Structured products market prices $138 million ahead of Memorial Day

By Emma Trincal

New York, May 29 – Agents last week priced only $138 million of structured notes in 75 deals, according to preliminary data compiled by Prospect News. Figures are likely to be revised upward as not all deals were filed on the Securities and Exchange Commission website by press time, especially in front of a holiday weekend.

The U.S.-China trade dispute intensified, taking a toll on investors’ confidence as many fear that higher tariffs will cause economic growth to slow. Those concerns were visible with falling oil prices and lower Treasury yields.

The S&P 500 index fell a third straight week, down 1.2% on the week. The benchmark lost 5% this month, which is when the dispute between United States and China began to intensify, with the two parties unable to reach a trade deal.

May is the first “down” month in the U.S. equity market so far this year.

Month up

On a better note, sales are up this month through May 24 with $1.8 billion sold in 609 deals versus $1.58 billion in 643 deals in the same period last month. It is a 13.9% increase.

“After December, people expected more volatility in this market. Instead, it rallied. Now the market is retreating again. As we’re heading to the summer months, with lingering trade war worries and European uncertainty, people want protection. Advisers are taking action on the structured notes market,” said Matt Rosenberg, sales trader at Halo Investing.

“If you want to make changes in the portfolio, if you need to reallocate, you want to get a hold of your clients before they go on vacation.

“I think we’ll continue to see a slight pickup in June before the slow days of July and August.”

Year down

Unfortunately, the year to date continued to lag, showing a 34.3% decline to $16.85 billion through May 24 from $25.66 billion last year. The number of deals has dropped 18% to 5,514 from 6,721.

“When you have shaky markets like we do now, despite what may people think, investors tend to be less aggressive in purchasing structured products,” a sellsider said.

“It’s the same for stocks and equity. There’s a flight to safety going on as you can see from watching yields on Treasuries which are decreasing by the day.

“People are shifting money out of equity, buying more bonds because they’re concerned about a potential economic slowdown. They want safety.

“Issuance is negatively impacted by the trade war but not directly. It’s just an aversion to risk.”

Autocallable structures made for 42.6% of total sales. Leverage however dominated with 47.5% of the total. Exceptionally, leverage with no downside protection prevailed with 30% of the total while leverage with barriers or buffers accounted for only 17.5% of the notional. But it was mostly due to the size of the week’s top offering, one of only two deals in the category of leveraged notes with no protection.

Phoenix is king

For autocalls, the pendulum has been leaning toward contingency of the coupon for a long time.

The market shows two types of autocallable products. The first one, which by far outnumbers the other, consists of contingent coupon autocalls, also known as Phoenix. Those structures pay a coupon based on a coupon barrier situated below the initial price, which is the strike that triggers the call. This allows investors to get paid a coupon without necessarily seeing the notes called since the underlying price may fall between the coupon barrier and the initial level.

The other type, which is the traditional autocall, will pay a call premium upon the automatic call event. No return will be paid unless the notes are redeemed early. In this scenario, there is no chance of collecting coupon payments while the product remains live.

The data revealed a significant imbalance between the two categories. The “Phoenix” type accounted for 44.5% of last week’s total while the traditional autocall consisted of only 1% of it. This trend is also visible on the yearly average with market shares of 32.5% for the Phoenix versus 3.75% for the call premium-paying type.

“It makes sense. The Phoenix autocalls are a great way to provide bond-like regularity type of return and equity-like type of return,” said Rosenberg.

“We’ve seen yield compression over the past few months. People want income. They use those products as a fixed-income alternative.”

Autocallables also provide barriers, which appeal to investors seeking defensive plays.

“As we’re heading toward Election year, Trump may want to put more pressure on China. If the trade war intensifies, it makes sense for investors to get a coupon plus a barrier for the downside protection rather than sitting in cash or being long the market during a pullback,” he said.

Euro focus

Last week saw a renewed interest in European equity with two euro-related offerings topping the list. Both were linked to the same index but differed in size and structure type.

First JPMorgan Chase Financial Co. LLC priced $40.55 million of 14-month Performance Leveraged Upside Securities linked to the Euro Stoxx 50 index. The payout at maturity will be par of $10 plus triple any index gain, up to a maximum return of 13%.

Investors will be exposed to any losses.

Morgan Stanley Wealth Management handled distribution.

“There was a lot of Brexit news last week along with the European Parliament elections taking place all across the euro zone. These are good reasons to ask for downside protection. But if your position is bullish Europe, if you believe that things will come up positive, then it makes sense to look for the high leverage,” said Rosenberg.

European comeback

The second top deal on the same index was issued by Credit Suisse AG, London Branch and distributed by UBS Financial Services Inc. It was a $10 million offering of three-year trigger autocallable contingent yield notes paying each quarter a contingent coupon at an annualized rate of 6% based on a 70% coupon barrier. After one year, the notes will be automatically called above initial price. The principal repayment barrier at maturity is also at 70% of the initial price.

Those two euro zone-related deals made for more than a third of the total issued last week given the size of the first one.

Earlier in the year, a total of $180 million were priced on the Euro Stoxx 50 index as a single asset, according to the data. This number dropped to $33 million the following month but has grown since. In March, notes tied to the Euro Stoxx 50 amounted to $178 million or more than five-time the volume seen in the prior month. In April, it jumped by more than a third to $239 million. A total of $87 million in Euro Stoxx-linked notional came to market this month through the May 24, which does not include the final week of the month when block trades hit the market.

The top agent last week was Morgan Stanley with $62 million in eight deals, or 45% of the total. It was followed by UBS and Barclays.

The top issuer was JPMorgan Chase Financial Co. LLC with $52 million in seven offerings, a 37.5% share.

For the year, the top issuer is now Barclays Bank plc with 651 deals totaling $2.47 billion.

“As we’re heading to the summer months, with lingering trade war worries and European uncertainty, people want protection. Advisers are taking action on the structured notes market.” – Matt Rosenberg, sales trader at Halo Investing

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