Four large structured products deals push up volume to $422 million for first week of October

By Emma Trincal

New York, Oct. 12 – Structured products issuance volume for the initial week of the month was unusually high with $422 million priced in 88 deals, according to data compiled by Prospect News.

The month is on a good start as well: last week did more than twice better than the initial week of September, which saw $182 million issued.

Volume this year through Oct. 7 is still down from last year, but the 25% year-over-year drop seen in the early summer has improved, with volume down 17.80% to $28.56 billion from $34.74 billion last year.

“It’s a busy time between September and November. People are definitely back from vacation and the holiday season has not yet started. It’s a good time for business,” said Tom May, partner at Catley Lakeman Securities.

Months usually start on a sluggish note, with the first week typically slow. The average volume for first weeks of the month is $330 million for the year, according to the data, suggesting that October is starting on solid footing.

A third in four

However nearly 40% of last week’s volume originated from four offerings, which led some sources to believe that some rollovers or bespoke deals may have contributed to last week’s robust flow.

Also the trades had quasi-identical maturity dates, which had sources speculate than one or two clients may have been buying the notes.

Three offerings maturing on Oct. 12, 2018 priced on Monday while the largest deal, which priced on Friday, had an Oct. 12, 2018 maturity date.

“If they have the same maturity, it could be the same client. Maybe one wealth management had some push at the end of September for the pricing of those products. If I had to guess I would say it’s probably the same investor. But it could still be some kind of coincidence too,” said May.

The big four

Those two-year deals were split between leveraged and digital structures.

HSBC USA Inc. priced the top offering with $44.43 million leveraged buffered capped notes linked to the Euro Stoxx 50 index. The leverage was 1.5 times, the cap was 36.435% and the buffer offered a 15% protection with a 1.1765 gearing beyond the threshold. HSBC Securities (USA) Inc. was the underwriter.

Wells Fargo & Co.’s $41.93 million was the No. 2 offering. Also a leveraged capped product, it did not feature any barrier or buffer. Linked to the S&P 500 index it provided three times leverage up to a 23.85% cap. Wells Fargo Securities LLC was the agent.

The two other big offerings were two-year digital notes, one buffered, linked to the S&P 500 index and issued by Citigroup Global Markets Holdings Inc. for $40.76 million. JPMorgan Chase Financial Co. LLC’s $31.67 million was the other one, with the Russell 2000 index used as the underlying.

The Citigroup notes offered a digital payment of 10.15% if the index did not drop by more than 15% at maturity. The 15% was a geared buffer with a 1.1765 times multiple.

The JPMorgan deal was identical in terms of maturity date, 15% geared buffer and digital payout triggered at the buffer threshold or above it. Only the issuers, underlying indexes and therefore caps differed.

Unusually similar

“They’re very similar. I don’t know for sure, but it looks like a client had a huge notional and needed to split it out among different issuers,” said a sellsider.

“Sometimes when you see prices in the same ballpark, like $44.43 and $41.93 million, it’s a possible sign that it was done for one investor...Possibly a rollover trade.

Even the same client could have used two different structures, he said.

“If the market is up a lot, your leveraged deals give you a nice double-digit return because these are decent caps. If it’s flat or down, the digital is your consolation trade.”

Market headwinds

The market last week was slightly down without much volatility pick-up. Oil prices rallied while expectations of a Federal Reserve rate hike in December gained ground, both factors helping the energy and financial sectors.

But oil prices moved down at the end of the week, pushing volatility up. Meanwhile the upcoming U.S. elections along with new concerns about Brexit contributed to make investors nervous ahead of the third-quarter earnings, which started this week.

“The elections in particular surely will have an impact on volatility,” May said.

“It’s a bit unprecedented...someone running for office unlike anybody we’ve ever seen...”

Fewer stocks

As a result of the large index-based trades, the market shares of equity indexes were higher than usual based on data for initial weeks of any given month. The proportion of equity index deals is always prevalent regardless of the time of the month. But it increases significantly at the end of the month when Bank of America prices its block offerings.

Equity-index-linked notes made for nearly 85% of total volume last week against 3.30% only for single-stocks, according to the data. The year-to-date averages for these two asset classes are respectively 78% and 11%.

Separately autocallable reverse convertibles, which account for 24% of the total year to date, represented only 7.60% of the total.

Timing it

“On a weekly basis, these things change very quickly. I’m not sure you can talk about a trend,” May said.

What is notable is that fewer single stocks and fewer autocallable reverse convertibles are not indicative of the same “trend” as a growing number of contingent coupon autocallable deals are now structured around multiple indexes instead of a single-stock partly due to the fact that worst-of structures have multiplied as a means to generate premium, said the sellsider.

“Perhaps it’s more about seeing fewer single-stock deals at least right now,” he said.

“With single-stock plays you have to time it. Even if the market is up or down, the volatility of the individual stock may not coincide with what the market is doing. That would be my guess to explain why investors are not in the mood to transact in single names right now,” he said.

JPMorgan was the top agent last week with 18 deals totaling $139 million, or a third of the total. It was followed by HSBC and Citigroup.

“It’s a busy time between September and November. People are definitely back from vacation, and the holiday season has not yet started. It’s a good time for business.” – Tom May, partner at Catley Lakeman Securities

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