Structured products agents still manage to price over $300 million amid historical sell-off

By Emma Trincal

New York, Jan. 13 – Last week was the worst start of a year in market history. The Dow Jones industrial average and the S&P 500 index both dropped 5% amid a global sell-off prompted by Chinese stocks and the ever-falling oil prices.

However, agents sold $314 million in 59 deals, according to data compiled by Prospect News.

It was half the volume of the final week of December, but also the beginning of a new month.

Unique start

“The first week of the month is always a slow week. The first week of the year is no exception,” a sellsider said.

“The turbulence in the market may have put activity on hold,” he said.

The start of the year was not much different from the first week of January 2015, when $325 million sold in 78 deals, the data showed. December, however, not known to be among the strongest months, debuted higher with $534 million.

Volatility surged last week. The CBOE VIX index, which tracks the implied volatility of S&P 500 index options, jumped up 35%.

Leverage with protection

The most popular structure was leveraged return accompanied by barriers or buffers. Those deals accounted for nearly a quarter of the volume with $74 million in 14 offerings. On the other hand, leverage with no protection represented only 6.15% of the total with six deals for a $19 million notional.

Autocallable reverse convertibles, which deliver higher coupons and premium when volatility is up, remained limited to 12% of the total. The average for last year is nearly 20%.

“The first reaction is generally to hit pause,” said the sellsider.

“Once investors digest the new normal, then they start looking at higher coupons. Even leverage on the upside up to a cap gets better pricing. You can put more attractive barriers or buffers. The coupon structure benefits a lot more. But both benefit.”

While classified as digital notes, the two top deals however offered coupon-like payouts. Both priced on Thursday in sizes approximately around the $50 million threshold.

“Digital notes also do well when volatility goes up,” said the sellsider.

Two big digital deals

Barclays Bank plc priced $52.09 million of one-year one-look notes linked to Apple Inc. Merrill Lynch & Co. was the agent.

If the final share price was greater than or equal to the initial share price, investors would receive at maturity a payout of par of $10 plus 21.1%. Otherwise, they would be exposed to the stock’s decline.

“They priced last week so I don’t think it was an immediate response to the sell-off,” the sellsider noted.

“The deal has probably been talked about for a couple of weeks or even more. Volatility was not the same in December but it was already high. That must have helped pricing.”

The second deal was brought to market by Deutsche Bank AG, London Branch. The $44.78 million one-year digital returns notes linked to the S&P 500 index were distributed by JPMorgan.

Investors received a fixed payment of 8% if the final index closed above an 85% trigger level with full downside exposure below the trigger.

“These are pretty good sizes especially for these types of notes,” said a structurer.

“People call them digital; I’m not sure why. Fundamentally it’s not very different from a reverse convertible with a contingent coupon. You sell volatility. Your upside is capped. It’s even similar to a reverse convertible autocall. It doesn’t really matter if there is a two-tier strike or just one. These are just levels.”

Apple falling

The pricing for the top deal was particularly opportune, he added, as the share price of the stock fell by more than 5% last week.

“With Apple, you get bargain-hunters on board,” he said.

“Apple dropped a lot last week. Those people would go long anyway, attracted to the low entry point. But in addition, they get a high premium as volatility went up sharply.”

All equity

Market shares of equity-linked notes were extremely high last week, erasing all other asset classes. Equity notes, which include notes linked to single stocks as well as products tied to equity indexes, usually represent between 85% and 90% of the total market. Their average last year was 87%. Last week’s penetration of these products was exceptionally high in volume at nearly 100% with 55 deals totaling $313 million.

Commodities, often rare, were missing altogether last week.

“Investors are frightened about commodity products right now with oil in a severe bear market,” said Fabrice Hugon, senior managing director, structured products at Elkhorn Investments.

“We’ve seen notes tied to oil stocks. But pure plays on oil or commodities have almost disappeared. People think oil will continue to fall. Some even see oil at $20 a barrel.

“But at some point, it will make sense to look at commodities products again because the asset class gets cheaper and cheaper by the day. You’ll find good entry points. Volume eventually will pick up. It may actually happen sooner than most people expect.”

GS Finance, a subsidiary of Goldman Sachs, priced the third deal: $25 million of four-month tracker notes linked to Topix index.

JPMorgan was the top agent pricing eight deals totaling $63 million, or 20.15% of the total. It was followed by Merrill Lynch and Goldman Sachs.

“The turbulence in the market may have put activity on hold.” – A sellsider

“Investors are frightened about commodity products right now with oil in a severe bear market.” – Fabrice Hugon, senior managing director, structured products at Elkhorn Investments

© 2015 Prospect News.
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