Structured products issuance $360 million for week amid banner stock market rally

By Emma Trincal

New York, June 26 – Structured products issuance for the third week of the month hit $360 million in 90 deals, according to preliminary data compiled by Prospect News, while the stock market strongly rallied. It was a banner week for stocks with the S&P 500 index breaking out to a new all-time high after the Federal Reserve board signaled its willingness to cut rates.

Updated figures for the week ended June 14 showed $533 million in 177 deals. Despite the upward revision, the month through June 21 remained weak compared to the same period in May, showing a 33.8% decline to $1.4 billion from $2.12 billion. Last week’s figures however are still subject to change.

An improvement can be seen on the year-to-date issuance volume even if 2019 remains considerably behind last year. Agents have sold $21.35 billion of structured products year to date compared to $28.69 billion a year ago, a 25.6% decline. While worrisome, the slowdown is not as significant it was a month ago when it exceeded 34%.

May is the best

As observed previously, January and February this year were the worst months. The best one was May with $4.89 billion, followed by April with $4.26 billion. This is counter to the usual seasonal trend which sees more business in the winter months.

“January and February this year were really below average, but keep in mind that the same months in 2018 were particularly strong. Last year started on a very strong note. So, by comparison, the beginning of 2019 looks really bad,” said a sellsider.

“I agree that May was the best month so far. I think it’s probably due to the fact that it took that long for investors to absorb the shock of December.”

Pricing

Rapid shifts in market conditions have also played their part.

“Rates were expected to go up but have been declining instead. Volatility came off after a big sell-off in December. This changing environment makes it difficult for issuers putting together those products,” a market participant said.

“For pricing to work, you need both rates and volatility to be higher.

“It’s a very challenging environment for structured notes.”

Income and growth

The mix between leverage and income-oriented structures was relatively even last week, each category making for approximately 42% of total issuance volume, according to the data.

Within those two groups, some interesting characteristics emerged.

For instance, snowball autocalls with a market share of 18% were more favored than usual compared to the average for the year of less than 4%. So-called snowballs pay a call premium upon the automatic call event instead of a coupon that may be clipped throughout the life of the notes.

More snowballs

“[The snowballs] are the traditional autocalls. I can see why some investors may find those products attractive,” the sellsider said.

“They pay you a higher coupon because the conditions under which you get paid are slightly more difficult to meet.

“Since you get paid only when the deal is called and since the call trigger is usually at the initial price level, the underlying has to be up. It makes it less likely for you to receive your payment when you compare that with a contingent coupon note in which the coupon gets paid at a barrier which is below the initial price. Therefore, your yield is higher.

“I don’t think it’s necessarily a trend. It probably is a few chunky trades.”

Indeed, two deals, whose combined notional was $32 million, fell into that group. One was from BofA Finance LLC on the S&P 500 index for $18 million, the other from Citigroup Global Markets Holdings Inc. on an international equity index basket for $14 million. Eight other smaller deals used this structure type.

Another benefit provided by those products may be related to taxes.

“You can make a case that since it’s harder to get called above 100 than above 80 or 70, you’re likely to hold the notes longer. If it’s more than one year you’ll get the more favorable tax treatment under long-term capital gains,” the sellsider said.

Broad exposure

Single-stock underlying were not popular last week with only 5% of the total issued versus a yearly average of 12%. By far, investors were more likely to bid on notes giving them broader market exposure either through indexes or exchange-traded funds or a combination of both. Equity indexes made for 73% and ETFs, 11%.

“When the market is bullish, volatility is low as a whole, including for stocks. It’s hard to get higher levels of income from single stocks for the risk you’re taking. It makes more sense in those conditions to trade on indices,” the market participant said.

But indexes may not offer enough volatility.

“You have to do worst-of to keep the same coupon levels. That’s why you see so many.”

Indeed, worst-of deals continued to be top-sellers last week accounting for more than a quarter of total notional with $91.6 million. The overwhelming majority of those worst-of deals (92% of their notional amount) were structured on equity indices and ETFs. The few worst-of on single-stocks used technology names and bank names in only three deals totaling $2.6 million.

As yields have been pushed to new lows, interest-rate-linked notes issuance continued to suffer. Only two deals in this asset class priced last week for a total of $2 million. Prospect News does not include lightly structured deals with no underlying such as fixed-to-floaters on Libor, for instance, in its totals.

Top deals, short deals

Last week’s largest offerings were a combination of recognizable structures investors sought for either growth or income.

They happened to all be short-term trades.

Based on recent deals reviewed by Prospect News, investors, when seeking shorter durations, have shown a willingness to make some compromises, including forsaking upside leverage, using geared buffers and even giving up downside protection altogether.

“Whenever it’s possible, people like shorter terms,” the market participant said.

GS’s $34.44 million

GS Finance Corp. priced the largest deal in a $34.44 million issue of 14-month leveraged notes linked to the S&P 500 index. It is a highly leveraged, short-term deal similar to Bank of America’s Accelerated Return notes.

If the index return is positive, the payout at maturity will be par plus 3 times the index gain, capped at 12.35%.

Otherwise, investors will be fully exposed to the index decline.

UBS Financial Services Inc. is the agent.

Phoenix worst-of

The second deal was a one-year worst-of phoenix autocallable issued by Barclays Bank plc for $29.66 million.

The notes are linked to the least performing of the S&P 500 index and the Russell 2000 index.

A contingent monthly coupon at an annual rate of 8.85% will be paid if each index closes at or above its 70% coupon barrier on a related monthly observation date.

After six months, the notes will be called at par plus the contingent coupon if each index closes at or above its initial level on any observation date other than the final date.

The payout at maturity will be par unless a 70% European barrier is breached in which case investors will be exposed to the decline of the worse performing index.

Geared buffers

Another leveraged deal came from Morgan Stanley Finance LLC as the third offering in $28.72 million of 18-month buffered notes linked to the S&P 500 index. The product featured an upside participation of 200% and a 13.3% cap. Investors will receive par if the index declines by 10% or less and will lose 1.1111% for every 1% that it declines beyond 10%.

Some fee-based advisers are still reluctant to use geared buffers, according to interviews with Prospect News. But the sellsider disagreed.

“Geared buffers are now a fairly common feature,” he said.

The difference in risk between a 10% traditional buffer and a 10% buffer with a 1.11 multiple is that investors may lose their entire principal with the latter. While some advisers find it difficult to sell the idea to their clients, others believe the risk is limited and worth taking.

“The index would have to go down to zero for this to happen,” the sellsider added.

“By selling more than one put, you can get more upside.”

UBS tops

The top agent last week was UBS with 35 deals totaling $92 million, or 25.7% of the total. It was followed by Morgan Stanley and Citigroup.

GS Finance Corp. was the No. 1 issuer with $77 million in nine deals, a 21.5% share.

For the year, the top issuer is Barclays Bank plc with 829 deals totaling $3.11 billion, or 14.6% of the total.

“It’s a very challenging environment for structured notes.” – A market participant

© 2015 Prospect News.
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