Agents price $351 million of structured products in week amid rally, receding inflation fears

By Emma Trincal

New York, May 16 – Structured products issuance volume was relatively robust in the second week of May thanks to a larger trade by JPMorgan and perhaps a seven-day winning streak in U.S. equity markets.

Issuance volume amounted to $351 million in 99 deals in the week ended Friday, according to preliminary data compiled by Prospect News.

Updated figures for the previous week showed $650 million in 235 deals. Last week’s data is subject to upward revisions.

The S&P 500 index rose 2.4% last week due to earnings growth and moderate signs of inflation.

The Dow Jones industrial average rallied 2.4%. Weaker-than-expected data on inflation eased investors’ fears about the Federal Reserve’s aggressive tightening stance.

Month, year

Volume for the month through May 11 is down 33% from April to $621 million from $925 million. Figures will be revised upward since last week’s issuance volume was not captured in its integrality by press time.

This year so far is showing a healthy growth compared to last year.

Sales are up 20.5% to $22.19 billion through May 11 from $18.41 billion during the same time last year.

JPMorgan’s block trade

JPMorgan was a big contributor to last week’s flow as it brought to market a deal in excess of $50 million. The product had all the attributes of a typical BofA Merrill Lynch’s Accelerated Return Note – short-term, high leverage, reasonable cap and full downside exposure. The main difference was the slightly longer maturity than BofA’s ARNs whose tenors usually range between 13 months and 15 months.

JPMorgan Chase Financial Co. LLC’s $50.38 million of 18-month leveraged notes linked to the S&P 500 index offer at maturity par plus 3 times the index return up to a 17.4% cap with no downside protection.

J.P. Morgan Securities LLC is the agent.

The ARNs formula

“Merrill does those [Accelerated Return Notes] deals all the time. There is no reason why others wouldn’t follow that lead,” a market participant said.

“It’s a simple structure that’s repeated month after month. Simple makes it easy. Innovation is overrated. You can only educate your salesforce if you have a consistency in your products. Mr. Client is not ready this month? No problem. A similar product will come out next month.

“This consistency has helped them build – I wouldn’t say an annuity – but a very efficient distribution model.”

No Euro Stoxx

The S&P 500 index was the star last week even more so than usual. No Euro Stoxx 50 or Russell 2000 deal could be seen on the top of the list of offerings. The top eight deals were linked to the large-cap U.S. benchmark at the exception of one rate deal. While it is not unusual for the S&P 500 to prevail on any given week, it is less common to see no other alternatives on the top of the list.

Especially unusual was the absence of the Euro Stoxx 50 index as a sole underlier. The euro zone benchmark was used in a couple of deals but as a basket component, not as a stand-alone index.

“It was just a bid on the U.S. markets,” said the market participant.

“All U.S. indices rallied a lot last week. But the S&P is the underlying of choice.

“What’s unusual is that it was just the S&P and nothing else. But I wouldn’t read too much into that. If an index has to dominate it’s always going to be the S&P.”

Geared buffers

The second top deal was already in another league, below the $20 million threshold.

Canadian Imperial Bank of Commerce’s $19.05 million of 18-month digital notes linked to the S&P 500 index pays an 11.3% digital return when the final index price closes at or above 90%.

Otherwise, investors will lose 1.1111% for each 1% decline beyond 10%.

CIBC World Markets Corp. is the underwriter.

Next, GS Finance Corp. priced $17.92 million of two-year leveraged buffered index-linked notes tied to the S&P 500 index.

The upside is levered at a rate of 1.5 times up to a cap of 20.55%.

Investors will receive par if the index falls by up to 10% and lose 1.1111% for every 1% decline in the index beyond 10%.

Goldman Sachs & Co. is the underwriter.

Two of those last deals came with a geared buffer, the market participant noted.

“Buffered notes are the flagship. People want buffers, and the gearing facilitates pricing. The fact that people are using them suggests a continued bullish bias. You’re willing to take some gearing, which doesn’t always work in your favor.”

Indexes, rates

Last week’s dominant asset class was equity indexes making for 72% of the market. Usually it’s only in the final week of the month when BofA Merrill Lynch prices its big index deals that the market shares of this asset class are so high. JPMorgan’s block trade last week was a determining factor.

More unusual was the significant weight of interest-linked deals. Three such deals priced last week for a total of $22 million, or 6.2% of the total. Rates as an asset class account for only 2.7% of the year-to-date issuance volume, the data showed.

A relatively large deal in the rates category had something to do with that proportion.

Barclays Bank plc’s $15 million of five-year floating-rate notes linked to the Consumer Price Index was the fourth largest deal. The interest rate will be equal to the annual percentage change in the index plus 100 basis points. Interest will be payable monthly and cannot be less than zero.

The payout at maturity will be par.

Barclays is the agent.

Leverage is hot

Among other characteristics seen last week concerning this structure type: leveraged notes continued to be popular in line with a recent trend observed over the past few weeks.

With $170 million, leveraged notes accounted for nearly half of last week’s sales. In comparison, the usually popular autocallable contingent coupon notes represented $68 million, or less than 20% of the volume.

The majority of leveraged structures offered a buffer or barrier on the downside.

“Buffered leveraged notes stand to be the staple of the business because it’s simply a product that reflects the best of what our market has to offer,” the market participant said.

“The concept of having the leverage with the downside protection should appeal to most investors, especially when based on broad underlying indices.

“That structure should be the poster child for the structured products industry.”

Caps

An industry source however said that leverage is not “one size fits all.”

“Everything people do reflects a market view. My main issue with leveraged notes is usually the cap,” he said.

“Leveraged buffered notes have picked up probably because people are not that bullish anymore.

“To me I always want to know: am I getting more than if I was buying the index outright? And if I see a cap, based on my view, the answer is: no.

“That’s what makes a market. People have an opinion. They create a structure around that.

“If you think the market had a big run and that it will go up a little bit more – and that’s a very common view nowadays – then capping your return is not a big deal. What you want is the leverage and the buffer. And that’s what you get.”

Agents, issuers

The top agent last week was JPMorgan with nine deals totaling $79 million, or 22.4% of total issuance volume. It was followed by UBS and Goldman Sachs.

JPMorgan Chase Financial Co. LLC was the No. 1 issuer with $77 million in eight deals, or 22.1% of the market.

JPMorgan’s issuing subsidiary is also the top issuer for the year with $3.80 billion in 793 offerings, or 17.15% of the total volume for the year through May 11.

“Buffered leveraged notes stand to be the staple of the business because it’s simply a product that reflects the best of what our market has to offer.” – A market participant

“Leveraged buffered notes have picked up probably because people are not that bullish anymore.” – An industry source

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