Structured products issuance tops $400 million for week amid choppy markets, health care debate

By Emma Trincal

New York, March 29 – U.S. structured notes issuance amounted to $405 million in 162 deals last week, according to data compiled by Prospect News. Agents were unperturbed by a turbulent market entranced by the vote of the Republicans’ health care bill.

When president Donald Trump decided to pull the bill on Friday, the benchmarks dropped, pushing the weekly return slightly down for the week and, according to some analysts, waning investors’ confidence. Analysts said investors are becoming more concerned about the feasibility of future reforms, perceived as pro-growth, such as regulation cuts and tax reforms, which so far have been the engine of the post-elections rally.

But structured products sales appeared to be immune to the noise despite the growing political uncertainty, sources said.

“We’re doing pretty good in terms of sales so far in March,” a sellsider said.

Volume is probably supported by demand, he implied, as terms of the products were far from ideal in the overall market.

“Pricing hasn’t been great because of this market,” the sellsider said. “Volatility is still very low. With last week, it’s picking up a little bit. Hopefully, we’ll get better pricing conditions soon.”

Turbulence

Volatility indeed made a comeback on Tuesday when the Dow Jones industrial average fell 238 points. Both the S&P 500 index and the Dow lost 1% on that day. In some cases, a selloff over several days, which was the pattern up until the middle of last week, may push investors to buy structured notes for the protection; in others, they may opt for staying on the sidelines, a structurer explained.

“I don’t think the selloff made a huge difference. Usually a week like that doesn’t significantly impact demand for structured products. Now if you have a continued selloff for a prolonged period of time, that’s a different story. Then it might give investors pause,” this structurer said.

From mid-March through the end of last week, the S&P 500 index was in a downtrend. But the market has resumed its bullish pattern this week, up 1.5% since Monday as of Wednesday afternoon.

Yearly data

Weekly totals provided by Prospect News may contain gaps due to the time at which deals are reported and filed with the Securities and Exchange Conditions. However, adjustments if any, are always on the upside.

A look at the preliminary year-to-date data is therefore encouraging. It showed a $10.90 billion volume this year through March 24 compared to $9.36 billion during the same time last year, or a 16.5% increase.

“Business is doing better this year, economic data has improved. Let’s hope it continues. We have uncertainty in Washington. Let’s hope it won’t affect the momentum,” the structurer said.

“So far, political expectations have created this rally rather than derailed it. I’m crossing my fingers.

“One good thing coming from Trump in general is that he has been the fuel for this bull trend since November.

“But no one knows for how long.”

Structures last week leaned toward coupon-paying deals, according to the data.

Reverse convertibles with or without an autocallable feature made for 51% of the total. Most of those deals paid coupons on a contingency basis.

Coupon business

“A pretty big chunk of the market is equity-linked income products,” the structurer said.

“I’ve always been surprised that Bank of America, the biggest distributor, is not a big participant in this market. From what I understand they do mostly leveraged deals. I guess they have those step-up deals that are like digitals. But this is not income. Your coupon isn’t paid until maturity.”

Nearly 75% of Bank of America’s volume for the year is comprised of leveraged deals and market-linked step ups, the data showed.

The step ups are digital notes, which offer uncapped participation when the index is above the step level.

The downside varies while it is generally full downside exposure as the notes tend to be short-term.

“For the most part they don’t do contingent coupons. They don’t do worst-of. I’m sure they look at structured notes as asset allocation tools. It’s a very prudent way of doing things,” he said.

“But it’s still odd to see more than half of the business designed for income and the top distributor not focusing on that at all,” he said.

Those income-oriented products make for 42% of the year-to-date volume. Their market share last week was particularly elevated, according to the data.

Top deals

GS Finance’s $27.76 million of two-year leveraged buffered notes tied to the S&P 500 index was the top deal in size last week, based on preliminary data compiled by Prospect News. The leverage was 1.5 times on the upside up to an 18.3% cap. There was a 10% geared buffer on the downside with a 1.11 multiple.

JPMorgan Chase Financial Co.’s $21.9 million of 3.5-year dual directional contingent buffered return notes linked to the lesser performing of the Euro Stoxx 50 index and the MSCI EAFE index or an equally weighted basket consisting of those two indexes, was an original structure. At maturity the basket price increase was leveraged at a rate of 2.85 up to a 50% cap. If it was negative but above a 60% barrier, investors would get half of the absolute return of the basket decline in price. If it breached the barrier, the payout structure changed and investors were exposed to the worst performing asset.

J.P. Morgan Securities LLC was the agent.

Morgan Stanley Finance priced the third offering with $21.81 million of 18-month buffered digital notes linked to the Russell 2000 index.

The digital amount was 10.86% if the index return was greater than or equal to negative 10%. If the index level was less than negative 10%, investors would lose 1.1111% for every 1% that the index declines beyond 10%.

The top agent last week was JPMorgan with $95 million in 21 deals, or 23.44% of the market.

It was followed by Morgan Stanley and Goldman Sachs.

All the deals priced by this agent were issued by its affiliate – JPMorgan Chase Financial Co., which was the No. 1 issuer of the week.

BofA Merrill Lynch was not in the market last week. This agent prices its deals in the final week of the month.

“Volatility is still very low. With last week, it’s picking up a little bit. Hopefully, we’ll get better pricing conditions soon.” – A sellsider

“So far, political expectations have created this rally rather than derailed it.” – A structurer

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