Structured products agents price $887 million during week; 2017 tally strongest since recession

By Emma Trincal

New York, Dec. 6 – The year is already set to be the best one in terms of structured products issuance volume in the post-financial crisis era.

Agents have priced $46 billion in 12,216 deals through Dec. 1, a 31.65% jump from the $34.94 billion sold during the same time last year, according to data compiled by Prospect News. There are four more weeks before the final tally. But already volume is greater than in 2015, which brought $44 billion, marking the best record after the 2007-08 crash.

The case for it

“Volume is up because people are looking for different strategies,” the market participant said.

“We’re trading at the highs. Investors are thinking of getting some kind of protection and also they’re trying to enhance the returns. This type of market is providing additional ammunition for making the case for structured products.”

Volume was strong last week despite the absence of BofA Merrill Lynch in the market. Agents sold $887 million in 310 deals, according to the data.

Whipsawing market

The mood in the U.S. equities market was mixed however. While the S&P 500 finished the week up 1.5%, volatility was rising in the technology sector, which on Wednesday went through a sell-off.

Resiliency prevailed as investors rotated money into other sectors, such as consumers and financials, but the trend was blurry after a Friday report announcing that former national security adviser Michael Flynn pleaded guilty to lying to the FBI.

“We are probably at a turning point,” said Paul Weisbruch, vice-president of options sales and trading at Street One Financial.

“Investors expected a pullback in October because that’s what has often happened in the past. We went through October unscathed... same thing in November. A lot of caution was thrown to the wind.”

With the year ending, investors continue to show signs of “superstition,” he said.

“People rely on the calendar. But the stock market doesn’t know what the calendar is.

“For the final stretch there is no guarantee you’ll get this Santa Claus rally.

“The way I see it, it has already happened. October, November...that was your Santa Claus rally.”

Clouds

Some recent signs should make investors more cautious, he added.

For instance, technology stocks are not recovering as fast as they have in the past since last week’s slump as the buy-on-the-dip failed to occur.

“A lot of the short squeezing has already happened. Now with the short covering out of the way, we’re subject to bigger moves,” he said.

The sell-off in Chinese stocks, which began around Thanksgiving, should also give investors pause, he added.

As the New Year is coming, portfolio managers have to get ready for new challenges such as the new leadership at the Federal Reserve and interest rate moves.

“If it’s not in your mind, it should be. It’s easy to be complacent when everything gets straight up with low volatility,” he said.

Structured notes designed to provide protection and upside leverage can make sense in this context as a defensive strategy.

“It’s probably time to look for more protection. Cut your position or buy some downside puts,” he said.

UBS, Morgan Stanley top

UBS and Morgan Stanley dominated the flow, pricing together 53% of total volume. Both have opposite styles. While UBS sold 103 deals totaling $260 million, Morgan Stanley came in with $209 million in only 33 deals.

“To see the market shared by two agents without one big player leading the game is a sign I think that our market is growing bigger and that more firms are contributing to the overall growth in the space,” the market participant said.

BofA Merrill Lynch did only two small deals last week, according to the preliminary data. This agent chose to close its monthly calendar during the previous week, just ahead of the Thanksgiving holiday. It priced nearly 70% of the $1 billion notional brought to market that week.

“It’s hard to tell why Merrill closed earlier on just before Thanksgiving instead of last week. I suppose it’s because they work with so many different issuers on their platform...perhaps they want to have enough time to synchronize...make sure everyone is on the same page,” the market participant said.

“Or it could be market-related. Maybe they thought they could get better execution.”

Equity indexes

During the weeks when BofA Merrill Lynch’s presence is overpowering, volume is skewed toward equity index issuance since this agent leads distribution of products tied to this asset class well ahead of others.

On the other hand, during times such as last week, the distribution is spread more evenly across agents and asset classes. Last week was different though. Despite the absence of the leader in equity-index-linked notes, those products accounted for 71% of total sales. But the types of structures were significantly different from what BofA Merrill Lynch tends to offer in its large block trades. Instead of leveraged return notes with no protection and market-linked step-ups, what prevailed last week were autocallable worst-of on two indexes as well as smaller leveraged notes with buffer or barrier, the data showed.

