Structured products issuance slows amid global sell-off in oil, stocks; short-term products eyed

By Emma Trincal

New York, Jan. 20 – Structured products issuance volume decelerated in the second week of January in the midst of a global market sell-off triggered by plunging oil prices and stumbling Chinese stocks.

Agents sold $297 million in the week ended Friday, or half the $581 million priced the week before, according to data compiled by Prospect News.

The number of deals also fell by half to 51 from 100.

While the reading of a trend is premature, so far the first half of January lags behind the same period last year.

Volume from Jan. 1 to Jan. 15 was $878 million, an 11.5% decline from $992 million a year ago, the data showed.

Global market slide

“It’s only two weeks’ data. I’m not concerned about it,” a market participant said.

“I’m more concerned about the stock market right now. Look at last week. And look at today.”

Global markets plunged on Wednesday. The S&P 500 index in midday session was down more than 3.50% at 1,812.29.

“When you have an established bear market trend, it’s never good for structured notes. People run for the exit. But hopefully we’ll go back to positive territory and see what happens with structured notes.”

The week ended with the Dow Jones falling more than 500 points while oil and Chinese stocks continued to plunge.

Investors, analysts said, are worried about signs of a global economic slowdown and the possible beginning of a bear market, analysts said.

The S&P 500 index on Friday had lost 2.71% for the week. It was down 8% for the year to date.

Oil in focus

“People see the rout in oil prices and the slowdown in China, which is not as horrific as forecasted but I guess it’s enough to scare everybody,” a sellsider said.

“I’m astonished by the market right now because when you look at recent earnings from companies like Bank of America and Goldman Sachs or others, numbers aren’t so bad. Maybe people are just disappointed somehow.

“Oil prices are affecting the whole world.”

The oil price slump, he continued, has a negative impact on emerging markets, whose economies depend on oil revenues.

“Emerging markets are under pressure and their currencies are depreciating as never before. Investors are pulling dollars out of Russia,” the sellsider said. “They’re also pulling money out of Hong Kong, which puts the Chinese stock market under even more pressure.

“Volatility spooks investors in structured products, of course.

“Nobody does anything.”

Sweet and short

One main trend last week was the appetite for shorter-dated deals. Those were on top of the list by size.

The No. 1 offering was Canadian Imperial Bank of Commerce’s $40.17 million of 14-month leveraged notes linked to the S&P 500 index. BofA Merrill Lynch was the underwriter.

“The payout at maturity was par plus triple any index gain, up to a maximum return of 15.75%.

Investors were exposed to any losses.

The third deal brought to market by GS Finance Corp., a subsidiary of Goldman Sachs Group, Inc., was a 16-week tracker note linked to the Topix index.

The Goldman Sachs’ Topix offering, which the market participant said was “likely to be institutiona,” was not the first deal of this type. It is also a monthly routine for Merrill Lynch to price three-year leveraged and capped notes over a 14-month term.

Yet the trend was consistently short-term.

JPMorgan Chase & Co. for example priced $38.08 million of 19-month buffered leveraged notes linked to the S&P 500 index. This product, the second in size, offered 1.5 times leverage subject to a 19.87% cap with a 12.5% geared buffer on the downside.

The average tenor seen last week was 2.11 years. There were only three deals longer than three years. Two-year maturities were the most widely used, or 37.25% of the time, according to the data.

Pricing

The market participant explained the trend in terms of pricing advantage.

“Investors who sell volatility need to capture enough premium to get attractive terms,” he explained.

“When vol. is up, it makes more sense for the issuer to do shorter deals.

“Volatility is not linear and you get more value per annum going short term.

“Say you sell a one-year option and it gives you 1% in premium. The selling of a two-year option is not going to give you 2%.

“Going short term when volatility is up simply gives investors more value. The cosmetics of the deal become more attractive.”

For the sellsider, the short-term trend seen last week may simply reflect the reluctance of investors to embrace contrarian investing tenets.

Short sighted

“The pickup in shorter-dated deals doesn’t surprise me,” he said.

“Hedge funds, CTAs are playing the short-end right now. They’re following the trend. You rarely see structured product investors going against the trend.

“Issuers will issue products when the underlying goes up. They’ll stop when it goes down. They don’t really care about long-term value. They try to maximize volume.”

He noted that the Hang Seng China Enterprises index was at its lowest since 2011.

“At some point you have to look at the fundamentals,” he added.

“If I had to buy a structured note right now, I would be looking at China. But you’re not going to see many notes tied to Chinese stocks right now.

China, oil

The last offerings linked to Chinese equities were brought to market last year by Morgan Stanley, according to data compiled by Prospect News.

One was $2.86 million of 0% Performance Leveraged Upside Securities due April 4, 2017 based on the iShares China Large-Cap exchange-traded fund. The most recent one, it priced on Nov 30.

The other, which priced on July 28, was $2.5 million of 0% performance securities due July 31, 2018 linked to the Hang Seng China Enterprises index.

“Same thing with oil,” he said.

“I would buy oil right now although oil is very difficult. There’s a very strong contango. You get killed by the rollover costs.”

Most oil-related structured notes, which have recently priced, have been tied to oil stocks rather than on the commodity price, according to the data. The most widely used underliers have been the Energy Select Sector SPDR exchange-traded fund and the SPDR S&P Oil & Gas Exploration & Production ETF.

The top agent was Goldman Sachs with 13 deals totaling $91 million, or 30.6% of the total. It was followed by JPMorgan and Bank of America.

“When you have an established bear market trend, it’s never good for structured notes. People run for the exit.” – A market participant

“If I had to buy a structured note right now, I would be looking at China. But you’re not going to see many notes tied to Chinese stocks right now.” – A sellsider

© 2015 Prospect News.
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