March structured products issuance $4.88 billion, beating highs for this period in 2007, 2008

By Emma Trincal

New York, April 12 – U.S. structured notes issuance is strong year to date, according to recent counts, showing an uptick by nearly a third from 2016, according to data compiled by Prospect News. March alone was the best of all prior months of March since 2001 when Prospect News began to collect data on U.S. structured notes issuance.

Big year

Volume this year is up 32% to $13.70 billion from $10.38 billion. This count is through April 7, which offers a more accurate picture and is likely to include the totality of the first quarter’s volume.

March volume has climbed 56% this year to $4.93 billion from $3.15 billion last year. Those figures have been revised upward from last week. Data is not immediately available due to settlement and filing delays.

Best March

Last month was the best month of March on record. The two years, which were the closest to this level, were just around the financial crisis in 2007 with $4.84 billion and 2008 with $4.47 billion, according to the data.

The final tally for the last week of March showed $2.15 billion in sales.

In the week ended Friday, which jump started April, agents priced $298 million in 93 deals. The figure is modest but it is the early part of the month. Also, most of those weekly figures get revised upward once the full data is available on the Securities and Exchange Commission website.

Rally factor

“People have turned to equity a lot this year. Sales are up compared to last year when issuance slowed down. It’s mostly in equity because FX and rates are down. Equity markets have shown a decent performance and that’s probably why volume is so strong,” a market participant said.

April is too young to tell if the markets will continue to support demand for structured notes.

Last week was volatile but ended flat with the S&P 500 index finishing slightly lower, down 0.3%.

The market was resilient however in the face of the U.S. military strike against Syria and a disappointing job report on Friday.

The U.S. markets have been trading range bound since the beginning of March. Expectations about the implementation of president Donald Trump’s pro-growth agenda are beginning to waver, some analysts said.

Markets are also focusing on the impending French Elections, another source of potential volatility if one of the two populist candidates is elected.

Getting exposure

“Our structured product business is strong,” a sellsider said.

“I don’t know the reasons for it except for the general excitement we’ve had in the market. I don’t want to say exuberance. We did have four strong months following the elections. Now there is talk of a pullback or range bound market.

“But this sort of environment seems to be conducive to structured products. There is a focus on equities. Equities have done well.

“People don’t expect huge rallies, but they’re still somewhat bullish. At the same time, they’re aware that we may soon have a pullback.

“In many of these scenarios, structured products can add value. They offer protection on the downside if there’s a pullback, a fixed return if the market is trading sideways and leverage on the upside if the rally slows down a little.

“People want to be exposed to equity, and using structured notes when there is uncertainty like there is now is a good way to do that.”

More stocks

The top asset class last week was equity index with $186 million in 16 deals, or 63.6% of the total volume, according to the data.

Single-stocks took a greater market share with $51 million, or 17.4% of the volume, versus a yearly average of 12%.

But nearly 30% of stock deals came from one agent –UBS – which also priced 49 of the 58 deals in this category. UBS is the leading agent in single-stocks. In the first quarter, it captured more than a quarter of the volume for this asset class, according to the data.

“It comes from mostly one agent and it’s still early in the month. I don’t know if it means anything and if we can say that investors are turning into stock-pickers again. I doubt it,” the sellsider said.

“The industry is moving away from single-stock deals in general. But some firms like UBS offer a large quantity of deals and it adds up to volume.

“Still by and large, stocks are no longer predominant in the industry as they used to be.

“Asset advisors are moving away from picking equity. They are focusing more on asset allocation.”

Goldman’s digitals

The issuing arm of Goldman Sachs priced two digital buffered deals, which ranked first and third in size last week, according to the available data.

Both were two-year notes with a negative threshold allowing investors to get a positive return even if the underlying finished negative provided that it closed at or above the threshold. The notes were guaranteed by Goldman Sachs Group, Inc.

GS Finance Corp. priced $33.59 million of digital notes due April 4, 2019 linked to the S&P 500 index.

This was the top deal, according to available data compiled by Prospect News.

If the index return was at least negative 15%, the payout at maturity would be 9.25%. Investors would lose 1.1765% for each 1% decline beyond 15%.

The second digital deal and third one in size for the week had the same issuer and structure except for the underlying and digital amount. It priced at $28.06 million and was linked to the Russell 2000 index, paying a 12.05% digital return.

“These digitals that pay above the barrier make a lot of sense,” the sellsider said.

“In this market when you price 9.25% on the S&P and 12% on the Russell, these are fairly high levels of set returns investors can expect. In most scenarios, in range bound markets those types of deals tend to be appealing. Now if you expect huge rallies, that’s not the kind of instrument.”

Morgan Stanley Finance LLC priced the second deal. It was $33.54 million of two-year capped leveraged notes linked to the S&P 500 index.

The payout at maturity was par plus 300% of any index gain, up to a 22.14% cap. Investors were exposed to any losses.

The notes were guaranteed by Morgan Stanley.

Goldman Sachs was the top agent last week with four offerings totaling $91 million, or 31.3% of the total. It was followed by JPMorgan and Morgan Stanley.

GS Finance was the top issuer with $91 million in four deals, or 31.3% of the total.

“People have turned to equity a lot this year. Sales are up compared to last year when issuance slowed down.” – A market participant

“People don’t expect huge rallies, but they’re still somewhat bullish. At the same time, they’re aware that we may soon have a pullback.” – A sellsider

© 2015 Prospect News.
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