebakk said.

Agents pricing reverse convertible deals focused on more volatile sectors such as financials and energy.

The second-largest deal of the week belonged to this category. JPMorgan Chase & Co. priced $17.41 million of 12.85% annualized yield optimization notes with contingent protection due Dec. 31, 2010 linked to MetLife Inc. via UBS.

Commodities for diversification

Another sign of growing uncertainty and risk aversion in the market was the return to commodities-linked deals, a trend incrementally seen over the past few weeks as investors are trying to diversify away from equity products, sources said.

Agents priced $105 million in two commodity deals last week, or 51.5% of the volume. The figure is biased by the large size of the UBS E-Tracs transaction, which was both the top deal and the top commodity offering of the week.

But sources agreed that commodities are becoming more popular again as investors are looking for diversification amid an increasingly uncertain stock market.

"People are risk adverse," the structurer said. "Seven days in a row of down equity markets plus the performance of last month have caused risk appetite to retreat."

The third-largest deal of the week was commodity-based. Bank of America Corp. priced $5 million of 0% Capped Leveraged Index Return Notes due July 8, 2015 linked to a basket containing equal weights of gold and silver.

Long, short Treasuries

Finally, Deutsche Bank AG, London Branch priced the No. 4 and No. 5 deals with long and short plays on the yield curve.

Deutsche Bank sold $5 million of PowerShares DB 3x Short 25+ Treasury Bond ETNs due May 31, 2040 linked to the DB Long US Treasury Bond Futures index and the DB 3-Month T-Bill index.

The issuer priced a nearly identical offering of the same size linked to the DB Short US Treasury Bond Futures index and the DB 3-Month T-Bill index.

UBS tops

UBS topped the league table last week with $128 million priced in seven deals, or 63% of the total, as a result of its $100 million E-Tracs but also due to a push in the sale of reverse convertibles.

Far behind came JPMorgan with $16 million in five deals, or 7.7% of the volume.

The third agent was Credit Suisse with $10 million in six deals, or 5% of the total.

UBS was second the week before behind Merrill Lynch and is ranked No. 6 in the year to date, according to data compiled by Prospect News.

"Double-dip recession fears is what everybody is talking about right now. Risk-taking is in retreat." - Jim Delaney, portfolio manager at Market Strategies Management

"When investors turn more bearish, they shy away from leverage." - A sellsider

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