Structured products agents price $181 million in subdued action; week ends with rally

By Emma Trincal

New York, July 18 – Structured products issuance slowed last week with $181 million issued in 100 deals, according to preliminary data compiled by Prospect News. It’s not as if the week was uneventful however.

JPMorgan Chase, Citigroup and Wells Fargo initiated the earnings season with mixed results. Wednesday saw a sharp sell-off as the U.S. added more tariffs on $200 billion of Chinese goods. Despite trade war headlines, bulls re-entered the market on Friday, pushing up stock prices. The S&P 500 index rose 1.5% for the week.

Bulls are still around

The slow season was noticeable in this second week of July.

“The markets have been relatively calm,” a sellsider said.

“It’s definitely a little bit of a summer trend although I can’t say if it’s worse than in the last couple of years during that time. But it looks like people lack conviction, that it’s hard to take a view. Maybe they’re postponing investment decisions and it’s really easy to do that in the summer,” a sellsider said.

With three large issuers reporting their earnings last week followed this week by Bank of America and Morgan Stanley, some pointed to the blackout period as a possible factor behind the reduced notional.

This sellsider was doubtful. “It usually limits their activity only for a couple of days,” he said.

Dick Bove, bank stock analyst with Hilton Capital Management, agreed. “I don’t think it has any impact.”

Month, year

For the month, volume hit $432 million in 184 deals through July 13, a 45% decline from $786 million in June, the data showed.

And while the year’s total notional is still greater than last year, the advance is progressively shrinking as months are passing. Agents sold $30.63 billion this year through Friday versus $27.22 billion during the same time last year, a 12.50% increase.

S&P-centric

Last week’s largest deals shared a number of characteristics:

• Size first: at the exception of the top one (greater than $30 million), all top deals were very small, mostly below $10 million, according to the preliminary data. The data is subject to changes since not all deals were filed with the Securities and Exchange Commission by press time; and

• Second characteristic: out of the top six offerings, five were tied to the S&P 500 index. The U.S. large-cap benchmark was by far the underlier of choice, which it usually is but not with such degree. More than half of total volume consisted of notes linked to the S&P 500 as the sole underlier, or $91.72 million in 15 deals.

In sharp contrast, only four offerings based on the Euro Stoxx 50 index were brought to market, which accounted for only 6% of the total for $11 million.

“It’s interesting because the economics of the Euro Stoxx are very compelling at this time,” the sellsider said.

A market participant was less surprised.

“Maybe there is some risk in Europe right now,” he said.

“People tend to be more bullish on the U.S. The prospects of growth are not as strong in Europe as in the U.S. We’re tightening rates right now. You don’t hear about rate hikes in Europe and that’s probably because the economic outlook is not that great.”

Digital frenzy

Perhaps the most important trend last week was the high proportion of digital notes. Most digital products, which priced, had a digital trigger below par with a cap. Also, most carried a geared buffer on the downside.

“It doesn’t surprise me that digitals are popular,” the market participant said.

“The market is kind of choppy. It’s no longer a bull, bull market, at least that’s not what people are expecting. They see it going sideways.

“That type of view fits that type of product pretty well.”

A total of $68.5 million of digitals were brought to market in nine deals, or nearly 40% of the total.

In comparison, leverage with buffers or barriers made for less than 20% of total sales; leverage with full principal at risk, 16%; and autocallable reverse convertibles with fixed or contingent coupons, 13.5%.

The sellsider offered an explanation for the appeal of digital structures.

“It could really be because the pricing of contingent coupon has backed off. You’re not really seeing the types of coupons that we had not so long ago,” he said.

“I don’t know if it’s because dealers are full up on it.

“Or if it’s the low volatility.

“Or if it’s the high correlation. I suspect it’s the high correlation.”

Issuers trying to price high coupons from equity indexes have no alternative than creating a worst-of, he said.

Yet only four worst-of deals for a total of $7 million were seen last week.

“When correlation is high, it’s tough to get good returns even from worst-of,” he said.

Top two

Morgan Stanley Finance LLC priced the top deal with $33.68 million of 14-month buffered digital notes linked to the S&P 500 index.

If the index return is greater than or equal to negative 15%, the payout at maturity will be 15.2%. Otherwise, investors will lose 1.1765% for each 1% that the index declines beyond 15%.

The second deal was a leveraged note with a cap and a geared buffer as well.

UBS AG, London Branch priced $11.61 million of 19-month notes tied to the S&P 500 index. The upside leverage factor is 1.5 and the cap, 19.65%. The buffer is 10% with a 1.111 leverage factor.

Whether the notes pay a digital return or leverage gains up to a cap, they offer a limited payout, which seems to accommodate most appetites in this late stage of the bull market, sources said.

“If you’re not overly bullish, you can still have relatively high returns in a relatively flat market,” said the sellsider.

“When the market is range bound, it’s a good strategy. You’re locking in your return with a digital or a cap and you get some protection.”

Two TD Bank trades

TD Bank issued the next two deals. TD Securities (USA) LLC was the agent.

The first one was another digital.

Toronto-Dominion Bank issued $9.82 million of two-year digital notes linked to the S&P 500 index.

The threshold was below par by 15%. Investors above this negative level will receive 15.45%.

The 15% buffer was geared with a 1.1765 multiple.

Geared buffers

It is unusual to see investors accepting so easily to get protection through a geared buffer. This feature often faces resistance especially from registered investment advisers who do not want to have 100% of principal at risk, according to interviews conducted by Prospect News. However, the downside leverage, which can provide better protection than barriers, is becoming more acceptable.

“People are probably getting more educated about it...I think it’s part of it,” the sellsider said.

“I also think that it’s related to pricing. It depends on how you construct the deal. Clients have minimum returns in mind when they look for a note. Let’s say they want at least 8%. With that, how much protection do I want to get? How much do I get with a barrier? How much does a buffer give me? What about a geared buffer? That’s how it usually works.”

3x up

The following two deals had a different structure, which has found great success among BofA Merrill Lynch clients under the bank’s brand name: Accelerated Return Notes.

Those deals are short-term (18-month and two-year), leverage the upside three-times, have a cap but no downside protection.

Toronto-Dominion Bank did one for $9.09 million on a basket of international equity indexes subject to a 20.1% maximum return with an 18-month tenor.

JPMorgan Chase Financial Co. LLC priced the other, a $6.26 million deal of nearly two-year notes on the S&P 500 index with a 29.4% cap.

The top agent last week was Morgan Stanley with $52 million in eight deals, or 28.4% of the total. It was followed by UBS and JPMorgan.

Morgan Stanley Finance LLC was the No. 1 issuer with $50 million in eight deals, or 27.54% of the overall volume.

Last week’s top issuer was UBS AG, London.

The No. 1 issuer for the year is JPMorgan Chase Financial Co. LLC with $4.90 billion in 1,142 deals.

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