Structured products agents price $276 million for week, aided by big UBS transaction

By Emma Trincal

New York, Aug. 15 – Agents priced $276 million of structured products in 78 deals in the first week of August ended Friday, according to data compiled by Prospect News. But nothing was quiet otherwise in the market. Trade threats, protectionist measures and on Friday, a currency crisis in Turkey, rattled the markets at the end of the week causing the averages to finish mixed.

The slow action can be attributed to the fact that the month is still early as well as the summer doldrums.

Yet, the slow action was offset by a big deal from UBS close to $100 million in size.

Summer rally

Market sentiment has brightened in the past two months amid a strong summer rally, which pushed up the S&P 500 only 20 points below its record high of January. Since the beginning of the summer, the S&P 500 index gained 4.3% through Friday.

“If you look at earnings growth, it’s phenomenal,” a structured notes trader said.

“We’re growing obviously. Despite higher interest rates, the trade headlines, the market is still going up. We have growth, a strong economy and no inflation. There are good reasons to be bullish.

“People are obsessed with the flatter yield curve. They have to realize it’s going to be positive again. It’s just getting better. I’m very optimistic.”

Investors appear to consistently show resilience in the face of negative trade and geopolitical headlines, playing a deaf ear to the bad news, they noted.

A structured notes distributor explained that the length of the bull market has raised concerns but not to the point of causing investors to lose confidence.

“People have said this bull market is going to end soon. There are many reasons to be concerned... geopolitical factors, interest rates. But people have said that all along for years and so far it’s just never happened,” he said.

“Investors are probably a little bit more cautious, and that’s why we use a lot of protection.”

Full equity

The appetite for structured notes last week was a reflection of the appeal of equity and the bulls “prevalence.”

In all, 99% of issuance volume last week was based on equity underliers: equity indexes and stocks represented 80% and 19% of the notional, respectively.

Equity as an asset class represents 87% of total volume for the year.

The week started off extending gains recorded in August during most prior sessions. It took the crash of the Turkish lira on Friday to finally scare investors. The Dow Jones industrial average fell 200 points on that day but ended mixed for the week, shedding 0.6%. The S&P 500 index lost only 0.2%.

UBS tops

UBS had a good week with UBS AG, London Branch’s $93.43 million of 18-month leveraged notes linked to a basket of international equity indexes. This underlying basket is commonly used by different issuers and agents. It consists of the Euro Stoxx 50 index with a 36% weight, the Topix index with a 27% weight, the FTSE 100 index with a 20% weight, the Swiss Market index with a 9% weight and the S&P/ASX 200 index with an 8% weight.

The payout at maturity will be par plus 229.05% of any basket gain. Investors will be exposed to any basket decline.

“What I see lately is that all the biggest deals are wealth management deals distributed directly into the firm’s wealth management channel or externally. The Morgan Stanley, JPMorgan, Merrill or UBS channels are doing well internally,” said a sellsider.

The structured notes distributor unfamiliar with the appeal of principal-at-risk products among private wealth clients said he was surprised by the size of the deal.

“No protection whatsoever...not even a buffer or a barrier? It’s not enticing. You have to have a pretty firm view. We wouldn’t do that kind of deal,” he said.

Given the size of the deal, last week’s top structure was leverage with no downside protection. Since the beginning of the summer, however, the breakdown between leveraged notes with barrier or buffer on the one hand and leverage with delta one exposure on the downside on the other hand is fairly even with 18% and 20% of the market share, respectively.

Contingent coupon on AT&T

Autocallable contingent coupon deals continued to be shown despite the drop in volatility.

The second deal last week was in that category with the particularity of being tied to a single stock. GS Finance Corp. priced $25.1 million of three-year contingent income autocallable securities linked to the common stock of AT&T Inc. The contingent coupon barrier is 75% of the initial price. The contingent coupon payable quarterly offers an annualized rate of 9.7%. The notes will be automatically called on a quarterly basis after six months if the stock closes above its initial price on an observation date. The principal repayment barrier at maturity is 75%.

Goldman Sachs & Co. LLC is the underwriter. Morgan Stanley Wealth Management is acting as dealer.

Scotia’s digital

Bank of Nova Scotia priced the third deal, a digital structure for the amount of $22.25 million.

It was a two-year digital note offering linked to the S&P 500 index with an 85% threshold level above which investors will receive par plus 12.67%. Otherwise, investors will lose 1.1765% for each 1% decline beyond 15%.

Scotia Capital (USA) Inc. is the underwriter.

Digital notes made for 11% of last week’s total notional.

“Digitals are very tax-efficient compared to contingent coupons. You get the capital gains tax treatment as opposed to being subject to ordinary income,” a market participant said.

UBS was the top agent last week with $121 million in 51 deals, or 44% of the total. It was followed by Scotia Capital and Morgan Stanley.

The top issuer last week was UBS AG, London Branch with $115 million in 50 deals.

Last week’s No. 1 issuer was Barclays Bank plc.

The top issuer for the year is JPMorgan Chase Financial as it brought to market 1,349 deals totaling $5.46 billion.

Volume for the year to date is up more than 11% to $34.84 billion from $31.31 billion through Aug. 10. The number of deals grew by more than 19% to 9,678 from 8,124.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.