Structured products volume weak; investors bid on delta one notes, worst-of structures

By Emma Trincal

New York, April 27 – The week ended Friday was still quiet although it showed an amelioration just before the final week when the bulk of structured products pricing will take place, which is now.

Agents last week priced $308 million in 90 deals, a 42% increase from the previous week, according to data compiled by Prospect News.

The most and equally popular structures were delta-one deals and autocallable reverse convertibles, taking often the shape of worst-of structures. Both structures –one-to-one index-linked products and autocallables – accounted for 20% of the volume each.

But in terms of deal quantity, a total of 43 autocallable reverse convertibles were sold versus two index-linked offerings. Those two however were on top of the list. But “top” is relative as the size of the No. 1 was only $37 million.

The Nasdaq was volatile due to disappointing earnings in technology stocks, causing a sell-off. But the other benchmarks remained stable.

On Wednesday, the Dow Jones industrial average exceeded 18,000 for the first time since July and closed up 0.6% for the week. The S&P 500 index ended up half a percentage point.

Sluggish year

The year-to-date volume continued to lag for the year, posting a 22% decline to $11.07 billion from $14.15 billion as of April 22, the data showed.

“Obviously it’s not too encouraging, but it’s not disastrous either,” said a market participant.

“I was talking to people in different spots, at my firms but also other shops and not just structured products. The sentiment is better.

“The release of the final DOL rules was a relief. It’s not great but it’s not as bad as many of us thought. Still there is a lot of uncertainty ahead of us and it’s not going to help the business.”

The Department of Labor has produced a rule requiring commission-paid brokers to act as fiduciaries when servicing the retirement accounts of their clients. Market participants expect implementation, training and compliance costs to be a drag on the business.

“At the same time, the market has improved after February. We’re not even at mid-year. Let’s see what happens,” he said.

Worst-of deals

Worst-of deals, which represented $52 million in 14 offerings, made for nearly 60% of the volume issued in autocallable reverse convertibles. Those deals were tied to indexes with only two linked to stocks. The rest consisted in autocallable contingent coupons linked to a single stock. Only a few deals offered a fixed coupon on a single name, according to the data.

“Overall the trend is to move away from single stocks into indexes,” said the market participant.

“That way you can significantly increase the coupon while remaining in the safety zone of a benchmark.”

Three tech stocks

The top autocallable reverse convertible deal – and the fourth one for the week – however was linked to three single stocks: JPMorgan Chase & Co. priced $16.36 million of 15-month 8% callable yield notes linked to the least performing of the common stocks of eBay Inc., Cisco Systems, Inc. and Microsoft Corp. Interest was payable monthly. The notes were callable at par on interest payment date after three months. There was a final 60% barrier with full downside risk thereafter.

“This one is a guaranteed coupon. But whether you have a contingent coupon or a fixed payment, a worst-of is a worst-of,” this market participant said.

“These stocks are all tech stocks. They’re correlated, which lowers the risk a little bit. But they’re also highly volatile. It’s probably why they can give you that guaranteed coupon over a short period of time.”

The fee was 2.75%, according to the prospectus.

“Pretty good fee ... They were lucky because they just had pretty good earnings last week. It helps,” a sellsider said.

The notes priced on April 18. JPMorgan reported strong earnings on April 13, which caused the share price to jump 4% on that day.

Short and mysterious

The other equity-linked note and the top deal of the week was one of the most intriguing ones, according to the market participant, who commented on GS Finance Corp.’s $37 million of 0% three-month notes tied to the MSCI Europe index.

The notes guaranteed by Goldman Sachs Group, Inc. offered a one-to-one exposure to the underlying index.

The fee was 5 basis points.

“It’s obviously an institutional deal given the fee and the term,” said the market participant.

Costs for institutional investors are lower and retail investors typically buy notes longer than one year for tax purposes, he explained.

“It’s worth trying to find out why you would be doing that. I guess there is not ETF for this index. That’s one reason perhaps. But is it enough?”

The most obvious rationale would be to avoid currency risk exposure, he said. A derivative solution called quanto allows investors to hedge exchange rate risk in most structured notes linked to international benchmarks. But such was not the case with this note, according to the prospectus, which warned investors that they would be subject to currency risk.

“Then I can’t understand why they would be doing it,” he said.

“I have no idea,” echoed the sellsider.

It is not the first time GS Finance, a subsidiary of Goldman Sachs, issued a three-month note that offers a one-to-one exposure to an equity index this year. But it’s the first time it used the MSCI Europe index. Four other similar offerings priced in January and March, all linked to the Topix index and all with a three-month maturity. Their fees ranged from 18 bps to 34 bps.

Raymond James’ basket

Another index-linked note with no optionality – and the second in size – was brought to market by Bank of Montreal. The appeal of the note was the use of Raymond James equity research. The $27.5 million two-year notes were linked to Raymond James & Associates, Inc.’s Quality Yield Basket of Common Stocks. The basket consisted in the stocks of 24 companies paying high dividends, showing medium-to-high credit ratings and having the ability to sustain or increase their dividend. Low volatility was also a selection factor.

The participation rate was 96.75%. Raymond James received a 2% fee.

Some of the most recognizable names in the basket included Boeing Co.; Cisco Systems, Inc.; Chevron Corp.; General Electric Co.; JPMorgan Chase & Co.; Coca-Cola Co.; Lockheed Martin Corp.; Altria Group, Inc.; PepsiCo, Inc.; Pfizer Inc.; Procter & Gamble Co.; Schlumberger Ltd.; AT&T Inc.; United Parcel Service, Inc.; and Verizon Communications Inc.

Bank of Montreal has used Raymond James stock picks before for several popular issues exceeding $100 million. The notes are sold by Raymond James advisers.

“It’s great having such an immediate distribution. Raymond James puts together these baskets, their brokers distribute the notes internally and they’re doing it pretty well. It’s really becoming a strong distribution platform. Good for them,” said the sellsider.

Top agents

The third deal to price last week was in rates.

Wells Fargo & Co. priced $20 million of fixed-to-floating notes due April 21, 2026 linked to the 10-year Constant Maturity Swap rate.

The interest is 3.25% for the first three years. After that, the rate will be equal to the 10-year CMS rate. Interest was payable quarterly. The payout at maturity was par. Wells Fargo Securities, LLC was the agent.

That deal gave Wells Fargo the third ranking in the week’s league table with $40 million in six offerings, or 13% of the total.

The top agent was Goldman Sachs. It priced nine deals totaling $55 million, or 18% of the volume.

Second was JPMorgan with 12 offerings representing $46 million, or 15% of the market share.

“Overall the trend is to move away from single stocks into indexes. That way you can significantly increase the coupon while remaining in the safety zone of a benchmark.” – A market participant

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