Lackluster structured products volume seen in short holiday week; Goldman affiliate issues big deal

By Emma Trincal

New York, Nov. 18 – It was a short and slow week for the structured products market with Veterans Day falling in the middle of it. While the stock market was open on that day, the bond market was not, which slowed down the action.

Agents sold $258 million last week in 55 deals, according to data compiled by Prospect News.

It was nearly half of what priced the week before, which was the first of the month, supposedly the slowest one on any given month.

As with the preceding week, volume was boosted by the issuance of a larger-than-average deal coming from a subsidiary of Goldman Sachs.

GS taps market again

GS Finance Corp. priced $100 million of 0% notes due Dec. 30, 2015 linked to the Topix index. The notes are guaranteed by Goldman Sachs Group, Inc. The issue price is 100.45% of par. The payout at maturity will be par plus the index return. Goldman Sachs & Co. is the underwriter.

It is the fifth deal issued by GS Finance since the beginning of August. In just three and a half months, the affiliate of Goldman Sachs has brought to market nearly $1 billion.

Goldman Sachs, as an agent, has so far this year priced 556 deals totaling $4.89 billion, including those issued by GS Finance. GS Finance now accounts for a fifth of the volume priced by Goldman Sachs.

Very slow

Last week showed the slowest week on record for the year volume-wise, according to the data. However, not all deals are always filed on the Securities and Exchange Commission website by press time and other deals may have been reported after that. Figures are therefore subject to change.

The second weakest week for the year to date was the first week of October at $300 million.

If the data is confirmed or only modestly altered, last week will be a very slow one. Excluding the GS Finance offering, which is unusually large, volume would have represented only $148 million.

Sources invoked the current market and regulatory conditions as potential factors behind the slowdown.

Domestic stocks were lower after a six-week rally due to a couple of disappointing earnings and a mediocre retail sales report. Meanwhile the Fed’s unknown timing and amount of interest rate increase did not encourage investors, they said.

TLAC brake

A sellsider pointed to finalized rules released by the Federal Reserve Board concerning minimum capital requirements banks are supposed to hold to be considered strong enough to sustain a systemic shock.

The Federal Reserve Board on Oct. 30 proposed rules requiring banks to maintain sufficient amounts of “total loss-absorbing capital” or TLAC.”

Unfortunately, lawyers said that most structured notes do not qualify as “TLAC” when issued from the bank holding company.

“We’re in the same limbo we were in when they did Dodd-Frank,” said the sellsider.

“Dodd Frank was very costly for the banks and as far as regulation, I don’t think it helped.

“If Dodd Frank did what it’s supposed to do, they wouldn’t need to have additional rules and regs.

“I mean, this market is very slow right now.

“I think it’s over-regulated and each time an industry is over-regulated, it never helps.”

Other events happened last week although too late to have an immediate impact, such as the Paris terrorist attacks on Friday.

“It hasn’t affected the market yet. But it has affected people. The mood is not the same, especially in Europe,” a distributor said.

Two Merrill Lynch deals

The next two deals – both sold by BofA Merrill Lynch – were much smaller in size.

One was brought to market by Bank of Nova Scotia. It was $25.29 million of one-year 9.5% STEP Income Securities linked to Delta Air Lines, Inc.

If the final price of Delta Air Lines stock was greater than or equal to the 109.5% step level, the payout at maturity would be par plus the step payment of 3.5%.

If the final share price was positive but lower than the step level, investors would receive par.

Below the initial price, investors would have one-to-one exposure to the decline.

Interest was payable quarterly.

Bank of America Merrill Lynch was also the agent for HSBC USA Inc.’s $19.94 million of five-year autocallable market-linked step-up notes linked to the Russell 2000 index. The notes were automatically called at par of $10 plus a call premium of 7.5% per year if the index closed at or above the initial index level on any of four annual observation dates.

The step-up value was 130% of the initial index level. There was full downside exposure.

Fed wildcard

Compared to most weeks, those No. 2 and No. 3 offerings were subdued in size, sources noted, based on the available data.

“There’s not much going on,” the sellsider said.

“I don’t know if the investor is just skittish.

“To be honest, the biggest problem we’re having in our industry right now is the Fed with the question-mark around the rate hike. Do what they say they’re going to do or just tell the market you’re not going to do anything.

“They have everyone pretty much waiting.

“Would you make a long-term investment in a bond today if chances are it’s going to be undervalued in three weeks?”

No view

A structurer had a broader approach.

“People talk about the Fed. But I wonder if all this Fed talk is not an excuse to stay on the sidelines,” he said.

“I think the business is slow simply because people have no strong convictions.”

He pointed to two “sectors” that are exceptionally slow – commodities and currencies.

“The rising dollar and the global slowdown have killed commodity issuance,” he said.

The S&P GSCI Commodity index is down nearly 30% this year.

The volume of commodities-linked notes dropped 52.3% this year to $803 million from $1.684 billion, according to Prospect News data.

Currencies have never been very much an active asset class, he said, but “it is getting worse.”

“The euro remains under downside pressure, and the dollar is up. This remains a good story.

“But other than that, people are not certain how to play emerging market currencies.”

“There are too many themes and too much uncertainty.”

The top agent was Goldman Sachs with $115 million in nine deals or 44.77% of the total. It was followed by Bank of America and JPMorgan.

“To be honest, the biggest problem we’re having in our industry right now is the Fed with the question-mark around the rate hike. Do what they say they’re going to do or just tell the market you’re not going to do anything.” – A sellsider

“People talk about the Fed. But I wonder if all this Fed talk is not an excuse to stay on the sidelines. I think the business is slow simply because people have no strong convictions.” – A structurer

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