Structured products volume shrinks to lowest weekly level amid panic over China, U.S. correction

By Emma Trincal

New York, Aug. 26 – So much for the dog days of August. As structured notes volume met the sluggish definition of “slow” with only $199 million in 60 deals, the smallest weekly notional to price for the year, global markets as a whole were rattled, closing the week in the red, pushing volatility to new highs and triggering the first U.S. market correction in years.

The big Friday sell-off saw the Dow Jones industrial average entering correction territory, closing down 530 points.

Friday was just the worsening of a bad week with the S&P 500 index falling in the red for the year on Thursday.

Market sentiment turned negative due to several factors, including a six-year low in Chinese industrial activity, crude oil prices breaking below $40 intraday for the first time since 2009 and the uncertain timing of the first Fed interest rate hike in years, sources said.

Fear, vacation

“Of course sentiment has something to do with the slow volume,” a sellsider said.

“It’s also the last days of summer. In structured products, it’s not just investors’ own decisions. You have brokers, advisers, bankers. People on the desks were on vacation too.”

For this sellsider, however, the disappointing volume last week was less the result of people going on holidays and more a matter of who had left and who had stayed.

“I’ve heard people attributing the sell-off to the summer holidays,” he said.

“Yes and no. The professionals are not in the markets while the retail investors, people who panic, may still be.

“You have to wonder why the Chinese stock market would have to impact us so much. China is not a big contributor to economy. It’s true that the Chinese stock market is a little bit scary...it’s mostly individual investors who may not be very savvy...but there’s not a whole lot of money that’s actually in the Chinese stock market.

“Friday sell-off is more a knee-jerk reaction. It’s not 2008 when you had a big bank defaulting. You don’t have the structuring problems that would justify that correction.”

Huge moves

Paul Weisbruch, vice president of options sales and trading at Street One Financial, says investors were just too scared to buy anything. They bailed out.

“I’d have to say, issuance is softening not because of the summer but because of the market environment changing suddenly in just 72 hours,” he said.

“If you were a portfolio manager and were on vacation, you probably should be fired right now.

“I don’t really buy into the seasonal explanation, like: summers are slow,” he added, pointing to record trading volume on Friday.

“Volatility was enormous in the last few days.

“It’s going to be difficult for anyone to issue anything in the next few days because they have to recalibrate everything.

“Right now the S&P is down 8% for the year and down 5.5% for the trailing one-year.

“We gave back more than a year’s worth of gains in three days.

“We’ve seen huge intraday moves. Some are almost trading on the bounces...up in the morning down at the end of the day. These are big dips. No one is buying to hold a position. The markets dynamics are changing.”

Friday pricing

Almost half of the week’s volume, or 44%, priced on Friday, according to data compiled by Prospect News.

“You’d be tempted to think that it’s market-related,” the sellsider said.

“These are good entry levels. But it doesn’t really work that way with structured products. I don’t think people move that fast. I would think it’s more of a coincidence. It’s usually more a matter of when deals are scheduled to price on the calendar.

“Either way though it was good for investors. The entry points were favorable for buyers.”

Small issues

Agents sold 60 deals last week, the data showed, with none in excess of the $20 million mark.

The top offering was UBS AG, London Branch’s $18.44 million of 0% capped leveraged buffered index-linked notes due Oct. 23, 2017 tied to the S&P 500 index. The upside was levered at a rate of 1.3 up to a 22.88% cap. There was a 15% geared buffer on the downside with a multiple of 1.1764.

The next following two deals, identical in size ($15 million) and terms were brought to market by Goldman Sachs Group, Inc. Each issue consisted of three-year notes linked to the Euro Stoxx 50 index with a three-to-one upside exposure and one-to-one downside.

Double down

One of the most unusual deals, sources said, was the No. 4. The structure offered leveraged exposure both on the upside and the downside, which is rare for standard structured notes, they noted. Usually, investors get symmetrical exposure on the upside and downside only with delta one products not with leverage unless the notes happened to be exchange-traded notes, they said.

Nomura America Finance, LLC priced $13 million of four-year capped leveraged notes linked to a basket of 10 stocks. Another unusual aspect was the composition of the underlying basket, which consisted in real-estate investment trusts and business development companies, which tend of offer higher yields.

Investors participated in the distribution of dividends. But in counterparty, losses were leveraged two times.

If the basket never closed below a 55% trigger level investors received par plus 200% of any gain up to a cap of 120%.Otherwise, they lost their entire investment.

“The reason why you have a trigger is not to give you a barrier or buffer,” the sellsider explained.

“If you breach the 55% threshold, it means you’re down 45% and 45 times two is 90%. At that point they unwind your position and hopefully there is enough for the issuer to get out without losing money.”

The top agent was Goldman Sachs with 11 offerings totaling $57 million, or 28.87% of the total. It was followed by JPMorgan and UBS.

© 2015 Prospect News.
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