Income prevails

Helped with the continued trend of using equity indexes in worst-of deals, the top structure seen was autocallable contingent coupon notes. Those represented a $362 million notional, or 41% of the total, in line with the year-to-date average market share of 37%.

The top autocallable contingent coupon deal, which also was the largest deal of the week, came from Goldman Sachs’ issuing subsidiary.

GS Finance Corp. priced $27.93 million of 10-year trigger autocallable contingent yield notes linked to the Euro Stoxx 50 index and the S&P 500 index.

The notes will pay a contingent quarterly coupon at an annual rate of 6.45% if each index closes at or above its coupon barrier, 70% of its initial level, on the observation date for that quarter.

After one year the notes will be called at par plus the coupon if each index closes at or above its initial level on any quarterly observation date. The structure offered a 50% barrier at maturity.

“The 10-year tenor is what makes this one a little bit different from most autocallables. But I see a new trend there because people want more safety. With a 10 year you get that 50% barrier, which is very comfortable.

Also many advisers feel more confident that they can go through a pullback and recover with a long tenor, which is another reason why those notes are considered more conservative among some advisers,” the market participant said.

UBS did $84 million of autocallable contingent coupon deals in 71 offerings. Other active agents in this category were HSBC, JPMorgan and Goldman Sachs. Morgan Stanley priced the second largest contingent coupon autocallable deal. However, it was tied to a single stock and therefor was not a worst-of.

A stock deal

This stock deal was Morgan Stanley Finance LLC’s $19.67 million of three-year contingent income autocallable securities linked to Bank of America Corp. The notes offer a quarterly contingent coupon at an annual rate of 9.85% based on a coupon barrier of 80% of the initial price. The barrier at maturity is at the same level.

The notes will be called automatically on the same schedule at the initial price level.

Leverage

When it comes to leverage, the trend year to date has tilted in favor of protection, with a market share of 18.5% for leveraged notes offering either a barrier or a buffer against 14% for those lacking protection.

Last week followed the same pattern even more with 25% of the volume seen in leveraged products incorporating some downside protection versus 7% offered with full downside risk.

The No. 2 deal last week, however, was the exception as investors have a one-to-one exposure to the decline.

JPMorgan Chase Financial Co. LLC priced $27.48 million of two-year leveraged notes linked to the S&P 500 index.

The structure was very similar to BofA’s Accelerated Return Notes although longer in maturity by 10 to 11 months.

It offered on the upside par plus 3 times the index return, subject to 19% cap.

“It is very much like Merrill’s bread and butter 13-month or 14-month deals. But JPMorgan has done those deals before. It came up with its own branding – the famous BRENs for Buffered Return Enhanced Note and RENs for Return Enhanced Note. This one last week is your typical REN,” the market participant said.

“It’s a two-year, and that’s still short. If you tried to put a buffer on a two year you wouldn’t get an attractive upside. You almost have to go without the protection.”

CMS deal

Rates issuance remains subdued, but Citigroup last week came out with one showing a noticeable size.

Citigroup Global Markets Holdings Inc. priced $17 million of 10-year fixed-to-floating rate notes linked to the 10-year Constant Maturity Swap rate with principal protection.

Interest to be paid quarterly will be 4% for the first three years. After that, it will be tied to the 10-year CMS rate.

The top issuer last week was JPMorgan Chase Financial Co., LLC with $166 million in 51 deals, an 18.75% market share.

“For the final stretch there is no guarantee you’ll get this Santa Claus rally. The way I see it, it has already happened. October, November...that was your Santa Claus rally.” – Paul Weisbruch, vice-president of options sales and trading at Street One Financial

“To see the market shared by two agents without one big player leading the game is a sign I think that our market is growing bigger and that more firms are contributing to the overall growth in the space.” – A market participant

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