Structured products volume holds up at $242 million in holiday-shortened week

By Emma Trincal

New York, June 8 – Agents priced $242 million of structured products in the four-day week starting with Memorial Day, a mixed indicator since the end of May and the first week of June overlapped in a shortened holiday week.

More than half of the volume priced on Tuesday, according to data compiled by Prospect News, the first day after the holiday and the last day of May. The bulk of the issuance came on Wednesday and Thursday. Action was on hold on Friday, as the Government issued a disappointing job report, causing heightened volatility in the market.

Compared to other early months, the first week of May brought to market $384 million in 76 deals. April was lower, kicking off at a similar pace as June with $258 million in 72 deals, the data showed.

The February effect

Only 43 offerings priced last week, which was less than usual. The average volume for the initial week of any month this year from January to April has been $420 million. The average number of offerings is 92 during that period, according to the data.

Such figures however, poorly reflect the monthly trend, which is always a function of the robustness of the final week, sources said.

Still, the year continues to shrink when compared to last year. As of June 3, sales accounted for $15.66 billion, a 26.6% decline from last year.

“We started out very slowly in particular in February,” a sellsider said.

February is usually the best month of the year after January. This year, from January to the end of May, it has been the worst so far, according to the data.

Sources attribute this early decline to the market correction, which occurred between Jan. 1 and Feb. 11 pushing down the S&P 500 index 13.50%.

“In mid-February, interest rates went very low. They came back up and went back down and now they’ve stayed that way.”

Grass not greener

For this sellsider, one positive way to look at the lackluster volume in structured note issuance was to compare the industry to other corners of the overall fixed-income market.

“Rates are too low and deals are less attractive. The good news is that you’re competing with all the other bonds that don’t yield anything. The comparison makes us look good but it’s still not attractive enough especially for principal protected products,” he said.

Volatility levels have also become an additional hurdle.

“In April and May, volatility stabilized. That hasn’t helped structured products where clients are selling volatility,” he added.

“I don’t know exactly what the problem is. But I don’t think it’s an industry problem per se. I don’t think it’s due to less demand. I just think the current macroeconomic conditions make the pricing of structured products a lot tougher.”

Flatter curve

A distributor agreed, pointing to market fluctuations and interest rate levels as factors behind the current slowdown.

“I wish there would be a silver lining. We’re seeing constricted flows...It constricts personnel, issuers are reducing in size, distributors are reducing in size...” he said.

If there’s a “silver lining,” it is perhaps that structured notes are not the only fixed-income instrument to suffer from a considerably less busy pace, this distributor said.

“All you need to do to find out whether it’s a structured product problem or if it’s broader than that is to look at the other parts of the market,” he said.

“Look at agencies, CMOs, CDs, high-yield bonds...For the most part you see a substantial slowdown.”

The flattening yield curve has also made matters worse, in particular for interest-rate linked note issuance, he noted, as steepeners have nearly vanished from the market.

Rate-linked notes excluding lightly structured plain-vanilla notes such as step-ups, dropped 85% in volume this year to $105 million. They now represent less than 1% of the total this year versus 3.60% last year.

Top deals

Two larger deals topped the list last week both at $50 million and higher.

HSBC USA Inc. priced $59.12 million of three-year leveraged notes linked to the S&P 500 index with a barrier offering absolute returns on the downside when the final price closed negative but at or above an 80% threshold. The upside offered two times leverage up to a 28.54% cap. Morgan Stanley Wealth Management was the agent.

“It’s an interesting structure. I can see why this would be popular,” the sellsider said.

“Your risk is in the extremes. You get penalized in a bear market or in a raging bull market when you blow to the cap on the upside.

“Personally I would be more concerned by the prospect of a bear. But even if you breach the barrier you’re just like an equity investor...you’d lose that same amount.”

Noticing that this deal among other recently-issued absolute return products offered a greater reward on the downside than on the upside, he said that the market has evolved, with investors becoming more cautious.

“Pricing works better that way and it’s also due to market sentiment. It’s both. People right now are a little bit less bullish. They’re concerned about limiting risk.”

The second largest deal, which was brought to market by Goldman Sachs’ issuing subsidiary GS Finance Corp. was $50 million of seven-year callable notes linked to the common stock of Archer-Daniels-Midland Co.

The notes were guaranteed by Goldman Sachs Group, Inc.

The notes were callable at any time after three years.

For each $1,000 principal amount of notes, the payout upon redemption or at maturity would be an amount in cash equal to the value of 20.9086 ADM shares, subject to a minimum payout of par.

“It sounds institutional,” the sellsider said based on the low fee of 40 basis points.

“I can only guess that it’s research-driven.”

The third offering, much smaller in size, was also a long-term product.

Morgan Stanley Finance LLC priced $23.88 million of 10-year callable contingent income securities due June 3, 2026 linked to the S&P 500 index. The contingent coupon was 7.5% gained quarterly above a 75% coupon barrier. The notes were callable after one year. The final barrier was 60% of the initial price.

Ten year appeared to be a long tenor for an equity deal with full principal at risk, a source noted.

“I don’t know if there’s a trend for longer-dated products per se. Some people do like it because you can get better terms,” the sellsider said.

The top agent last week was Goldman Sachs with $93 million in six deals, or 38.25% of the total. It was followed by HSBC and Morgan Stanley.

“Rates are too low and deals are less attractive. The good news is that you’re competing with all the other bonds that don’t yield anything.” – A sellsider

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