Index-linked autocallables prevail in transition week; volume driven by number of deals

By Emma Trincal

New York, April 6 – It was a transition for structured products issuance as issuers returned from the Easter weekend. With most of the pricing done before Good Friday, last week’s volume was just average: neither big nor small.

Agents sold $777 million – nearly half the volume seen in the previous week, which concluded the March calendar.

A great number of deals hit the market too – 241 versus 105 the previous week – but they were small, according to data compiled by Prospect News.

Despite the low supply of big offerings, quantity helped make volume honorable, especially for a transition period in between March and April.

Wild ride

“Trading volume was high last week. More than just oil prices, I think it was driven by asset allocation changes going into the second quarter,” said Paul Weisbruch, vice-president of options sales and trading at Street One Financial.

“If people were under-allocated in equities, if they trailed the benchmarks and missed the dip, they may have wanted to add more on April 1. That would explain why we hit the high.”

The S&P 500 index sharply dropped until mid-February, hitting a low at 1,810 on Feb. 11, and then rallied. The benchmark recorded its highest close for the year on Friday at 2,073.

The market moves are unusually sharp this year, he noted, which may make the ‘chasing-the-rally” strategy risky.

“We had this dip in mid-February and we stayed at a low for no more than six or seven sessions. The next thing you know we’re back to 1,900 and now over 2,000,” he added.

“Usually we don’t have such moves in just a short period of time.

“You’re talking 15% moves in a couple of weeks. Up and down.

“And it’s not some biotech stock. It’s the S&P, a vanilla benchmark.”

Small pieces

Deals were much smaller in size and the appetite for autocallables was strong as those products made for 30% of the volume. Unlike past trends, however, those autocalls were linked to broad equity benchmarks. Single-stocks represented less than 8% of total volume. The rest was in equity indexes.

Out of $227 million of autocallable reverse convertibles, only 21.5% were linked to single stocks.

“When I talk to issuers I hear that the trend is to move away from stocks into indices. Yet people still need income,” a sellsider said.

The majority of those autocallables offered a coupon on a contingency basis. Getting a call premium upon early redemption without any form of coupon has become rare, the data showed. Only six offerings totaling $14 million fit into that category, last week.

Low return expectations

“People still want some income stream,” he said.

The way issuers were able to offer competitive coupons with index-linked notes was through the use of multiple underliers. The commonly used payout feature was the worst-of.

“People want to stay away from stock-picking but they still want the high coupon. Worst-of are a way to achieve that goal,” the sellsider said.

While autocallable pricing was the flavor of last week, previous weeks saw investors heavily bidding on leveraged buffered notes with a cap. For this sellsider, the common trend is the same.

“A lot of investors don’t have high return expectations. At these levels, people tolerate caps much more. It can be a cap on your leveraged upside or a coupon. But the idea is the same. When the market is at all-time high why would you be averse to having a cap?”

The market has been volatile for while, said Weisbruch. Now investors may anticipate muted returns, which would explain the tolerance for limited upside.

“People are expecting that we may have a flatline for a while. Perhaps sideways would be a healthy trend. We haven’t seen a consolidation since last year,” said Weisbruch.

Volume for the first quarter was $10.12 billion versus $12.94 billion last year, a 22% decline.

Sources attribute this disappointing result to volatility.

“The sentiment hasn’t changed much. Volume picked up a little bit. Terms are a little bit better. But the effect of volatility isn’t seen yet. Just because volatility has increased doesn’t mean you’ll get a boost in volume. In this market, it doesn’t change that fast,” the sellsider said.

Some traders said it is very difficult for investors to have convictions in any position given the market gyrations, especially when the Federal Reserve Board adds to the uncertainty in its announcements.

“Investors who missed the dip in February are now chasing the rally. But it’s a very tricky market,” said Weisbruch.

“I can’t really explain why we had such moves this year. It’s tied to the Fed because whenever they say they’re going to raise rates, we can’t take it seriously anymore. People still like lower rates in the stock market. But when they said they’ll cut the number of hikes, nobody was paying much attention.

“It’s very hard to say what will happen, when and if the rates change.”

Top offerings

The top deal was brought to market by Wells Fargo & Co. It was $32.91 million of five-year 4.715% market-linked securities linked to the S&P 500 index. Interest was payable semiannually. A 25% geared buffer protected investors on the downside.

“The gearing on the downside is just a way to maximize your coupon. It allows the issuer to provide a buffer as well,” the sellsider said.

Credit Suisse AG, London Branch priced $30.27 million of 12-month leveraged buffered notes linked to the S&P 500 index. The upside participation was 300% of the gain, subject to a 12% cap. Investors received par if the index fell by up to 5% and lost 1.0526% for every 1% that the index declined beyond 5%.

“Usually we see barriers observed just once, at maturity. But if you want to increase the coupon and not move the barrier too high, a daily observation is a way to do that,” he noted.

“Investors who missed the dip in February are now chasing the rally. But it’s a very tricky market.” – Paul Weisbruch, vice-president of options sales and trading at Street One Financial

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