Structured products issuance cools at $120 million for week amid trade fears; activity range bound

By Emma Trincal

New York, June 27 – The U.S. structured products market saw light issuance volume last week amid renewed fears of a trade war.

Agents priced $120 million in 91 deals, according to preliminary data compiled by Prospect News, a stark contrast with $857 sold the previous year, based on updated data.

Last week was volatile for the U.S. equity market as president Donald Trump imposed new tariffs on China on Friday. The Standard & Poor's 500 index fell 0.9% for the week.

While volatility tends to move up or down based on daily geopolitical or global trade headlines, the market overall has remained flat so far. The S&P 500 index is up only 1.95% for the year.

This has led investors to favor range bound bets and income-oriented structures as many anticipate subdued returns looking forward while discounting the risk of a severe bear market right as the economy is still on strong footing, sources said.

A market “going nowhere” has actually been a buying opportunity for structured notes investors, one source said.

Volume is up nearly 16% to $27.67 billion this year through June 22 from $23.90 during the same time last year, according to the data.

The number of offerings has also increased by more than 24% to 7,494 from 6,171.

Income, worst-of

Income notes made a comeback last week. Specifically, autocallable contingent coupon notes accounted for 64% of the volume issued. At the same time, the overall volume of notes linked to equity indexes represented two-thirds of the market, suggesting that investors may have preferred worst-of and contingent coupon notes linked to indexes rather than to single stocks.

“We’re increasing our worst-of business right now,” said a sellsider who specializes in credit.

“With the yield curve getting flat, we’re switching out of credit into worst-of trades.

“Either way, it’s just slow.

“I think it’s just because advisers need to take a step back.

“Last week was not the end of the cycle. Advisers start to make deals toward the end of the month.”

Nowhere trades

Leverage with no protection almost vanished and represented only 1% of total sales. On the other hand, barrier and buffered leveraged notes made for 21% of total volume, confirming a trend observed over the past few months, which signals a heavier bid on protection.

“The market hasn’t gone up much this year,” said a structurer.

“People are not necessarily worried about a bear market, at least not yet. But they’re not convinced that it will go up very much. They want yield. Or they want leverage on the upside with a cap if they can get a buffer. There’s a reason why people do those range bound deals. The market lacks conviction.”

“Leveraged capped and contingent coupon notes are different. You get to participate with the leverage while the income is a fixed payment. But in a way, it’s the same concept. You want to fit somewhere between the protection and the cap.”

The sellsider agreed.

“People think the market is going nowhere, and they’re using the different ways to play it,” he said.

Short-dated notes

An important portion of last week’s volume priced in shorter-dated notes. Notes shorter than two years accounted for 53% of the volume and 85 out of 91 deals, according to the data.

“It’s probably driven by demand as investors are dealing with uncertainty,” the structurer said.

“It’s easier to have a view that the market is going to stay the way it is in one year or two years from now. But the terms are not going to be the same as if you had a five-year.”

Top UBS deal

The top agent last week was UBS with 79 deals totaling $75 million, or 62% of the total.

This agent priced the top deal on behalf of GS Finance Corp. in $31.67 million of five-year worst-of callable contingent yield notes linked to the Russell 2000 index, the MSCI EAFE index and the S&P 500 index to become the No. 1 offering.

The notes will pay a contingent quarterly coupon at an annual rate of 8.4% if each index closes at or above its coupon barrier, 70% of its initial level, on every day that quarter.

The notes will be callable at par plus any coupon due on any quarterly observation date.

The payout at maturity will be par plus the final coupon, if any, with a principal barrier at 60%.

UBS Financial Services Inc. is the selling agent.

Indexes versus stocks

Despite the use of three underliers in the worst-of structure, the deal was successful given its size, said the structurer.

“It’s because people prefer worst-of on indices. They’re more comfortable.

“Give me stocks and I can price a worst-of with any return you want. As long as I can pick any stock I want I can get you any coupon you want. It’s not easy with indices. They are the market. They can be correlated. That’s going to translate into a lower coupon but much less risk and people like that,” the structurer said.

JPMorgan, second agent

The second agent was JPMorgan with a total of $22 million in four offerings. Its largest one and the No. 2 in size for the week was JPMorgan Chase Financial Co. LLC’s $10.73 million of two-year digital buffered equity notes tied to the Euro Stoxx 50 index.

If the index return is zero or positive, the payout at maturity will be the greater of 127.30% and par plus the index return.

If the index falls by up to 10%, the payout will be par. Investors will lose 1.1111% for every 1% decline beyond 10%.

The top issuer was UBS AG, London Branch with $38 million in 76 deals.

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