Month debuts slowly with $285 million of structured products issuance

By Emma Trincal

New York, Feb. 11 – Agents sold $285 million in 89 structured products deals in the first week of February, a light volume even for an early month standard. Compared to last year’s totals, this issuance size would rank as the fourth smallest week, according to data compiled by Prospect News.

February is also starting on a more muted note than January, which saw the pricing of $400 million in its first week.

The year-to-date volume, however, is very strong thanks to January’s final week hitting $3.14 billion.

For the year so far, structured products issuance amounts to $5.34 billion versus $4.34 billion last year as of Feb. 6, a nearly 24% increase, according to the data.

The first major trend seen last week was a flurry of single-stock deals, making for half of the volume, accompanied by a surge of autocallable reverse convertibles, which represented 40% of the total.

As a comparison, average market share last year was approximately 27% for single-stocks and 21% for autocallable reverse convertibles.

Half in stocks

Technology and biotech names were the most widely used.

“You have to play where the ball is. Issuers pick names that are getting retail recognition while having enough volatility in it,” said a market participant.

A sellsider explained why, despite the renewed volatility in the broader market, issuers and investors alike were still looking for single names.

“The S&P volatility is still relatively low,” he said.

“It’s been better than six months ago or so. You kind of have the market spiking up then coming back down. We’ve seen four or five iterations of that, so certainly there is more vol. But it’s not like what I call a good market for volatility. Different houses have different investment themes, but obviously you have a lot more premium in stocks, particularly in some sectors like energy.”

Energy plays were tied to stocks such as Halliburton Co.; Chevron Corp., Anadarko Petroleum Corp., Apache Corp. and Hess Corp.

The Energy Select Sector SPDR fund, the United States Oil fund and the S&P GSCI Crude Oil Index Excess Return were also commonly used as index or exchange-traded fund underliers.

“Some energy companies hedged out for a certain amount of time that may not be reflected in their pricing. That creates opportunities for short volatility trades in those stocks,” the sellsider added.

“People are starting to...I’d say...not really call the bottom in energy because you don’t have to call the bottom with an autocall if you have a decent barrier...but they’re starting to feel more comfortable doing trades in this sector.”

Issuers pricing deals in technology routinely used stocks such as Facebook, Inc., LinkedIn Corp., Micron Technology Inc. and Twitter, Inc.

“There’s still volatility in blue chip technology stocks as well as a relatively low degree of correlation,” said the sellsider.

Shorter terms

The biggest single-stock offering and the second to price last week was JPMorgan Chase & Co.’s $31.85 million of contingent income autocallable securities due Feb. 9, 2018 linked to Apple Inc. stock.

The quarterly contingent coupon was 2.5% on an 80% barrier level. The autocall trigger was the initial price.

BofA Merrill Lynch priced on the behalf of HSBC USA Inc. one of its STEP Income structures in the third offering of the week. The $18.82 million of 8.5% STEP Income Securities one-year deal was tied to Micron Technology.

If the stock price finishes above a 108.5% step level, investors received an extra income payment of 1.71%. Between 95% and the step level, the payout will be par. The 5% protection was a buffer.

Otherwise, investors will lose 1% for every 1% decline beyond the 5% buffer.

“Issuers are getting shorter; that’s been the trend,” said the market participant.

“Investors are willing to trade the downside protection for shorter terms and higher coupons, which is why they’re increasingly using single stocks.

“They have no choice really. There’s just no yield. You can’t tie your money for 10 years and get a rate of 3%.”

Barclays’ repeat

A second trend seen last week was the use of baskets of indexes instead of single-indexes.

Barclays Bank plc issued the leading offering last week – a mini version of its $547.56 million giant brought to market the week before. The newer one was a $33.71 million one-year of 0% capped return enhanced notes due Feb. 24, 2016 linked to the same unequally weighted basket of indexes.

“Somebody might have heard of it. A salesman had another client who was interested,” the market participant said.

“The first one was probably an allocation under a discretionary account. An institutional investor would do these call spreads themselves; they wouldn’t do it in a note format, especially in that size.”

The underlying basket was the same in both the large and smaller deals: it was the Euro Stoxx 50 index with a 58% weight, the FTSE 100 index with a 21% weight and the Topix index with a 21% weight.

The full downside exposure, 200% upside participation up to a cap were identical. Only the cap level varied. It was 20.3% in the $33 million offering versus 21.14% in the initial version. JPMorgan was the agent on both.

“We’ve seen an increased use of baskets. It’s been talked about,” said the sellsider.

“They are somewhat recreating an MSCI World index through a weighted basket. By using a basket instead of a single index, they get a higher cap. It could be a different index that they’re targeting. But what they’re doing is recreating an exposure that is more or less similar to a single index,” said the sellsider.

JPMorgan was the top agent last week with 25 deals totaling $128 million, or 45% of the volume. It was followed by Bank of America and UBS.

“There’s still volatility in blue chip technology stocks as well as a relatively low degree of correlation.” – A sellsider

“Investors are willing to trade the downside protection for shorter terms and higher coupons, which is why they’re increasingly using single stocks.” – A market participant

© 2015 Prospect News.
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