Issuance volume up 22% for year as stock prices climb to new highs

By Emma Trincal

New York, Feb. 6 - Volume was up 22% year to date as of Feb. 2 with agents pricing $3.63 billion, compared to $2.97 billion during the same period last year, according to data compiled by Prospect News.

"You might call it the January effect," said Guy Gregoire, former syndicate manager at Pershing.

"It's a big January if we're up 22% from last year. Maybe the January effect this year has accelerated due to a very poor last quarter. The euphoria in the stock market since the beginning of the year is also a big factor.

"This has been a very good month. People have been coming back into equities through the month of January."

U.S. stocks have seen their best month of January in two decades.

The number of offerings was just about the same - 672 this year versus 673 last year - but deals have grown bigger this year. The number of offerings in excess of $20 million amounted to 45 this year versus 28 last year.

Volume last week was lower than the prior week at $760 million versus $1 billion, but sources said that it was consistent with the monthly calendar as most of the January deals priced in the week prior to last week.

A bull market

While the declining volatility may not be a positive for some structures, structured notes issuance clearly benefited from the bullish momentum seen in the overall equity market, sources said.

"Even though in theory you can use structured products whether you're bullish, neutral or bearish, ultimately people do more when they feel more rich, when they have more money to spend," a structurer said.

"So there is obviously a correlation between the market and issuance volume. You see more volume when the market is up.

"That's the macro picture. In reality, things are not so straightforward. When investors are very bullish, it can also be challenging because people may say why bother doing structured products when I can do the market directly? So a bull market helps volume in general but may not help certain deals."

The money flowing out of bonds into equities, a general market trend, was also reflected in the growth of the equity asset class in volume, according to the data.

Equity volume grew by 31% to $2.94 billion from $2.24 billion during the same period in 2012. Equity-linked notes made for 80% of the total volume, compared with 75.5% last year, according to Prospect News data.

"It makes sense to see increased activity in equity-oriented structures," said Gregoire.

"The inflow into equities in general seems to translate into the structured products space. There is consistency."

The S&P 500 index has gained 3.5% this year as of the end of last week. During the same time, the CBOE Volatility index, or VIX index, has fallen by 13%.

"The decline in volatility is not necessary a bad thing for structured products across all structures. It's hard to quantify the impact of the lower VIX. It helps certain deals and it hurts others. It's not clear cut," the structurer said.

"The evidence that the negative impact remains to be seen is that we're up 22% year to date in issuance volume and yet, the VIX is down."

Morgan Stanley autocallable

Morgan Stanley took the lead the last week with 26.42% of the issuance volume in 27 deals, or $201 million.

In particular, Morgan Stanley brought to market the top two deals with two contingent income autocallables each in excess of $30 million.

In the first one, Morgan Stanley priced $38.63 million of 0% contingent income autocallable securities due Jan. 30, 2020 linked to the Russell 2000 index.

The notes paid a contingent monthly coupon if the index closed at or above the 70% barrier level on a monthly determination date. The contingent monthly coupon would be 7.5% for the first five years, stepping up to 9% for years six to 10 and to 13% after that.

The notes would be called at par plus the contingent coupon if the index closed at or above the initial index level on any quarterly redemption determination date after five years.

If the notes were not called and the index finished at or above the 50% downside threshold level, the payout at maturity would be par plus the final contingent monthly coupon. Otherwise, investors would be fully exposed to losses.

While the contingent coupon was given a step-up schedule, the structurer said that the notes were not that different from the main autocallable concept.

"Originally, autocallables only put your principal at risk. Then they've evolved into products where the coupon itself is at risk. Here, you have a scheduled step up. It's not a huge departure from the standard product," he said.

"To me it's interesting. It's got a step-up feature, but in order to get that without the early redemption, you somewhat need to be bearish but not really bearish," Gregoire said.

"You get 7.5% for the first five years. The first thing to do is to compare this with what you would get with a plain vanilla Morgan Stanley paper."

The second deal of the week was Morgan Stanley's $33 million of contingent income autocallable securities due Feb. 5, 2016 linked to Bank of America Corp. stock.

The observation dates were quarterly. The barrier for the coupon and for the final payout was 70% and the quarterly contingent coupon was 2.46%. The notes were callable quarterly if they closed over the initial price on an observation date.

In general, structures designed to offer income remained heavily bid.

"Contingent autocallables, income-based products. That theme is a very popular theme. Everybody is in a quest for yield in today's market," the structurer said.

"The reach for yield continues as QE remains in place and people anticipate rates to be flat until 2014," Gregoire said.

"The quest for yield and the trend for issuers to come up with more and more innovative ways to provide income will continue."

Leverage, commodities

Leverage with either a buffer or a downside barrier regained momentum last week, accounting for 26% of the volume at $196 million.

However, leveraged notes with no downside protection, notably those emanating from BofA Merrill Lynch, remained among the largest in size.

The third and the fourth largest deals of last week fit into that category. Barclays Bank plc issued one, Bank of America the other, but BofA Merrill Lynch was the agent for both.

Barclays priced $32.45 million of 0% Accelerated Return Notes due March 28, 2014 tied to the NYSE Arca Gold Miners index. There was a 25.08% cap, a 300% upside participation rate and no downside protection.

Bank of America priced $24.13 million of 0% Accelerated Return Notes due Feb. 24, 2014 tied to the Merrill Lynch Commodity index eXtra - Excess Return index. The leverage factor was three, the cap 12.06%. Investors were fully exposed to the downside.

Both deals also illustrated some slight interest in commodities as an asset class, at least last week.

Commodities issuance has been losing ground since last year. But investors last week through those two deals sought exposure to the asset class even if they did it indirectly through an index.

Volume in commodities issuance more than doubled last week from $23 million to $49 million, but it still remained limited to 6.5% of the total.

BNP Paribas, New York Branch priced the fifth largest deal, $22.44 million of 0% buffered return enhanced notes due Feb. 20, 2014 linked to the MSCI EAFE Price Index USD index.

The notes offered two-times leverage on the upside up to a 12.2% cap. At maturity, investors would receive par if the index fell by up to 10% and would lose 1.111111% for each 1% decline beyond 10%.

JPMorgan was the placement agent.

"They're growing their notes business and are not just doing CDs anymore. It's encouraging to see this market expanding," the structurer said in reference to BNP Paribas.

"Maybe the January effect this year has accelerated due to a very poor last quarter." - Guy Gregoire, former syndicate manager at Pershing

"Contingent autocallables, income-based products. That theme is a very popular theme." - A structurer

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