Structured products agents price $653 million during week; UBS, BofA, Goldman Sachs sell top deals

By Emma Trincal

New York, June 20 – Structured products issuance volume hit $653 million in the second week of the month ended Friday, a 46% increase from the previous week’s notional of $447 million, according to updated data compiled by Prospect News. The deal count rose from 142 to 174.

It was a robust week, which was dominated by three larger trades in excess of $30 million placed by three different large dealers – UBS, BofA Merrill Lynch and Goldman Sachs.

Cautiously bullish

“We had a first alert in equity markets a couple of weeks ago. Now things seem to be going back to normal. But I’m sure that investors are vigilant because market valuations are high,” said Alexandre Peroux, president of Fin Avenue, a technology platform that distributes structured products.

“There are many reasons to be cautious: when you see president [Donald] Trump sending aggressive tweets, the prospect of a trade war with China and the political tensions in Europe, especially in Italy, it makes sense to be concerned.

“These headwinds coupled with a resilient market are the perfect mix for structured products. This is the reason why demand for those products remains high despite the uncertainty.”

Year is up

For the year to date, volume rose by 17.4% through June 15 to $27.33 billion from $23.28 billion, according to the data.

While income notes dominated last year over leverage (38% versus 31%, respectively) the trend has slightly reverted itself this year with leverage making for 34% of total volume versus 30.5% for income.

Both types of products however continue to dominate the mix.

Structures

“Leveraged capped and coupon paid are in the same league to me,” said Peroux.

“They both limit your upside. If you think markets still have room to rise you may want to avoid caps and coupons. But most people think the markets are quite toppish, which is why you see solid demand for these products.”

Autocallables are very well-suited to the needs of most investors in today’s market, said Jason Barsema, co-founder of Halo Investing.

“When you see a lot of autocalls with protection on the downside it means one of two things: people want to generate more income in the portfolio or they worry about the market going sideways,” he said.

Buffers, barriers

Leveraged structures suggest more focus on protecting against risk. Over the past months, leveraged buffered notes issuance has increased in volume. Prospect News data breaks down leverage with full downside risk on the one hand and leverage with a buffer or a barrier on the other hand. Only 2% of the total volume went to unprotected leveraged notes last week versus 24% with either the buffer or the barrier.

“When people prefer leverage with a cap and some form of downside protection, it indicates that the market is a bit more nervous,” said Barsema.

“When we survey the markets as I do all the time all across the world, everyone is mildly bullish. They want the leverage for the upside and if they’re wrong like the last six days when the market pulled back they want the comfort of a cushion.”

“It’s really when people want the buffers only that you can tell they’re really spooked. When they’re more bullish, they’re comfortable with a barrier. In 2015, 2016 and last year, you had tons of barriers because people didn’t mind barriers.

“This year, everyone is looking for buffers.”

The preference for one type of protection versus another also depends on the type of market.

“Advisers have a fiduciary responsibility. They’re naturally more conservative so they prefer buffers. Brokers on the other hand are a little bit more aggressive. They like the leverage and they don’t mind having a barrier.

“I would expect to see more buffers in 2018 and 2019 as the market cycle comes to an end,” he said.

UBS sells No. 1 deal

UBS AG, London Branch priced the top deal with $64.10 million of 14-month leveraged buffered notes linked to the S&P 500 index.

The payout at maturity will be par plus 160% of any index gain, up to a cap of 25.92%.

Investors will receive par if the index falls by up to 15% and will lose 1.1765% for each 1% decline beyond 15%.

Geared buffers are becoming more visible recently, according to the data.

Advisers who used to stay away from buffers that do not guarantee at least a portion of principal now see in those features some benefits either in terms of pricing or in tax efficiency. A hard-buffered note may be taxed as ordinary income. On the other hand, a downside leverage will eventually take the principal down to zero, allowing investors to switch to the more favorable capital gains tax treatment.

“Investors are really becoming more educated about structured notes in part due to the rising role of technology platforms. The direct result is a greater appetite for plain-vanilla products,” said Peroux.

“You find innovation not so much in the structure but rather in the type of underlying, the investment theme behind the product or other things like tax-efficiency. That could be one reason why we see more geared buffers. People understand them better.”

BofA’s $47.6 million

BofA Merrill Lynch distributed the second-largest deal of the week, using one of its top-selling structures.

Barclays Bank plc priced $47.6 million of six year autocallable market-linked step-up notes linked to the S&P 500 index.

The notes will be called at par plus an annual call premium of 6.15% if the index closes at or above its initial level on any annual observation date.

If the index finishes above the step-up level – 130% of the initial level – the payout at maturity will be par plus the index gain.

If the index gain is up to the step-up level, the payout will be par plus the step-up payment of 30%.

Investors will receive par if the index falls by up to 15% and will be exposed to any losses beyond the buffer.

Innovative payout

Goldman Sachs priced the No. 3 deal on the behalf of Bank of Nova Scotia. It was $33.54 million five-year enhanced participation notes linked to the Euro Stoxx 50 index.

Peroux noticed an innovative feature: The leverage applied not just to the index return but also to a fixed payment.

On the upside, the payout will be par plus three times the sum of any gain in the index and 20% up to a 95.4% cap.

If the index declines but finishes at or above 80% of its initial level, the payout will be 80% of par plus four times the sum of any gain in the index and 20%.

If the index ends below 80% of its initial level, investors will be fully exposed to any loss.

“It’s not a plain-vanilla note. But everything is possible. They give you three times the upside plus 60%. It’s just another example of the many ways you can enhance equity market performance with a note.”

UBS was the top agent last week pricing 77 deals totaling $191 million, or 29% of the total. It was followed by Bank of America and Morgan Stanley.

The No. 1 issuer was UBS AG, London Branch with $129 million in 67 deals, a 20% share.

“Investors are really becoming more educated about structured notes in part due to the rising role of technology platforms. The direct result is a greater appetite for plain-vanilla products.” – Alexandre Peroux, president of Fin Avenue, a technology platform that distributes structured products

“When people prefer leverage with a cap and some form of downside protection, it indicates that the market is a bit more nervous.” – Jason Barsema, co-founder of Halo Investing

© 2015 Prospect News.
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