Month kicks off with volume up 17%, Credit Suisse's $225.9 million deal, year's largest so far

By Emma Trincal

New York, Feb. 12 - Structured products agents sold $524 million in 110 deals in the first week of February, but the volume mostly came from one mega deal, Credit Suisse AG, London Branch's $225.9 million return notes linked to three Select Sector indexes and the S&P 500 index. The deal accounted for nearly half of the week's volume and also is the largest deal of the year so far, according to data compiled by Prospect News.

The year-to-date picture is encouraging with $4.63 billion priced so far as of Feb. 7 compared with $3.95 billion in the same period last year, which represents a 17% hike, according to the data.

A sellsider said that demand for structured notes is on the rise as investors are looking for ways to hedge a possible market correction.

"The market was up 30% last year. We're getting a sense that this level of growth is not sustainable," the sellsider said.

"Everyone expects some form of a pullback. We already had a pullback. We're now 4% off that pullback. But there's a sense that there is more to come. Even if most strategists remain bullish for the year ahead, it's going to be a rocky year."

The structured products market is up 67% in volume for the first week of February compared to the same week last month. More telling, because it's not skewed by the New Year holiday, is the 40% volume increase for the first week of February between this year and last year.

However, some sources played down the natural strength of issuance so far because a lot of the flow can be attributed to the existence of one or two exceptionally large deals.

Top deal of the year

Credit Suisse priced the No 1 offering of the year so far in its $225.9 million of 0% return notes due Feb. 25, 2015 linked to the upside return of an equally weighted basket of three Select Sector indexes and the downside return of the S&P 500 index.

The basket consists of the Select Sector Financials index, the Select Sector Industrials index and the Select Sector Technology index.

Investors will get the positive return of the basket levered up at a rate of 1.09 and the negative return of the S&P 500. The payout does not take into consideration any positive return in the S&P 500 or negative return in the basket.

While not technically a delta-one product given the leverage, a structurer said that the product's structure is a quasi-tracker with no downside protection and a relatively minor upside leverage factor.

Delta-one products, which Prospect News classifies under the "convertible/linked" label, have been the fastest-growing type of structure so far this year, growing 156% to $476 million from $186 million last year.

On Jan. 30, Credit Suisse issued another big deal, $111.37 million of autocallable step-ups linked to the Euro Stoxx 50 index. This offering was sold by BofA Merrill Lynch. Last week's giant deal had JPMorgan for agent.

Leverage

Leverage remains the dominant structure with $1.42 billion sold this year. But volume is down 13% from last year. When breaking down this structure type between leverage with some form of downside protection and leverage with full downside exposure, the trend this year shows a push toward more buffering and more protection, according to the data. Bullish leveraged notes have declined by 38% while sales of barrier/buffered notes have increased by 23%.

There has been a reverse in the trend regarding protection. Last year, the split between pure bullish leveraged products and barrier or buffered leveraged notes was 60% and 40%, respectively. It is now roughly the opposite (42% versus 58%), according to the data.

"Last year, the investment style was buy-and-hold. This year, definitely, people are concerned about the downside, which translates into more demand for barriers and buffers," the sellsider said.

"The rationale for investors is I don't mind paying for that protection because I don't think we'll get the huge upside we got last year. Last year, it was all about give me more upside. This year, the theme is more like give me more downside protection, a barrier or a buffer."

Autocallable

Autocallable reverse convertibles have continued to rise in volume, following last year's trend. Those products, which make for 21% of the total volume so far this year, amount to $954 million, almost 37% more than last year.

"People want yield. That's as simple as that," the sellsider said.

"Rates haven't moved up as much as we expected them to. Yields are still relatively low. We see spikes in volatility. People are monetizing that. They're selling vol; they're getting yield. Yield still remains a core piece of any portfolio. You can get some yield and be outright bullish.

"Any income play people can get outside of the traditional strategies is going to be popular. People are concerned about the tight spreads over Treasuries they're getting on their bonds. We have yet to see interest rates spike the way people have been talking about."

Last week saw 61 autocallable reverse convertible products, or 23% of the total. None of those deals, however, were particularly large in size.

Deutsche Bank AG, London Branch priced the largest one in this category, which was also the No. 4 deal for the week with its $19.99 million of trigger phoenix autocallable optimization securities due Feb. 8, 2019 linked to Apple Inc. The coupon barrier and final barrier are 75.6% of the initial price. The notes pay a contingent coupon at an annualized rate of 8% based on monthly observations. The autocall trigger, also observed monthly, is the initial price. In the case of a barrier breach, investors will be fully exposed to the downside.

For the structurer, inclusion of autocall features has given issuers a wider range of pricing opportunities.

"Autocallables allow you to make a longer structure shorter since you might be called on a shorter notice. Clients forfeit a higher volatility in the future," he said.

"Right now, we're not in times of stress, so volatility in the short term is lower than volatility in the long term.

"From a structuring standpoint, the autocallable makes sense because we'll take the average between the short-term and long-term vols to create something more attractive, which can translate into better terms, a higher coupon or a more defensive barrier, for instance. The structures can look very appealing. You may have the 18-month volatility higher than the six-month volatility. You'll take the average at 12 months, but you can get called in six months. You write mid-term volatility but get called short term. It's a good play in today's market."

Equity, stocks

The bid on equity-linked notes is still very strong this year. Equity-linked notes make for 83.5% of the total versus 78.5% last year, according to the data. Single stocks have grown faster than indexes, but indexes, with 52.5% of the volume, continue to represent the main source of equity-linked notes issuance versus stocks, ETFs or baskets of stocks, the data showed.

Last week, however, saw a third of the volume sold in single-stock deals, which is higher than the 26.5% average for the year. The second, third and fourth top deals were stock-linked products last week.

Equity index-based products, however, tend to dwarf stock deals in the last week of the month, sources said.

Bank of America Corp. issued last week the second largest deal, $35 million of 8% floored participation notes due Feb. 10, 2015 linked to the common stock of Allergan, Inc.

The third offering was brought to market by Goldman Sachs Group, Inc. in its $25 million of 0% callable exchangeable equity-linked notes due Feb. 19, 2021 linked to Kansas City Southern shares. The notes are exchangeable in whole or in part for a number of shares of Kansas City Southern stock equal to the exchange rate or, at the issuer's option, the exchange value in cash. The notes are also callable after five years.

The solid issuance pace as well as the popularity of the equity asset class were both the result of current market conditions, the structurer said.

"People took the opportunity to invest at the bottom of the small correction we've had. Most investors know it's best to buy on the dip. It becomes a question of timing," the structurer said.

"We had two years of a bullish market. People are getting more confident. More actors are doing something, buying stocks or buying structured products. Those already in the market are willing to change allocation or style in order to go to more conservative instruments. Structured notes in general offer that advantage," he said.

JPMorgan was last week's top agent with 15 deals totaling $259 million, or nearly half of the total volume. Its top $225.9 million deal overshadowed all the others 14 deals, which together represented only $33 million.

The second agent was UBS followed by Barclays.

"Everyone expects some form of a pullback." - A sellsider

"More actors are doing something, buying stocks or buying structured products." - A structurer

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.