Structured market rebounding after weak July, structurer says; sees more leverage, averaging features

By Kenneth Lim

Boston, Aug. 1 - The structured product market is set to bounce back after a weak July as hungry investors return, a structurer said.

Products linked to equities will continue to be a significant segment of the market, while averaging structures and leveraged notes could see better interest, the structurer said.

"I couldn't be more optimistic," the structurer said.

The structured product market seemed to slow in July as total issuance for the month eased to about $2.41 billion, based on preliminary figures compiled by Prospect News. The number still could grow as deals that were priced before the month's end are announced, but any growth would likely still be below that of previous months.

July's figures were dragged down by broader trends, the structurer said.

"First of all, it's summer, and business is always slower when it's summer," the structurer said. "Second, there was generally a sentiment of caution across the board. I think a number of barriers were being broken, so naturally people were a little cautious. There was a lot of holding and not so much buying, and that affected all of us."

Outlook brighter for year

But the structurer said the market was showing signs of coming back to life.

"We're already seeing more chatter in the markets, people are making inquiries, so that's a very positive sign," the structurer said.

"Usually when the market goes through some turbulence, the bargain hunters will emerge after a while, and that's what we've seen. Structured products work very well in these kinds of situation, because you can structure a product regardless of what your view is. So we can meet the needs of any investor who wants to take a position in this market."

Most of the asset classes are showing signs of improvement, the structurer said.

"We're still seeing a lot of interest in equities, the main indexes like the S&P, still healthy interest in financials," the structurer said. "Emerging markets hasn't been affected that much, and we're still seeing inquiries for those. Commodities, I think we're seeing some interest in bearish or neutral products there. Inflation products are one that haven't really been affected, those are still doing well."

Leveraged notes gain interest

Leveraged notes and structures that incorporate averaging features have seen some increase in use, the structurer said.

"A number of products we've seen use an averaging kind of structure," the structurer said. "These could be autocallables, or those where the starting or end point is based on maybe a 30-day average, or the maximum or minimum price during the observation period. Basically it reduces your point-to-point exposure, which in a volatile market can be quite a risk. When you use averages, the volatility is reduced."

Leveraged notes are also gaining in popularity because investors are hoping for better returns, the structurer said.

"When everything else is doing poorly and interest rates are low, leveraged notes provide an opportunity to outperform the market," the structurer said.

Those structures are likely to continue to grow in popularity this year, the structurer said. Investors can also look forward to more innovative indexes.

"There's a lot of focus now on trying to come up with new and innovative indexes," the structurer said. "We're trying to replicate trading strategies in the form of an index, which will allow us to wrap those in a structured product and allow investors to access those trading strategies. Again, in a weak investment environment, people want products that can offer them something more than just a simple delta-one SPX note."

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