Structured products agents sell $233 million for week amid stock gains; big Goldman deal eyed

By Emma Trincal

New York, Dec. 18 – Agents priced $233 million of structured notes in the second week of December, in 101 deals. Revised figures for the previous week showed $512 million in 165 deals, according to data compiled by Prospect News.

The proportion of autocallable volume was greater than usual last week – 71.5% or $166 million. This was largely due to a large Goldman Sachs trade priced at $53.3 million and linked to the worst of three equity indexes. This deal alone made for 23% of total notional and a third of the amount of autocallable issuance for the week.

Equity indexes accounted for three-quarters of total volume and stocks for 18.5% of it.

Rarely has the flow been so intensely directed to equity assets: those made for 97% of the total compared to 90% on average for the year.

Bull run

Investors had reasons to focus on the stock market. The major indexes reached new record highs as the United States and China announced the phase one of a trade deal, which removed some uncertainty.

To make things even better for the markets, the Federal Reserve at its FOMC meeting left interest rates unchanged. The S&P 500 index posted a 0.7% weekly gain.

“We’re seeing tremendous gains in the market. Not to say it’s not going to continue to go up but when the S&P is up 27% for the year, you don’t necessarily have to pull money out of the market. Buying a structured note instead with limited upside and downside protection makes for a good story,” said a sellsider.

Winter months

December so far saw a higher volume than a year ago with $745 million versus $635 million. But December was also the worst month of 2018 in notional volume.

This time, the rally is an incentive to invest in structured notes as expectations of return for 2020 become more modest and the need for protection more pressing.

“As people move money into structured notes for their core allocation, there’s a sense of urgency. They want to do it now before the holidays,” the sellsider said.

Not the typical seasons

In 2019, November has captured the top spot as best month of the year with $5.16 billion in 1,523 deals. The second-best month was May, followed by August.

This pattern is unusual. The bulk of issuance volume each year is often seen during the first quarter while this year demonstrated that business can pick up in momentum in the midst of summer or in the fall.

“We had an active summer,” said the sellsider.

“Now we’re going into the Elections with very polarizing candidates. We’re still negotiating the trade deal with China. Overall, we’re bracing for more uncertainty in the market, which bodes well for structured products even if the market continues to go up.

“I’m optimistic on issuance going into the first half.”

Year to date improving

As the year nears to a close, total volume through Dec. 13 is now down only 12.2% compared to last year at $47.43 billion from $54 billion during that time last year. Six months ago, the gap used to be twice greater.

The number of offerings is nearly identical: 15,351 this year versus 15,341 during that time last year.

Going solo

Brokers going independent is an important trend to follow, said the sellsider.

“There was a record amount of M&As this year. Advisers are leaving the wirehouses seeking to be independent. They’re creating their own [registered investment advisory] firms,” he said.

“We’ve seen more transition from the wirehouse than in recent memory.

“I think it’s a good thing for structured notes.

“The Merrill Lynch broker who used to sell $1 million a month will continue to do so at a greater clip as an independent.”

A market participant agreed. If brokers already used to sell structured notes move into the RIA space, they may serve as a model and inspiration for fee-based planners who are less familiar and sometimes more skeptical about the products.

“The RIA market is big. They’re not going away anytime soon. It’s a more difficult market to target but that’s where growth is coming from,” this market participant said.

Big GS Finance callable

GS Finance Corp. priced $53.29 million of callable contingent coupon notes due Sept. 15, 2023 linked to the least performing of the Euro Stoxx 50 index, the Russell 2000 index and the S&P 500 index.

The notes are callable quarterly at the issuer’s discretion.

Each quarter, the notes pay a contingent coupon at a rate of 9.05% per year if each index closes at or above its coupon barrier, 70% of its initial level, on the observation date for that quarter.

The repayment barrier at maturity is 60%.

“Having a 40% protection with a 9% yield is pretty good,” said the sellsider.

“I know that six months ago, you could have had higher coupons, 12% coupons. But the 9% ...that’s how things have been pricing lately.

“It’s tougher to sell a note like that because of the issuer’s call. But putting it there is what allows you to get a better return. A call instead of an autocall can boost your yield by 100 basis points.”

UBS Financial Services Inc. is the selling agent.

“It’s not a surprise to see UBS selling Goldman’s’ paper,” the sellsider said.

“As a private bank, you want to diversify credit. They went with the issuer that can provide the best levels.”

Another callable trade

A somewhat similar deal but smaller in size was distributed by Morgan Stanley and issued by Barclays Bank plc in $27.8 million of contingent income callable securities due June 15, 2022 linked to the least performing of the same three indexes.

The notes are also callable quarterly.

Each quarter, the notes pay a contingent coupon at the rate of 8.75% per year if each index closes at or above it’s a 70% downside threshold.

The barrier at maturity is at 70%.

The underliers, the worst payout, the main structure and the discretionary call are similar to the Goldman offering, noted the sellsider. But he also pointed to some differences.

“Going from a 40% protection to 30% makes a big difference,” he said.

“It’s a shorter-dated note.

“There’s also a difference from a pricing standpoint.”

He was referring to the commissions.

GS Finance’s three-year and nine-month deal carries a 1.25% fee while the two-and-a-half-year issue from Barclays has a 2.25% commission.

UBS tops

The top agent last week was UBS with 59 deals totaling $91 million, or 38.9% of the total. It was followed by JPMorgan and Morgan Stanley.

Not surprisingly given its block trade, GS Finance Corp. was the No. 1 issuer with $64 million in two deals, or 27.3% of the market.

Barclays Bank plc is still the top issuer for the year with $6.94 billion in 1,661 deals, a 14.6% share.

“I’m optimistic on issuance going into the first half.” – A sellsider

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