Banner year ends quietly with $104 million issued during holiday-shortened week

By Emma Trincal

New York, Jan. 3 – Structured notes issuance was muted in the last trading week of the year between Christmas and the New Year, reflecting the light trading volume in the equity market, which was no surprise as most investors and money managers were on holidays.

Agents priced $104 million in 68 deals, with half the trades taking place on the day following Christmas and a third on the 27th, according to preliminary data compiled by Prospect News. Figures are subject to upward revisions due to lags between pricing and filings.

The stock market ended down on the last day of 2017 but up strongly for the year. As measured by the S&P 500 index, the performance was a drop of 0.5% on Friday but a gain of 19.4% for the year.

Tax trades

“Volatility is low and still getting lower. Obviously the market ended up on a higher note,” said Paul Weisbruch, vice-president of options sales and trading at Street One Financial.

“There was some end-of-the year profit-taking on the final day of the year. But look, on the first two days of 2018 we’re at fresh new highs.

“That tells me that there was some intentional profit-taking and tax-related trading on the last day of the year. People were happy with the gains and did some selling,” he added.

Last-minute tax selling must have influenced the pace of issuance in structured notes as well, he said.

“It probably didn’t help. That and the holidays.”

Indexes first

During this quiet period, investors took no chance stock-picking at the last minute. Notes linked to equity indexes made for 77.5% of total sales.

Structures were fairly balanced between autocallable contingent coupon deals representing 38% of the total in 40 deals and leveraged notes with barriers or buffers accounting for 40% in 10 deals, the data showed.

Most of the single-stock deals were found in the first category but were too small in size (less than $1 million) to significantly weigh on the totals. The larger share of autocallable contingent coupon products was worst-of deals tied to equity indexes.

Bond bears never learn

“The chase for yield will continue this year,” said Weisbruch.

“Everyone has been doing this trade for probably a decade, quite frankly.

“You can sit out the market or be bearish that market by shorting it. But it’s a tired reasoning.

“The bears keep on expecting rates to go higher, they’ve been shorting Treasuries for a while and they’ve miscalculated that move.

“Today high-yield bonds are rallying,” he said, pointing to the SPDR Bloomberg Barclays High Yield Bond exchange-traded fund, which was up a third of a point during Wednesday’s mid-day trading session.

“It means people are willing to accept lower interest rates just to get exposed to that asset class.”

The high-yield ETF yields 5.65%.

Many contingent coupon deals that price in the United States offer higher annualized yields due to the equity risk they carry as well as the use of options such as calls and worst of provisions to add even more premium, according to the data.

Second best

Reflecting on 2017, U.S. structured notes had their second best year ever, according to the data.

Agents sold $49.35 billion in 13,235 deals, which was also a record year in terms of number of offerings.

Volume was up 27.5% from the previous year’s $38.72 billion.

It was the second best year volume-wise after the $50.52 billion brought to market in 2008. During this fateful year, 85% of the notional amount priced before September when the demise of Lehman Brothers triggered the financial crisis.

Last year’s growth was in large part the result of a strong bull market as U.S. stocks had their best year since 2013.

In terms of monthly issuance volume, December was the weakest month of last year with $2.91 billion, behind August’s $3.79 billion.

The best three months were March with $5.24 billion, May with $4.79 billion and January with $4.39 billion.

UBS’ success story

One of last year’s biggest stories was the rise of UBS as top agent partly due to the explosion of the number of deals it handled, up 86% from the previous year.

UBS sold $9.85 billion in 4,285 deals, which means that a third of the deals issued last year were sold by this agent. UBS was closely followed by Bank of America with $9.44 billion in 447 deals. As the data is subject to change, it may be too soon to call a winner. But market participants have taken notice of the emergence of UBS.

“UBS has two ties of distribution: the calendar offerings and the reverse inquiries, which have increased massively,” said one of those market participants.

“They’re doing smaller sizes. Technology platforms allow them to do more reverse inquiries coming from the brokers. The result is obvious. It has put UBS over the top on a notional basis. They’re succeeding on combining two tracks: basic bread and butter of the calendar offering and technology offerings.”

Top deals

By size, GS Finance Corp.’s $14.18 million of 10-year worst of contingent yield notes linked to the Euro Stoxx 50 index and the Russell 2000 index topped the list of offerings last week, according to the preliminary data.

The contingent annualized coupon of 7.05% is paid quarterly based on a 70% coupon barrier. After one year, the notes are automatically called on a quarterly observation date above initial price. The barrier at maturity is 50%.

The second deal was a leveraged play brought to market by HSBC USA Inc. in $12.42 million of six-year barrier leveraged notes linked to the S&P 500 index.

The upside participation rate is 131.45% of the index return. The barrier level is 65% of the initial price.

Morgan Stanley Wealth Management handled the distribution.

Steps are adopted

Equity-linked step notes, which provide a minimum return on the upside with no cap if the underlying finishes above the step level, have grown in popularity. Mostly sold by BofA Merrill Lynch and to a lesser degree Morgan Stanley, they are being adopted by other dealers as well.

JPMorgan Chase Financial Co. LLC priced $8.55 million of that structure in the third biggest offering of the week.

The five-year trigger absolute return step securities linked to the Euro Stoxx 50 index show a step return of 49% and a downside barrier of 70% of the initial price above which index declines turn into gains. UBS Financial Services Inc. is the agent.

Barclays Bank plc was the top issuer last week with four offerings totaling $20 million or 19% of the market.

This issuer is also No. 1 for the year with $7.06 billion in 1,461 deals.

© 2015 Prospect News.
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