Agents priced $241 million of structured products before May’s closing week; investors on sidelines

By Emma Trincal

New York, May 25 – It’s too soon to gauge the robustness of structured products issuance for May, but last week recorded a slowdown with $241 million sold in 93 deals. It was the third week of the month.

Updated data compiled by Prospect News showed a deceleration from the previous week’s $361 million of 30%. When compared with the third week of April, which saw the pricing of $402 million, the drop in notional was 40%.

Surprisingly the first two weeks of May with $968 million fared much better than the first half of April, which recorded $646 million in sales, the data showed.

As a result, the month through May 13 still holds well compared to the same period in April, with $968 million issued versus $645 million, respectively, a 50% increase.

But the upbeat picture stops here. Compared to a year ago, volume during the May 1-13 period is down 40% from $1.62 billion.

Year to date, the negative trend persists with $13.82 billion sold, down 25.5% from $18.53 billion.

Market unease

Sources said the decline is market-induced. Investors remain nervous about a possible June rate hike amid a tepid economic growth.

“There’s a lot of uncertainty in the market. We don’t see a lot of appetite for people to invest,” said Mark Dueholm, chief trader at Landolt Securities, Inc.

“There are so many things you can worry about in this environment from China to Brexit that I think people are a little bit wary making too big a move, not to mention what the Fed is going to do with interest rates.”

The top deals last week showed more diversity than usual in structures.

The first one was a contingent coupon deal. But a few caveats –a worst-of payout based on three underliers; a call option versus an autocall and a daily observation for the coupon barrier – made it slightly unusual.

JPMorgan’s $30.5 million

JPMorgan Chase Financial Co. LLC was the issuer with JPMorgan Chase & Co. guaranteeing the notes.

The $30.51 million two-year contingent income callable securities were linked to the worst performing of the Euro Stoxx 50 index, the Russell 2000 index and the S&P 500 index.

Each quarter, the notes paid a contingent coupon at an annual rate of 15.1% if each index closed at or above its downside threshold level, 75% of its initial index level, on each day during that quarter.

The notes were callable at par on any quarterly date.

The final barrier was 75% of the initial price based on the final closing price of the worst-performing index.

Distribution was through Morgan Stanley Wealth Management.

Oil basket

The second deal illustrated Raymond James’ continued commitment to put together stock picks for specific sector plays.

Its new basket used as the underlying for the notes was the Raymond James Oil Focus. The basket was comprised of stocks of Continental Resources, Inc., Canadian Natural Resources Ltd., Concho Resources Inc., EnLink Midstream, LLC, Halliburton Co., Hess Corp., Newfield Exploration Co., Occidental Petroleum Corp., Patterson-UTI Energy, Inc., Pioneer Natural Resources Co., RPC, Inc., RSP Permian, Inc., Superior Energy Services, Inc. and Total SA.

Bank of Montreal issued $16 million of delta one equity-linked notes due May 29, 2018 tied to this basket with BMO Capital Markets Corp. acting as the agent.

Issuers have used each year some of Raymond James’ equity analysts baskets or indexes for the underlying of their notes in a bid to attract investors seeking investment themes, stock picks or access to specific strategies.

Sector bets

Some of the most successful issues have been the bi-annual deals of Bank of Montreal based on Raymond James’ Best Picks of the year. Scotia Bank has also priced sizable offerings linked to Raymond James Analyst Current Favorites Total Return index.

But in recent years, Raymond James’ structuring department has worked on a few narrower baskets as well.

Last month, TD Bank priced $1.11 million notes linked to Raymond James sustainability stocks. Earlier this year, Scotia Bank sold two deals linked to Raymond James CEFR Domestic Equity Total Return index, giving investors access to closed-end fund arbitrage strategies.

Raymond James also put together baskets in the energy, financial and housing sectors, each of which has been used for the structuring of notes.

Many market factors have contributed to a trend reversal in oil. After hitting a bottom at less than $30 a barrel in February, prices have extended gains now edging closer to the $50 mark.

“They are continuing to leverage their research group’s expertise and doing short-term static basket trades based on a theme,” a market participant said about Raymond James.

“The program is similar to a UIT platform, theme-based, and not an index. You'll see more of these coming from Scotia, BMO and now TD.”

Range accrual

GS Finance Corp. priced the third deal with $10 million of 15-year callable monthly range accrual notes linked to six-month Libor and the Russell 2000 index. The notes were guaranteed by Goldman Sachs Group, Inc.

The interest rate was the applicable rate multiplied by the proportion of days on which the index closed at or above the barrier level, 75% of the initial index level, and six-month Libor is 6% or less. The applicable rate was 6% per year for the first 40 quarters and 8% per year for the final 20 quarters. Interest was payable quarterly.

The payout at maturity was par.

“I like that one for the duration and the principal-protection. I would prefer a coupon barrier of 60% rather than 75%. But at least it’s fully protected at maturity,” said Dueholm.

The top agent last week was JPMorgan with 24 deals totaling $80 million, or a third of the volume. It was followed by Goldman Sachs and Credit Suisse.

“There’s a lot of uncertainty in the market. We don’t see a lot of appetite for people to invest.” – Mark Dueholm, chief trader at Landolt Securities, Inc.

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