Declining sales confirmed: yearly volume down nearly 50% in worst start to year since 2009

By Emma Trincal

New York, Feb. 22 - The volume of structured products sales continued to be slow by historical standards last week, according to data compiled by Prospect News on weekly, monthly and year-to-date figures.

And yet, the Dow Jones industrial average ended last week at a 52-week high, which led some sources to conclude that too much bullishness may not be so good for structured products.

Back to 2009

"The [equity] market has been up since the beginning of the year, not just in the U.S. but in Europe too. This in general should make investors in structured products more bullish," a sellsider said.

"However, for whatever reason, the start of this year in structured notes is different."

Excluding exchange-traded notes, agents have priced $3.82 billion in 2012 through Feb. 18, a 46% decline compared to the $7.03 billion sold in the comparable period of 2011, according to Prospect News data.

One has to go back to 2009 (from Jan. 1 to Feb. 18) to find weaker volume. Agents sold $2.15 billion in the wake of the Lehman Brothers collapse.

During the comparable period of time, sales amounted to $9.32 billion in 2008 and $5.19 billion in 2010.

The number of big deals points to a weakening supply. In the first seven weeks of the year, agents sold seven deals in excess of $50 million, compared with 34 during the comparable period of last year.

Only three deals in excess of $10 million were issued last week versus 12 the week before. The top offering last week did not even reach $15 million in size.

"I've seen deals getting smaller, but I didn't realize it was to that degree," a market participant said.

For the month through Feb. 18, sales fell by 22% to $913 million from $1.17 billion during the same period of January. The number of deals increased to 307 from 261, up by more than 17%.

Beware the charts

Some said that the overbought equity market is not helping structured products sales.

"We haven't bought enhanced products or principal-protected notes in a while. The market has gone up so quickly we're just afraid we're going to buy high and that if the market reverts in three months, we're going to be on the wrong side of the trade," said Andrew Valentine Pool, main trader at Regatta Research & Money Management.

This does not mean that Pool is liquidating his equity allocation.

"We're willing to hold positions a little bit longer if we know we can get out," he said.

"But when it comes to structured products, if you're locked in, you're locked in. In this market, and if you look at the charts right now, we don't think it's such a good idea to get in at those prices and be locked in."

Sentiment

A second reason invoked by sources was investors' lack of conviction about the longevity of the bull run.

"I really don't know how to explain why the market is so slow other than the fact that it probably has to do with investors' sentiment," the sellsider said.

"My guess is that it's not just structured products that are suffering.

"You may have some apathy among investors. Maybe everybody is sitting in money markets."

Some said they did not expect the global rally to have such magnitude given the current geopolitical environment.

"There is so much stuff going on in the Middle East and Europe. I'm surprised the U.S. markets have not reacted more negatively," Pool said.

Demand and design

Another cause potentially dampening sales volume could simply be issuers themselves, according to Pool, who said that perhaps supply is not meeting investors' expectations in this uncertain market.

"If we were to buy an enhanced product on the S&P, and say the S&P is at 1,000, I would be happy with a 10% buffer. But with the benchmark at 1,350, we wouldn't want to take anything less than 20%.

"In this market, with a 20% buffer, you hardly get any upside. You buy a product with no upside just for the protection. We'd rather be in cash," he said.

"Maybe issuers have not been able to come up with compelling designs," the sellsider said.

"I mean, it's either the structured notes that are offered that are the problem or it's the lack of appetite on the part of investors. It's hard to say."

Issuers have faced some structuring challenges of their own, he said, but not more than before.

"In principal-protected notes, the lower interest rates are definitely hurting issuers' ability to do something compelling," this sellsider said.

"But that can't be the problem because most notes are not principal-protected, so it's not going to have such a big impact."

However, the quality of the product does matter, he noted.

"If issuers can offer notes that give investors a definite advantage over a direct equity investment, if they can come up with really compelling products, then I think volume will go up," he said.

ETFs, protection

Equity-linked notes declined by 25% for the month to date to $655 million from $880 million in January. The decline was almost entirely due to a lower volume in equity indexes. Stocks increased by nearly 5%, and notes tied to exchange-traded funds saw a real increase of 46.5% to $66 million.

Currency deals also gained in volume but remained limited to 6.5% of the total.

The volume of sales for all other asset classes fell.

In terms of structures, the decline was also broad for the month. The exception was leveraged notes with partial downside protection, which went up 15%. Agents have sold 31 of such deals totaling $254 million this month.

"People are looking for downside protection in this market. They want a buffer or a contingent barrier regardless of the structure," the sellsider said.

Last week's top deal list revealed that in some cases, investors are looking for even more. The largest and third-largest deals offered full principal protection.

Top offerings

JPMorgan Chase & Co. priced $14.27 million of range accrual notes due Feb. 17, 2027 linked to six-month Libor and the S&P 500 index. It was the biggest non-ETN offering of the week.

The coupon accrues at 6.5% per year on each day that six-month Libor is 6% or less and the closing level of the S&P 500 index is at least 890. The notes are redeemable after one year.

The third top deal, also offering full principal protection, was brought to market by Morgan Stanley. It priced $10.53 million of 0% market-linked notes due Feb. 21, 2018 linked to the Dow Jones industrial average. The payout at maturity offers a minimum return of 5% and unlimited upside.

The second-largest deal last week provided access to a special strategy and asset class. Deutsche Bank AG, London Branch priced $11.61 million of securities due March 20, 2013 linked to the Deutsche Bank Commodity Booster OYE Benchmark Light Energy Total Return index.

The index seeks to outperform the S&P GSCI Light Energy index by selecting constituent commodity futures contracts using Deutsche Bank's proprietary Optimum Yield Enhanced methodology.

"Access trades always work because people want to be able to enter hard-to-reach asset classes or strategies," the sellsider said.

"Overall, tactical trades drive market volume."

JPMorgan was the top agent last week with 14 deals totaling $38 million, or 29.38% of the total. It was followed by Deutsche Bank and Morgan Stanley.

"In this market ... you buy a product with no upside just for the protection. We'd rather be in cash." - Andrew Valentine Pool, main trader at Regatta Research & Money Management

"I mean, it's either the structured notes that are offered that are the problem or it's the lack of appetite on the part of investors." - A sellider

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