Structured products issuance for year through April strongest since 2008; week sees $307 million

By Emma Trincal

New York, May 10 – Structured products issuance volume continues to be at record highs this year, buoyed by the equity rally and investors’ uncertainty about its longevity, causing them to seek hedged exposure to the market, sources said.

Volume this year rose 36% to $17.77 billion through May 5 compared to $13.06 billion during the same time last year, according to data compiled by Prospect News.

“That’s impressive,” a distributor said about the year-to-date growth.

Back to 2008

The first four months of the year represent the strongest on record since 2008.

Agents sold $17.46 billion this year through the end of April, the strongest notional amount of sales on record since the same period in 2008, which preceded the financial crisis when volume reached $24.31 billion.

The distributor said that sales are not evenly spread across all firms.

“We’ve had ourselves some good numbers especially in terms of secondaries and reverse inquiries but not so much across the broad calendar month,” he said.

“I was at a conference last month and many issuers were complaining about the slow volume. Perhaps things picked up at the end of the month.”

In April, agents sold $3.75 billion, a 44% increase from the previous year, the data showed.

Finalized data for the last week of April showed $2.1 billion in sales, a readjusted figure, which was significantly higher than previously reported due to filing delays.

May began last week with $307 million in 131 deals. Those figures are subject to be revised upward.

Better conditions

“The trend has been your friend,” a market participant said.

“Even with low volatility, people are still looking for downside protection in the form of buffers and barriers and they still want to participate.”

Investors who have stayed on the sidelines have missed the rally. The S&P 500 index is up more than 7% for the year.

“It’s damned if you do, damned if you don’t.

“We’ve been talking about a correction for so long. But it hasn’t happened.

“In the structured products space people want to take the bullish view but they also want some downside protection.”

In addition, some market factors helped pricing.

“Volatility is still low. But rates are higher at least compared to last year,” he said.

Higher rates while still low have helped offset some more negative pricing conditions.

“It’s not just rates... it’s not just a funding trade or a volatility trade...it’s that combination that has improved. Meanwhile the market is still trending up,” the market participant said.

Wait-and-see

The distributor was less confident about the improvement of market conditions, seeing record low volatility as a real impediment. Investors’ complacency was somewhat of a red flag too.

Factors which used to move the market before don’t. Last week, the Federal Reserve Board left rates unchanged.

The week traded in a range and finished flat despite a positive job report released on Friday.

“There’s nothing to put your finger on,” the distributor said.

“The market seems to find some comfort when waiting for things to pass whether it’s the Fed or some kind of political event.

“As long as there is something that can be postponed, the market is comfortable.”

Stocks

Single-stocks as underlying assets saw their share last week grow to 12% versus a year-to-date average of 12%.

UBS contributed to most of that in volume (90%) as well as in number of offerings (80%), with nearly all of them sized under $1 million.

“We’ve been successful with stock deals following the Trump trade that has been in fashion, an unfortunate name if you ask me because it’s more political than financial,” the distributor said.

His firm sold one such deal for $10 million last month.

The trade, which began as a reverse inquiry, has been repeated six times since the presidential inauguration.

It was an autocallable reverse convertible tied to the worst of three stocks, each of which was picked from sectors that are seen as likely to benefit from the pro-growth agenda of the president: infrastructure, defense and finance.

“It’s not easy to price high coupon deals with low volatility. I think we’re moving back to stocks to pick up a little bit more premium. The use of worst-of and the contingency of the coupon help too,” he said.

Top deals

GS Finance Corp. priced the No. 1 deal with $17.67 million of two-year leveraged buffered index-linked notes tied to the S&P 500 index. The upside participation rate was 155.15% up to a 26% cap. Investors received par if the index fell by up to 5% and lost 1.0526% for every 1% decline in the index beyond 5%.

The second offering was Morgan Stanley Finance LLC’s $13.4 million of 18-month contingent income autocallable securities linked to the least-performing of SAP SE, Microsoft Corp. and Nvidia Corp. shares. One interesting tidbit in the structure was the observation of German underlying stock SAP SE in euros. Another feature was the decreasing autocallable threshold starting at 95% of the initial price and stepping down to 95% and then 90%. The notes paid a 6.3% contingent coupon based on the worst-performing stock with a monthly 55% coupon barrier.

Morgan Stanley Finance also priced the next deal: $13.3 million of 16-month leveraged buffered notes linked to the S&P 500 index with a 140% upside participation rate, a 14.69% cap and a 10% geared buffer on the downside with a 1.11 multiple.

Morgan Stanley was the top agent, pricing 10 deals totaling $78 million, or 25.5% of the market share.

All this agent’s deals were issued by Morgan Stanley Finance LLC, making the firm’s issuing arm the top issuer on the list of deals last week.

“Even with low volatility, people are still looking for downside protection in the form of buffers and barriers and they still want to participate.” – A market participant

“It’s not easy to price high coupon deals with low volatility. I think we’re moving back to stocks to pick up a little bit more premium.” – A distributor

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