Structured products issuance for week hits $460 million; 25% of total comes in two trades

By Emma Trincal

New York, Sept. 25 – Structured products issuance volume was relatively strong in a week rife with geopolitical and economic events.

Agents priced $460 million in 137 deals, versus $475 million in 172 offerings the week before, according to updated data compiled by Prospect News. A quarter of this dollar amount however came from two larger deals, one in rates, for $75 million, the other at $40 million in equities.

So far September’s notional is weak compared to August. Firms sold $1.4 billion through Sept. 20 versus $2.04 billion the month before, a 31.3% drop. However, September is so far 11.1% higher than the $1.26 billion recorded a year ago.

Year-to-date issuance continued to lag but has improved compared to earlier in the year. Agents have priced $33.67 billion this year versus $41.48 billion last year, an 18.8% decline.

“Everybody has been fairly cautious this year because of Brexit,” said Russell Catley, chief executive officer of London-based Catley Lakeman Securities.

The ongoing trade tensions between the United States and China have played out as well but less so in Europe and the U.K. than in the U.S. as Brexit has put investors on hold, he added.

The trailing totals showed a 13.5% decline between the 12 months ending on Sept. 20 and the previous 12 months to $49.03 billion from $56.69 billion.

“Things have improved since early on this year. The month of May and the summer have been pretty strong in terms of sales,” a market participant said.

Some surprises

Last week was rich with market-moving events. The one non-surprise was the 25 basis points cut delivered by the Federal Reserve bank during its FOMC meeting on Wednesday, which the market had priced in.

Less anticipated was Brent crude oil futures jumping 10% on Monday as a result of a drone attack on Saudi Arabia on Sunday.

Another surprise: a spike in the repo rate on Monday and Tuesday, which revived liquidity fears reminiscent of 2008 prompting the Fed to inject liquidity into the money markets.

As Chinese officials cancelled their visit to the U.S. on Friday, the week ended negative. The S&P 500 index lost 0.5% and the Dow Jones industrial average shed 1.1%.

The losers win

Underliers for last week’s deals provided revenge for the forgotten asset classes.

“People don’t do structured products on gold and commodities anymore. These products have got off the radar,” said Catley.

But tactical plays can happen occasionally.

The oil price surge may have prompted the pricing of three Brent crude oil-based deals on Wednesday from JPMorgan Chase Financial Co. LLC totaling $14 million, or nearly 3% of the total. In comparison, commodities volume represents only 0.7% of this year’s total. In dollar size, commodities issuance has declined by about a half for the year to $233 million from $456 million.

Interest-rates linked notes issuance has also deeply fallen in volume this year, down by two-thirds to $370 million this year from $1.08 billion through Sept. 20 of last year. The deal count dropped at the same pace during this period to 64 from 179.

“As rates are very low everywhere, there’s very little credit spread volatility, nothing to create any value and therefore, not much to structure on,” said Catley.

Again, last week showcased a notable exception with Royal Bank of Canada pricing $75 million of three-year fixed-to-floating rate notes linked to the two-year Constant Maturity Swap rate.

The interest rate is 2.5% in year one. In years two and three, the interest rate is the two-year CMS rate plus 30 basis points. The payout at maturity will be par.

This was by far the largest interest-rate linked note offering coming to market this year, according to Prospect News data, whose methodology excludes lightly structured, plain-vanilla, Libor-based types of deals.

This fixed-to-floating block trade alone accounted for 20% of the total year-to-date volume in the rate category.

Catley said the client on the deal was probably an institution.

“We do those from time to time when an institutional investor needs to hedge something,” he said.

“These trades tend to be bigger because unlike equities, it’s difficult to find value in fixed-income.”

ETFs on the rise

The major asset classes naturally remained in equity but last week saw an unusually small percentage of single-stock deals (less than 5% versus 12.1% on average for the year). While equity indexes continued to prevail with a 55.6% market share, their volume was lower than the 74.3% yearly share.

Meanwhile, exchange-traded funds continued to show progress, a relatively new trend, accounting for 13.8% last week compared to 5% on average for the year to date.

“I’m not sure why they’re doing more ETFs. Major indices will always be more liquid and more in line with what people expect,” said Catley.

“It’s true that the SPDR or the iShares are probably as liquid as the indices. But I don’t see the point unless you want a very specific exposure to a sector or if you can’t find an index.”

ETF underliers in addition could be pricey.

“The fees on the ETFs are not the fees on the indices. You don’t pay huge amounts of fees on indices if you have a large position.”

Snowballs

Structural trends continued to point to two important changes relative to year-to-date market shares.

Among income products, the so-called “snowballs,” which pay a “coupon” or call premium upon the call event with memory (coupons accumulating when missed), continued to gain momentum. A total of $43 million of those in seven deals priced last week, which pointed to a deal size nearly twice as large as the average deal for last week. Snowballs accounted for 9.3% of the total sold versus 4% for the yearly average.

One noteworthy deal in this category was HSBC USA Inc.’s $8.89 million of five-year autocallable barrier notes linked to the lesser performing of the Euro Stoxx 50 index and the Russell 2000 index for its step-down call threshold making the automatic call more likely to occur with time.

Contingent coupon

Autocallable contingent coupon notes, which now represent 34% of the total yearly volume, continued to dominate the week as issuers brought to market 78 deals totaling $131 million, a 28% share.

Worst-of payouts are closely associated with these deals and are for the most part built on equity indexes.

Leverage with protection

In a second trend, leverage was down in volume, especially leveraged notes offering pure downside exposure probably as those structures may be seen as too risky in this toppish market. These deals, which offer neither buffer nor barrier made for only 2% of the total. The average for the year is 11%.

On a volume basis, leverage with full downside exposure represented $3.73 billion this year, a 28% decline from last year’s $5.18 billion. While the decline in volume of the barrier/buffer growth category has not declined by a whole lot this year ($8.04 billion from $8.75 billion), leverage as a whole has suffered.

Big Wells Fargo deal

The second deal of the week, a buffered leveraged note, contributed to pump up volume in the leveraged with protection category.

It was Wells Fargo Finance LLC’s $40.3 million of two-year notes linked to the iShares MSCI Emerging Markets ETF.

The payout at maturity will be par plus 150% of the ETF gain up to a 21.525% cap. Investors will receive par if the ETF falls by up to 15% and lose 1.1765% for every 1% decline in the ETF beyond 15%.

Top agent

The top agent last week was JPMorgan with $87 million in 28 offerings, or 18.9% of the total.

It was followed by Morgan Stanley and Royal Bank of Canada.

JPMorgan Chase Financial Co. LLC was the No. 1 issuer was $109 million in 30 offerings, a 23.7% share.

For the year, Barclays Bank plc tops with $4.87 billion in 1,220 offerings or 14.5% of the total volume.

JPMorgan is closely behind with $4.56 billion in 1,753 deals, a 13.5% share.

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