More deals over $10 million pricing in modest week with lower volume, fewer deals

By Emma Trincal

New York, April 28 - Issuance declined in volume, but deals of more than $10 million made for a greater proportion of total issuance last week, according to data compiled by Prospect News.

Agents priced $456 million in the week ended Friday, down 36.5% from the prior week.

The number of deals also dropped by nearly a half to 48 last week from 89 the week before, according to data compiled by Prospect News.

$10 million deals

The number of deals in excess of $10 million increased compared to the past few weeks.

In spite of the modest volume seen last week and while only one deal priced for more than $100 million, 11 deals in excess of $10 million priced out of the 18 total number of transactions, or nearly 40% of the total volume.

This ratio compared with 25.71% for the week before and to 31% in the first full week of April.

A $10 million deal, which was not considered to be so big before the Lehman Brothers crisis, has become a new benchmark for a good size, a sellsider said.

"There are more deals in the $10 million size, and I think it's a sign that the memories of the Lehman collapse are fading," he said.

Larger deals are also the result of mergers in the aftermath of the crisis, this sellsider said.

"We're seeing consolidation in the industry with fewer players. Each brings a bigger potential distribution capability, so that's a positive," he said.

Rally impacts size

The recent stock market rally also plays a significant role, he noted, pointing to a 15% surge of the S&P 500 index between its low in mid-February and its high in the middle of April this year.

"People are coming back to the market after a nice bull run," the sellsider said.

"There's more interest in bullish products or enhanced upside products. People see the opportunity is still there."

Equity products last week amounted to 68% of the total volume with $309 million priced in 28 deals.

Alerian dominates equity

However, nearly half of this equity issuance came from the top deal of the week, which gives investors a mixed exposure to stocks and commodities: an Alerian MLP index linked product.

JPMorgan Chase & Co. priced another $142.77 million of exchange-traded notes due May 24, 2024 linked to the volume-weighted average price level of the Alerian MLP index, bringing the total issue size to $761.46 million. The transaction was the sixth add-on after the initial $75 million pricing a year ago.

The index measures the composite performance of energy-oriented master limited partnerships.

Each note has a face value of $19.03661, which is equal to the initial VWAP level of the index divided by 10.

The Alerian deal has been popular because it gives commodity exposure to investors with generous income distributions, sources have said. But some sellsiders are skeptical about its potential to really go mainstream.

"The Alerian deal is still more exotic for most people," the sellsider said.

Commodities on break

Regardless of who may be buying those ETNs, the structure continued to offer exposure to commodities in a market where commodity-linked notes have been shrinking over the past few weeks.

There was only one deal linked to a commodity index last week.

It was from Credit Suisse, Nassau Branch, which priced $17.82 million 0% index knock-out notes due May 5, 2011 linked to the S&P GSCI Commodity Index Excess Return.

During prior weeks, a heavy supply of reverse convertibles linked to an energy or commodity stock offered an indirect alternative to plain vanilla commodity index-linked transactions. But a look at the various stocks for last week's reverse convertible deals showed that unlike prior weeks, energy stocks were not over-represented, according to data compiled by Prospect News.

No autocallables

Another trend for last week was the absence of any autocallable supply, a change from the previous several weeks.

"There were no autocallables, but it doesn't spell out death," the sellsider said. "Autocallables are an income play, and right now, people think performance instead of income. They want to capture growth."

Fourteen reverse convertible offerings priced last week for $64 million, or 14% of the total. This indicates that appetite for income, if less preeminent than the interest for leveraged products, remains fairly stable, according to data compiled by Prospect News.

Large reverse convertibles

The week saw the pricing of a larger-than-usual reverse convertible.

UBS AG, London Branch priced $30.45 million of 9.9% yield optimization notes with contingent protection due April 28, 2011, linked to Dow Chemical Co.'s share price. It was the fourth-largest transaction.

"A lot of the bigger reverse convertibles are driven by possibly research and views that these firms might have," said the sellsider. "So they put together deals that can generate significant volume."

UBS analysts' views on Dow Chemical stock could not be identified. But shares of the company jumped by nearly 6% Wednesday afternoon after the company reported better-than-expected first-quarter earnings and a 33% increase of its sales year-over-year.

"Big reverse convertible deals are more sporadic because it's driven by when the research is going out. Analysts' reports definitely impact the size of those deals," the sellsider noted.

"It doesn't mean you're going to see big reverse convertibles every week," he said.

"While a Barclays will try to print about 50 reverse convertibles every month, people like UBS are a little bit more focused and use names based on their own research," he added.

CMS bets still strong

A look at last week's issuance by underlyings and asset classes shows that people continue to bid on rate deals with Constant Maturity Swaps being the most popular play.

Agents brought to market $73 million rates-linked products in nine deals, according to data compiled by Prospect News.

The top deals came from Bank of America Corp and Morgan Stanley.

Bank of America priced $41.93 million of floating-rate notes due April 23, 2020 linked to the 10-year CMS rate, the second-largest transaction of the week. Interest will accrue at 98% of the 10-year CMS rate, payable quarterly.

The payout at maturity will be par.

Morgan Stanley upsized its issue of leveraged CMS curve and S&P 500 index-linked callable notes due April 23, 2025 to $52 million from $30 million.

The coupon will be 10% for the first two years. After that, the rate will be five times the spread of the 30-year CMS rate over the two-year CMS rate for each day that the spread is at least zero and the S&P 500 is at least 750, up to a maximum rate of 15% per year.

"There's been a renewed interest for yield curve steepening trades because of subdued core inflation and talk that the Fed wants rates to stay low, so it keeps the front end anchored," said a rate products structurer in New York speaking ahead of Wednesday's Federal Open Market Committee meeting.

"Plus you have the prospect of supply on the long end. Investors believe that we can stay steep for longer than the forwards imply," the structurer added.

JPMorgan leads

JPMorgan led the league tables with $245 million, or 53.61% of the volume. Much of this was the Alerian ETN deal, which alone represented a third of last week's total issuance.

Further behind was Merrill Lynch, which ranked second with $45 million in two deals, followed by Goldman Sachs with $41 million in three deals.

UBS took the fourth slot, and some are noticing the progress of this issuer over the recent weeks.

"UBS has been rising. They focused their efforts on structured products, and it's paying off," the sellsider said. "They're open to new ideas, and they've been diversifying their offerings."

But he also noted that weekly league tables must be put in perspective.

"You can't read too much into the weekly league tables because each firm has its own calendar. It's month to month that really matters," he said.

"I think it's a sign that the memories of the Lehman collapse are fading." - A sellsider speaking on the increasing number of issues that are $10 million or more

"There's been a renewed interest for yield curve steepening trades because of subdued core inflation and talk that the Fed wants rates to stay low." - A rate products structurer in New York

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.