Structured products volume, deal sizes modest despite relief rally; investors eye buffers, barriers

By Emma Trincal

New York, March 9 – Action was mild on the U.S. structured products front last week as bulls on the equity market were regaining control while agents were getting ready to start the new month.

The S&P 500 index jumped 2.67% for the week, thanks to a better-than-expected jobs report on Friday. But most market participants still see the rebound as a relief rally, without necessarily expressing strongly bullish views, as seen in the prevailing trades. Rather investors favored structures offering some downside protection.

Volume, trends

Agents sold $278 million in 71 deals. Such volume was comparable to the first week of February, which saw the pricing of $270 million, according to data compiled by Prospect News.

Deals were small in size last week. The top one amounted to $22.88 million and no other surpassed the $20 million mark.

It was Barclays Bank plc’s $22.88 million of 0% capped leveraged notes due July 5, 2018 linked to the Euro Stoxx 50 index. The notes offered three times leverage on the upside up to a 49.35% cap.

Equity indexes overpowered all other underlying asset classes with 84% of the total volume in 51 deals.

The S&P 500 index continued to be the most widely used underlier with $106 million priced in 14 deals, or 38% of the total, the data showed.

“We’re seeing a lot more domestic than international on our part,” said a large distributor. “It’s mostly the S&P and the Russell rather than the Euro Stoxx.”

There were nine offerings based on the Euro Stoxx 50 index totaling nearly $54 million, or 19.5% of the total. However the Russell 2000 index made for only 7.7% of the total in four deals. Those figures only include single-underlying indexes.

Rally

Last week’s rally, which really started in the middle of last month, was supportive for issuance as investors felt more inclined to put some money at work again, sources said. Yet the trend, based on the products bought the most, was skittish after a rough patch earlier in the year.

“What rally are we talking about?” a sellsider said.

“We had a major sell-off for the first month-and-a half of the year. Then we climbed back up. But we’re still a little bit off where the S&P was in the beginning of January.”

The S&P 500 is down 2.90% for the year. The index lost 10.5% from the beginning of January to its low on Feb. 11 but has regained 8.5% since then.

“While this rally helps a little bit, the correction we’ve had earlier might have some clients concerned, which is why we’re seeing more buffers and barriers being priced,” the sellsider added.

Bid on protection

Leveraged products with a barrier or a buffer accounted for more than 40% of last week’s volume. This proportion represents twice the average for this year, as well as last year, with both around 20%, according to the data.

“People view good entry points. At the same time they want some good protection,” the distributor said.

“The rally makes people a little bit less nervous. The sky is not falling anymore. It gives them comfort. But I think the volatility we’ve seen before is still in people’s minds.”

More demand for protection usually comes with lower return expectations, he said. This may help explain the relative success of some other products, well suited for range bound markets, such as digital or absolute return structures.

Combined, those types of notes made for 10% of last week’s volume.

“We’re definitely seeing digitals. If you’re not expecting a major bull market, these products make sense,” he said.

Fear factor

But the sellsider argued that current entry points along with fresh portfolio losses could make the case for more aggressive products.

“The reality is you want to be invested in 3x right now. You want to bounce out that dip. But it’s easier said than done. What is best for investors doesn’t always necessarily translate into products,” he said.

“There is fear among clients and the desire to have additional protection. That’s the mindset.”

The fear was justified, he admitted.

“There is still some uncertainty in the market. The anticipation of what the Fed is going to do next is not yet clear.

“And you have the regulation. What is TLAC going to do with the environment? Nothing has been finalized. Until the market understands the new rules, volume will be softer.”

The acronym TLAC stands for Total Loss-Absorbing Capacity. It refers to a new capital requirement rule for banks, which, some market participants worry may have a negative impact on structured note issuance.

Agents so far this year have priced $7.18 billion versus $9.03 billion last year, which represents a 20.5% decline. The number of deals has also fallen to 1,300 from 1,505, a nearly 14% drop.

“I’m not surprised,” said the sellsider.

The top agent last week was Goldman Sachs with $45 million in 11 deals, or 16.10% of the total. It was followed by HSBC and Morgan Stanley.

“There is fear among clients and the desire to have additional protection. That’s the mindset.” – A sellsider, commenting on recent equity volatility

© 2015 Prospect News.
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