At the crossover of two summer months, volume stands up at $408 million

By Emma Trincal

New York, Aug. 8 – Agents priced $408 million in 130 deals in the week ended Friday, data compiled by Prospect News showed.

The leftovers from July’s business gave last week a healthy start as $351 million of the week’s notional was priced on Monday and Tuesday, the last days of July, which represented 60% of the action.

Two-month overlap

“This just goes to show that the calendar stuff is pretty well laid out. Most dealers don’t price after the calendar for a number of reasons, usually based on their compensation,” a market participant said.

“Unlike deals put out on the calendar, reverse inquiries or internal distribution don’t have these incentives to be pushed for the end of the calendar.”

He cited other factors dictating when deals get priced.

“Mostly it’s a function of how long the deal has been in the marketplace.”

Market events also play a role, he added.

Hot market

To be sure, last week was rich in events and headlines.

After a three-day selloff due to a 20% plunge in Facebook, Inc.’s stock price on July 26, the market recovered on Tuesday and strongly jumped on Thursday after Apple saw its market capitalization hit the $1 trillion mark, a price move that came after the company’s release of quarterly earnings.

“What’s so funny is that the Facebook debacle was followed by Apple becoming the first U.S. company with a $1 trillion market cap,” an industry source said.

“I don’t know if people had time to digest that.

“The Apple headlines on the heels of Facebook and not much reaction one way or the other can mean two things: either everyone forgot Facebook or there were so much news and so much volatility that people didn’t have nearly the time to react.”

Strong earnings results and the 4.1% GDP figure for the second quarter released on the Friday prior to last week have helped investors turn a deaf ear on a barrage of worrisome trade war-related headlines, he said.

“I think people are pretty bullish again.

“You don’t want them watching the Jim Cramer show and calling their broker every day. But you don’t want them to be hiding their heads in the sand either.

“There’s a balance between ignoring everything and being on information overload. I’m not sure where we’re at...”

Slow month, big week

As expected due to fundamental seasonal trends, July was the slowest month of the year but not by a long stretch.

Agents priced $3.65 billion in July, or $670,000 less than June. May recorded $4.55 billion.

Before that, January through April saw notional sales numbers comprised between $5 and $6 billion, January being the best month with $6.12 billion.

More impressive was the volume seen for the closing week of July. Latest updated figures showed $1.81 billion for the week ended July 27. BofA Merrill Lynch priced $846 million on that week, grabbing 47% of the total volume in just 26 deals.

Among those transactions, BofA Finance LLC issued the largest structured note deal of the year for $187.92 million, if one excludes a series of voluminous convertible bonds priced in the first quarter. BofA’s offering was a 14-month Accelerated Return deal based on the S&P 500 index. The note pays triple the index gain up to a 10.09% cap. The downside participation is delta one.

Year still up

For the year, volume rose to $34.18 billion through Aug. 3 from $30.71 billion a year ago, an 11.3% increase, according to the data.

“Despite volatility surging earlier this year, the market is now retesting its all-time high of January, which signals that this bull cycle is more resilient than many would have thought,” the market participant said.

“People who buy structured notes are buying equity-linked products. Obviously the market being up has an impact, which you see in these figures for the year. It reflects the general positive trend in the equity markets and that’s good for the industry.”

Leverage is king

Last week’s top structure was leverage with a buffer or a barrier. This category of product amounted to $177 million or 43.5% of total notional in 34 deals.

Income products came next with 62 deals totaling $84 million. Most of those products came as autocallable contingent coupon notes.

Separately, worst of payouts notes are making headway: a total of $80 million of them hit the market last week, which accounted for 19.6% of total volume.

Comfort zone

It’s worth noticing that nearly all the worst of deals last week – except one that came in below $2 million – were tied to broadly diversified underliers, not stocks, according to the data.

The underliers are typically the broad indexes – the S&P 500, Euro Stoxx 50 and Russell 2000. In a few cases the trio of indexes is modified by a mix of indexes and exchange-traded funds.

The market participant said he was not surprised.

“Worst of on indices are probably less likely to be prone to negative headlines down the road as opposed to stocks, which can create pretty ugly outcomes. If a stock blows up you’ll get negative press for sure.

“If a broad-based index goes down a lot of people lose money. It’s not the same things as when a stock gets crushed like Facebook.”

If nearly all worst of deals are linked to indexes or ETFs, the majority of notes linked to indexes and ETFs use a different structure, essentially leverage with or without protection. Still the proportion of worst of notes is significant too.

A total of $366 million of notes linked to indexes and ETFs came out last week, the majority of which in indexes. Worst of accounted for $22% of this aggregate.

Big Citi deal

The top deal last week followed a structure type recently put forward by Morgan Stanley Wealth Management.

This time the issuer was Citigroup Global Markets Holdings Inc., which priced $52.46 million of two-year leveraged uncapped notes tied to the MSCI Europe index with a minimum payment of 95% and a 1.25 times upside leverage factor. The deal priced on July 31.

Morgan Stanley Finance LLC itself priced nearly the same deal in mid-July for $9.04 million. The only difference was the leverage factor set at 1.2 times.

JPMorgan’s $30 million

JPMorgan Chase Financial Co. LLC’s $30.05 million of two-year leveraged notes linked to the Euro Stoxx 50 index came next. The payout will be par plus 2.25 times the index gain up to a 42.975% cap.

If the index declines by up to 15%, the payout will be par. Investors will lose 1.1765% for every 1% decline beyond 15%.

More modest in size was the third deal, another product from the Morgan Stanley distribution channel in the form of a dual directional.

Morgan Stanley Finance LLC priced $22.5 million of five-year dual directional notes linked to the S&P 500 index.

If the index finishes at or above its initial level, the payout at maturity will be par of $10 plus the greater of the index return and 40%.

If the index falls but finishes at or above the trigger level, 80% of the initial index level, the payout will be par plus the absolute value of the index return.

If the index finishes below the trigger level, investors will lose 1% for every 1% that the index declines from its initial level.

A total of $37 million of dual directional also known as absolute return notes priced last week in five deals. The $22.5 million Morgan Stanley offering was by far the largest. The second one based on the S&P 500 was issued by HSBC USA, Inc. for $8.1 million.

Morgan Stanley tops

Morgan Stanley was the clear winner last week. In just 24 deals, this agent priced more than $197 million, or 48% of the total. It is rare for any agent aside from BofA Merrill Lynch at the end of the monthly calendar to take such a large market share.

“Size matters,” the market participant said.

“They did half of the week because a big chunk of it came from that $50 million trade. It changes the metrics a lot.”

The second agent after Morgan Stanley was JPMorgan with $86 million in 18 deals or 21% of the total. It was followed by Goldman Sachs.

BofA Merrill Lynch was done for the month as it priced only $23 million in two deals.

Last week’s top issuer was JPMorgan Chase Financial Co. LLC with 18 deals totaling $93 million or 22.8% of the total.

This issuer is also No. 1 for the year having brought to market $5.34 billion in 1,299 trades, a 15.6% share.

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