Sales are slow in early part of the month with $231 million; single-stocks volume is up

By Emma Trincal

New York, Nov. 15 – Agents priced $231 million of structured products in the week ended Friday, a meager amount but one to be expected for the first full week of the month, according to preliminary data compiled by Prospect News.

This figure will rise as more deals get filed with the Securities and Exchange Commission and added to Prospect News database. As it stands now, last week’s notional was the weakest for any given week this year aside from the first week of September, which was shortened by Labor Day and which saw $226 million priced.

Meanwhile October ended the previous week with a revised figure of $933 million, a large figure consistent with volume amounts seen for the final week of a month.

The equity market was slightly down last week due to concerns over the tax overhaul reform in Congress. The S&P 500 index finished last week down 0.1% and the Dow Jones industrial average lost 0.2%.

Pullback

It was the first decline since September, raising among market participants the question of whether the long-running bull market has finally topped.

Some structures would not mind seeing more volatility in the market.

“Right now issuance volume is driven by the bull market. People use structured products to get exposure to the stock market,” a sellsider said.

“But volatility is so low. It’s really hard to price anything very exciting.

“If we had a correction in the 5% to 10% range, it wouldn’t be a bad thing. More volatility would help a lot.

“You would be able to roll those autocalls that have expired. There’s still a lot of cash sitting on the sidelines.”

Higher volatility levels would facilitate the sale of the notes, he explained.

“You could lower the barriers, increase the coupons and raise the caps,” he said.

“A reasonable correction would be good news.”

Month, year

The month so far is down by a third with $504 million through Nov. 10 against $751 million last month.

The drop is only 2.5% from $516 million sold during that time last year.

Year-to-date issuance is $43.04 billion, a third more compared to $32.45 billion during the same time last year. Deals have multiplied. Their number is up 47% to 11,455 from 7,773.

It is already certain that this year will be by far better than in 2016. Total volume last year through Dec. 31 was $38.72 billion.

Less certain is the outlook for the final weeks of this year.

“We only have a short time ahead of us, and I’m not sure if the end of the year will be as great as the year so far,” said a structurer.

“We’re entering this slow holiday period – Thanksgiving is already next week – and a lot will depend on market conditions.

“In spite of the obvious benefits of using structured products if only for the protection they offer, when markets are turbulent, people tend to stay on the sidelines.”

Structures

Structures and asset classes seen last week revealed a few particularities.

First, deals were small, according to currently available data. Only six offerings priced for more than $10 million and the top one was at $16 million.

Second, income-oriented products dominated, with reverse convertible (featuring autocalls and contingency of the coupon) making for 61% of the total, an unusually high proportion compared to 38% in average for the year.

More stocks

Finally among those income-generating products, the volume and size of deals using stocks was greater than usual.

Single-stock issuance represented 28% of the volume while indexes accounted for 47% of it.

In comparison, the distribution for the year to date is 12% in stocks and 73% in equity indexes.

Some of those single-stock deals were among the largest by last week’s standard ($16 million and $14 million for the top two).

Reverse convertibles

Finally, among the 37 offerings linked to stocks, only one – for less than $1 million – was a worst-of structure with two underlying assets.

All others were traditional autocallable reverse convertibles. Coupons however are contingent, not fixed.

“Volatility is so low, you can’t do a barrier reverse convertible on a single stock anymore. You have to use a worst-of,” the sellsider said, talking about fixed-rate reverse convertibles.

One option issuers have is to carefully pick highly volatile names. It’s apparently what happened last week for a number of autocallable contingent coupon deals.

Many of the single-stock deals were chosen from more volatile sectors such as health care (Bristol-Myers Squibb Co., Gilead Sciences, Inc., Celgene Corp.) as well as technology (Netflix Inc. and Micron Technology, Inc.) and names with negative headlines, for instance General Electric Co. whose shares have plummeted recently after the company slashed the dividends by half.

Aging trend

Worst-of deals, as it has been the trend for a while, are found the most among index products. Still worst-of deals do not constitute the majority of notes linked to this asset class, although it was a close call last week.

Equity index-linked notes last week accounted for $109 million in 30 deals.

Ten worst-of deals were priced totaling $44.5 million. The rest was mainly leveraged deals tied to one index, which is the most often the Euro Stoxx 50 or the S&P 500. A couple of deals were leveraged notes tied to a basket of unequally weighted international stock indexes, which have been very popular.

“Worst-of on indices have been the trend. Issuers have been motivated by the force of habit. They do these products over and over. They do it because it has worked before. Whether it still makes sense is another story,” the sellsider said.

“Correlation has become very high between those indices. So you get less value.

“Stocks on the other hand do not have high correlation.

“Even within the same sector, three stocks may have a low correlation,” he said.

He offered as an example the names of Peugeot, Volkswagen and Ford in the auto sector.

“Those three are not very correlated,” he said. “They’re diversified by country and by their target market.

“It would make more sense to do worst-of on single stocks at this point.”

Ideas wanted

Some good ideas lack supply, he added.

“We noticed that theme-based baskets are very popular. They’re easy to sell because you can sell a story instead of being focused on a structure. These are delta-one products, not hard to put together. And yet, you see them mostly in Europe, not much in the U.S.,” he said.

For other asset classes, as usual commodities and forex were nearly nonexistent.

There was only one rate deal, a short-term steepener with principal at risk, but it was an interesting one, according to the sellsider.

Short-term steepener

Morgan Stanley Finance LLC priced $4.05 million of 11.5% six-month trigger securities linked to the spread of the 30-year U.S. dollar ICE swap rate minus the two-year U.S. dollar ICE swap rate. If the final spread declined by more than 50%, investors would be exposed to the percentage of spread decline.

The bet offered a fixed rate over a short period of time, making a full protection out of the realm of possibilities, the sellsider said. But looking at the current spread between the two swap rates at 70 basis points, he saw in the deal a relatively risky bet.

“You would lose principal if it went down to 35 bps. We’re not so far and that could easily happen if the curve flattens,” he said.

On top

Morgan Stanley Finance also priced last week’s top deal with $16.01 million of three-year contingent income autocallables linked to Bristol-Myers Squibb stock. The notes pay a contingent quarterly coupon at an annual rate of 9.65% based on a coupon barrier of 80% and are callable at par. The barrier at maturity is at 80% too.

The top agent was UBS with 49 deals totaling $79 million, or 34.33% of the total. It was followed by Morgan Stanley and BofA Merrill Lynch, which priced $26 million in two deals.

Merrill’s top deal was Canadian Imperial Bank of Commerce’s $14.07 million of one-year 10.5% STEP Income Securities linked to the common stock of Netflix. It was the No. 3 deal for the week.

For issuers, Morgan Stanley Finance was No. 1 with $61 million in 12 deals.

UBS AG, London Branch was the top issuer the previous week with $174 million in 73 offerings.

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