Volume up nearly 15% for year; February strong despite modest week; single stocks in demand

By Emma Trincal

New York, Feb. 19 - Agents sold $258 million in the week ended Friday, a 60% decline from the first week of the month, which saw the pricing of $624 million, according to data compiled by Prospect News.

But the large volume on record during the prior week was largely due to the pricing of Credit Suisse AG, London Branch's $225.9 million notes linked to the S&P 500 and a basket of three indexes, which is the biggest deal of the year so far. This deal was distributed by JPMorgan.

The bigger picture was much brighter.

Year, month up

Sales have grown 4.40% to $881 million in February as of the 14th from $844 million during the same time in January.

Volume registered a solid 15% increase from a year ago, when agents priced $766 million during the same Feb. 1-to-Feb. 14 period, the data showed.

"If the trend is not clear, if the market is going up and down as it is now, it's usually a good thing for structured products. People talked about the Fed tapering. Then it was the weakness in emerging markets. It turned out it didn't really hurt the U.S.," a structurer said.

"But uncertainty remains, and it actually helps our market."

Finally, issuance volume has grown 14.75% year to date to $4.99 billion from $4.35 billion last year. The number of offering also increased, up nearly 19% to 1,036 from 872.

"That's terrific of course, even though it's only a month and a half, but it's still a good start," the structurer said. "Some banks have been laying off people when the market was going down. But banks always get their timing wrong. The structured product market is coming back, and volume is up."

For this structurer, structured notes become more attractive in times of market turmoil.

"Certain features give investors a good reason to look at structured notes," he said.

"You can look at yield with a buffer or a step-up or a principal protection. There are many reasons to use a structured note when the direction of the market is not clear."

Regulatory comfort

A sellsider attributed this year's solid issuance pace to factors other than the market itself.

"I'm not really surprised to see that volume is up," he said.

"Last year was a tough year for structured notes with increased regulatory scrutiny in the U.S., which perhaps may have distracted some of the players. It looks like issuers are getting used to this new market environment and are better able to focus on the business at hand, which is to deliver good products."

Stocks in demand

Single stocks continue to be in favor this year, the data showed. Their volume rose 45% from last year, and deals in this asset class now account for 28% of the total volume versus 22% last year.

Equity indexes have increased at a more moderate pace of 7.6%, representing 51% of the total versus 54.5% last year.

"The market as a whole brought very good returns, so investors have played the theme of the broad market," the sellsider said.

"Now they're beginning to look for more unique opportunities.

"The increased use of single stocks suggests that investors are more comfortable with the market. They feel that they can venture out in some of these names. Usually they start with the blue-chip names. Then as the market develops they may branch out to smaller stocks."

Top deals in stocks

The top two deals last week were linked to single stocks.

The first one was UBS AG, London Branch's $39.5 million of 0% callable exchangeable securities due Feb. 15, 2021 linked to the common stock of Google Inc.

The notes can be exchanged at any time for an amount in cash equal to the conversion value. The payout at maturity will be the greater of par and the average of the conversion values on Feb. 9, 2021, Feb. 10, 2021 and Feb. 11, 2021.

"It's an exchangeable note that happens to also be a principal-protected note," the structurer said.

"Like any principal-protected note, it gives you the reference equity return or just your money back. If the stock goes up, you switch to a certain number of shares. If not, you get your principal back. It's a good conservative play if you want exposure to Google. Maybe it's just an institutional client. It could be anything."

Bank of America Corp. priced the No. 2 deal, $34.76 million of 9.5% STEP Income Securities due Feb. 27, 2015 linked to Valero Energy Corp. stock.

The step level is 109.5% of the initial price, with a step payment of 6.4%.

"Google, Valero ... these are all blue-chip, large-cap, well-known, well-understood names," the sellsider said.

Leverage and protection

The top structure year to date continues to be the autocallable reverse convertible category, with a volume already at $1.04 billion, a 37.65% increase from $753 million last year, according to the data.

The picture with leverage remains mixed. While leveraged notes with full downside exposure have declined by 42% in volume, leveraged deals incorporating a buffer or a barrier are on the rise, up 18%.

"I don't look at leverage with or without a buffer very differently," the structurer said.

"Either way, it's principal at risk. A lot of time, it's a matter of pricing. Obviously, you want the buffer, all things being equal.

"Usually the client decides first what kind of leverage they want and then what level of cap they're comfortable with. Once you nail down those two, you can address the buffer piece. Whatever's left allows you to structure a buffer or not.

"An issuer may tell you: 'I'm sorry, you can't have two times leverage with a cap of 20 even with a no-buffer. Can you do 18?' The buffer gives you a little bit of comfort, but it's not the driving factor. It's not the main piece either, at least not for me, not in the way I structure my products."

For the sellsider, the use or not of buffers is a direct result of the market and pricing.

"It has to do with volatility. When volatility is higher, as it is the case now, you are able to build the protection, plus you have some decent participation on the upside. That's because with a higher volatility, the cost of the puts becomes more expensive, and since investors sell the puts, the issuer has more to play with," he said.

"But demand on the part of investors can be a factor too. In a more turbulent market, investors want to see more downside buffers."

Equity bid

Equity as an underlying asset class has risen 21% this year with the bulk of the increase coming from single stocks.

"People are reasonably bullish but still concerned," the structurer said.

"They can reduce risk with leveraged notes with or without protection. A buffered leveraged note will of course do just that. But even a leveraged note without any buffer or barrier is not necessarily synonymous with high risk. It allows you to put less money at risk for the same targeted return. In that sense, it's another way to play the market if you're not 100% sure about its direction. You put less money out there. You get the leverage on the upside. But on the downside, your exposure is only one to one. That's risk mitigation.

"Structured notes allow you to play the market using leverage, using buffers. They have their own additional risk - credit risk. But they can certainly cut some of the market risk."

Citi CMS deal

The third largest deal was a rate structure.

Citigroup Inc. priced $27 million of callable leveraged CMS spread notes due Feb. 19, 2034 linked to the 30-year Constant Maturity Swap Rate and the five-year CMS rate.

The first two years, fixed interest is 10.5%. After that, it is six times the spread of the 30-year CMS rate over the five-year CMS rate minus 25 basis points, up to a maximum interest rate of 10.5% per year. The notes are callable after one year. The payout at maturity will be par.

Interest-rate-linked notes have seen their volume surge 144% to $274 million from $112 million. In market share, however, the structure only accounts for 5.50% of the total.

The top agent last week was UBS with $61 million in 50 deals, or 23.72% of the volume. It was nearly equal to Bank of America, following very tightly with nearly $61 million in three deals, or 23.56% of the total. Goldman Sachs was third.

"Some banks have been laying off people when the market was going down." - A structurer

"The increased use of single stocks suggests that investors are more comfortable with the market." - A sellsider

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