Structured products issuance slow amid short week; $204 million prices ahead of Fed move

By Emma Trincal

New York, Sept. 16 – It was another lackluster week for structured products issuance during the four days following Labor Day even if U.S. stock markets finished the week on a rally note.

Agents sold 58 deals totaling $204 million, according to data compiled by Prospect News. There were only three deals in excess of $20 million and not one offering over the $50 million mark.

Fed pause

“The market has been dead for the past month, month and a half,” a market participant said.

“Right now, it’s on hold. Everybody is waiting for the Fed next week.

“I don’t see this market in a very bright light, to tell you the truth. Commodities are plunging; oil has been falling all summer, even though it has been up a little recently. But the uncertainty is still there.

“As a result, everybody is rushing to equities.

“The market has been rallying lately because people are starting to see that the Fed may not raise the rates next week. They may only do it later this year or even next year.

“So we see people buying tons of one-year notes with two, three times leverage and no protection. I’m not sure it’s the best way to control risk. Maybe the idea is to enter at these lower levels. That sort of makes sense if that’s the rationale. After all, the U.S. stock market is still down from the mid-August levels. So bulls are rushing into equities.

“Still. I think it’s a little bit risky at this point.”

Year to date pace outperforms

Volume so far this year is still greater than last year, according to the data. A total of $31.84 billion has been brought to market as of Sept. 11, a 7.37% increase from last year’s comparable period.

“Look, I’m still hopeful. We’re still ahead,” a sellsider said.

“People are in a wait-and-see mode with the Fed next week. We had a bad couple of weeks a month ago. But it’s not like we’re entering into a bear market; at least people are no longer as negative as they were in August. There’s still uncertainty ahead. But at least, it looks like investors are no longer in this gloom-and-doom mode.”

Fewer deals, bigger sizes

Agents this year have been pricing fewer deals than last year – 6,087 versus 6,403, a 5% drop – but this sellsider did not see this trend as negative.

“First, I don’t pay that much attention to the number of deals honestly. We don’t get paid by the number of deals. We get paid by the amount of dollars we get in,” he said.

“And those numbers are actually encouraging. If volume is up by 7% and the number of deals down by 5%, it simply means that we’re pricing chunkier deals. More money is being made. I’m not too concerned about a decline in the number of deals when volume is up or even when volume is down as long as it’s not down more than the number of deals. It’s actually a good sign. Your average deal size is up.”

He took the example of UBS, an agent known for its sales of a large quantity of smaller deals.

UBS this year saw its volume drop 9.75% to $3.74 billion from $4.15 billion, according to Prospect News data. The agent’s deal count also declined but by a greater percentage: down 26% to 1,817 from 2,454. The figures showed an average size deal of $2.05 million this year versus $1.68 million last year.

“Their volume is down but not as much as the number of deals they’re pricing. It’s not so bad, actually,” he said.

“If I was running UBS, I wouldn’t be too unhappy about these numbers.”

Baskets of stocks

Baskets of stocks represented the most popular underlying asset used by issuers last week. The asset class accounted for 30% of the total versus less than 4% in average for the year, according to the data.

Only three offerings were based on this type of underlying, including the top deal, which captured alone a fifth of the total volume. While much smaller, the two other basket-linked deals were noteworthy for their innovative structures.

JPMorgan Chase & Co. priced the top deal with $42.87 million of 0% leveraged notes due Dec. 16, 2019 linked to the common shares of the 25 Spanish companies included in the MSCI Spain 25/50 index.

The payout at maturity was par plus triple any basket gain, up to a maximum return of 75%.

Investors were exposed to any losses.

Nomura 2x down

The other unusual basket-linked deal came from Nomura America Finance, LLC, which priced $13 million of 0% capped accelerated return securities due Sept. 11, 2019 linked to a basket of 10 real estate investment trusts and business development companies. The deal introduced a two-times leveraged participation on the upside and on the downside. There was a 55% American barrier on the downside and a 120% upside cap.

Investors were to lose 100% of their principal and not 90% if the basket was down by 45%.

“It’s different. Usually leverage on both sides is used in ETNs or ETFs. You can see that with some UITs. But all these are different wrappers. It’s not that common to see that on a regular structured note,” he said.

“It looks like a reasonable structure. You hit 45% and you have to give up 10%. But at this point you’re already down 90% and the issuer has to get out. They have to sell the instruments very, very quickly.”

Lock-in feature eyed

Finally Morgan Stanley priced a small worst-of fixed coupon lock-in RevCons tied to three stocks – Credit Suisse Group AG, Adecco SA and Novartis AG. The size was $4.28 million. The underlying was not technically a basket since the payout was a worst-of. But the deal was notable in that it introduced a lock-in feature giving investors a chance to get full protection at maturity if on any weekly observation date, all three stocks were up 3% from their respective initial level.

The use of baskets offers some advantages, explained the sellsider, who said he was referring to standard baskets, not a group of individual stocks separately determining the payout in a worst-of.

“With a basket, pricing will depend on the structure,” the sellsider said. “But if you’re talking about the most common type, the typical leveraged buffered note, pricing, when using a basket, may be less attractive because those products are short volatility.

“Since a basket is more diversified it’s also less volatile. You’ll be selling volatility at a lower price.

“On the other hand, there are reasons why people would do that. A diversified basket is safer. It’s less likely to lose.”

Other deals

The second deal for the week was HSBC USA Inc.’s $35.71 million of three-year autocallable market-linked step-up notes linked to the Euro Stoxx 50 index. The call premium was 13.02%. The call was triggered at the initial price based on two annual observation call dates. If the index finished above the step-up value – 130% of the initial level – the payout was par plus the index gain. Between 100% and 130% of the initial price, investors received a step-up payment of 30%. There was no downside protection.

JPMorgan Chase priced the third deal for $28.29 million. It was a two-year note with a 500% participation rate and a 34.35% cap with full downside exposure. The underlying was the iShares MSCI Emerging Markets fund.

The top agent was JPMorgan with $80 million sold in 10 deals, or nearly 40% of the total. It was followed by Bank of America and Morgan Stanley.

© 2015 Prospect News.
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