Structured products issuance slows to $55 million for week; Goldman Sachs tops with rate deal

By Emma Trincal

New York, Feb. 17 – It was a very sluggish week for structured products issuance ahead of the extended Presidents Day holiday weekend in the midst of another volatile market, which surprisingly ended up as oil prices rallied on Thursday and Friday.

“It was another roller coaster,” said Paul Weisbruch, vice-president of options sales and trading at Street One Financial.

“The sell-off was driven by China, oil as well as a discontent with Fed chair [Janet] Yellen grilled by Congress. If you noticed, the market bottomed down on Wednesday when the issue of negative interest rates came out.”

“The market has rallied since then, but people remain very cautious.”

Federal Reserve Board chairman Yellen testified before the House Financial Services Committee on Wednesday and before the Senate on Thursday.

Asked whether the Fed would consider negative interest rates, as it already is the case in the euro zone and Japan, she did not rule out the option.

The market hit its 52-week low on Wednesday.

Small volume

Goldman Sachs last week was the No. 1 agent and priced the top three deals, including a rate product.

Agents overall only sold $55 million in only 27 deals versus $433 million the previous week in 96 deals, according to data compiled by Prospect News.

Those results may not be final. The holiday may have delayed the reporting of some of the deals. But as it was, volume was low even if it was not at a record low.

The $55 million level was the equivalent notional amount seen in the second week of June and the early week of December last year.

“Everyone is frozen, like a mouse in front of a snake,” a sellsider said about investors’ buying sentiment.

“Investors don’t like this environment. It’s too risky for many of them. Investment ideas, trading ideas are not well received because they have already lost money in the portfolios. They don’t want to throw good money after bad.

“They’d rather wait than invest in the downtrend. The market has been rallying over the past few days. But market sentiment for investors remains very skittish.”

Last week’s issuance volume pushed down the year-to-date total to $5.17 billion, a decline of more than 11% from last year’s $5.83 billion as of Feb. 12, the data showed.

There were only two deals over the $10 million mark to price last week versus 13 for the previous week. None of those deals hit the $20 million threshold, while three did on the previous week, which was the start of the month.

Rate deal

Goldman Sachs Group, Inc. priced the top deal with $15.54 million of 10-year fixed-to-floating-rate notes.

A fixed rate of 4% was paid for the first three years. After that, the interest rate was the 10-year Constant Maturity Swap rate, payable quarterly. Principal was fully protected at maturity.

“The 10-year CMS is very low. And we see high CDS spreads for banks like Goldman or Morgan Stanley, which makes their funding very attractive,” the sellsider said.

“If you expect rates to go up, this is not a bad deal. People are not talking about rate hikes right now. But the market has no memory. This topic will come back.

“The PPI was higher than expected. Industrial production is higher. The market is underestimating the resilience of the U.S. economy.”

He said that a Goldman Sachs bond of the same maturity currently offers a 4.25% yield.

“You lose 25 basis points per year in difference for three years. Then your CMS rate has to increase enough to beat the 4.25% yield.

“I would say I would buy this if, a), CDS spreads decrease and b) I’m expecting the 10-year rate to rise more than the implied forwards.”

The 10-year Treasury currently yields 1.83%. The forwards for the next 10 year average approximately 2.5%, gradually going up from 2.2% to 2.8%, he said.

“Right now, the forwards indicate you’re better off with Goldman’s bonds. But if your expectation is higher, then it’s a good idea.”

Hunters and buyers

Weisbruch said that income deals with a “principal-protection built in” are appealing in today’s environment.

“People are starved for yield. Getting some decent income in this environment makes more sense than chasing for yield aggressively. It’s easier to do something like this note than calling a bottom,” he said.

“Some people are looking at beaten down stocks, bonds in oil, high-yield, emerging markets or China.

“You could be paid nicely. For some it’s worth the risk. But you have to be right on this.

“So rather than chasing yield, especially if you have concerns about your principal, you can do something like that... It takes a lot of guesswork out of the picture.”

Range accrual

The second Goldman deal issued by its subsidiary GS Finance Corp. was a $10 million of 15-year callable range accrual notes based on six-month Libor and the Russell 2000 index.

The interest rate was an applicable rate multiplied by the proportion of days on which the index will close at or above a 70% barrier level and six-month Libor is 6% or less. The applicable rate was 6.5% per year for the first four years and 8% per year for the remainder of the term. The notes were callable after one year. Investors received par at maturity.

Finally Goldman also via its GS Finance affiliate offered $5.43 million of two-and-a-half year autocallable contingent coupon notes linked to the Euro Stoxx 50 index, the Russell 2000 index and the S&P 500 index. It was the third largest deal for the week, based on current data.

The return of principal at maturity and the coupon distribution were defined by a worst-of feature. The notes were callable on any quarterly coupon payment date.

Goldman Sachs priced $33 million in four deals, or 58.63% of the total.

The second agent was JPMorgan with $13 million in seven deals followed by UBS with $4 million in 12 deals.

“Everyone is frozen, like a mouse in front of a snake.” – A sellsider commenting on investors’ buying sentiment

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