Structured products issuance volume hits $701 million for week amid continued rally

By Emma Trincal

New York, Feb. 6 – Agents priced $701 million of structured products in the week ended Feb. 1, a smaller notional than the previous week’s $1.15 billion, which saw the close of the calendar month with Bank of America leading the game, as always. A total of 288 offerings were brought to market last week, but smaller in size than in the previous week, which counted 149 deals, according to revised data compiled by Prospect News.

JPMorgan was the top agent, selling 62 offerings totaling $188 million, or 26.81% of the total. Bank of America was on pause with $3 million in five deals.

January finish

“It was in-between months with the last few days still in January,” a market participant said.

“But these were probably not all calendar-based offerings where typically brokers need to be done three business days prior to the end of the month.”

To fall into that category, deals would have to have priced on Monday, Jan. 28. There was actually a fair amount of volume pricing on that day: $285 million in 145 deals, or 41% of the total, according to the data.

“Fee-based accounts are indifferent. It makes no difference if you price in January or February for those accounts. You probably had a mix of fee-based last week and a few more subscription-based stuff, but for the most part, the big deals for January calendar priced the week before,” he said.

Nothing “big” indeed came in last week. The top deal was below the $40 million mark, according to the preliminary data.

Bulls are back

The lifted market mood had an impact on what was shown or pulled out, modifying some of the preferred structures seen in the previous weeks.

As of Friday, the S&P 500 index was up 8% for the year. The Dow Jones industrial average moved back to its highest level since early December, prior to the holiday rout that brought to the forefront fears of a bear market.

Several factors last week played out to confirm the bullish momentum of this early part of the year. Federal Reserve chairman Jerome Powell continued to appear dovish, leaving rates unchanged and reaffirming his willingness to move up rates slowly. Apple came out with positive quarterly results showing a jump in revenues. Finally, a strong job report on Friday eased some of the fears of an economic slowdown in the United States.

Growth products

One possible result was the surge in leveraged notes. Those products, which are more bullish than income-oriented structures, took over last week, making for 40% of total notional. Autocallable contingent coupon deals on the other hand accounted for 30% of the total, the data showed. The split is typically even.

The market rebound from the December sell-off has reassured investors.

Fewer investors worry that the market is overpriced anymore, giving bulls a sense of vindication.

“I’ve been through a number of sell-offs before, and I haven’t been selling last year,” a trader said, talking about last quarter’s pullback.

“I’ve watched that stuff come back too many times. Staying put paid off. Right now, the momentum is back. Stocks have rebounded. I’m bullish. I’ve been a bull for so long though. I may be a little bit color-blind.”

For structured products buyers, fears are not completely alleviated as suggested by the distribution of leverage between barriers or buffers (75%) and no downside protection (25%).

“While we see a good deal of the leveraged notes uncapped. We also see more absolute return since there’s still a certain level of uncertainty to have another shakeup,” the market participant said.

Overall however the return of growth products signaled a regained confidence on the part of investors.

“This rally is changing what people are looking for,” he said.

“As stocks have been moving pretty much straight up since the beginning of the year, people are now looking at growth products more than income deals. It speaks to uncapped growth notes,” the market participant said.

Bears in hiding

Along with the rally some structures have lost their appeal while others are making a comeback.

An example is last week’s disappearance of bearish structures.

Back in the first two or three weeks of January, several issuers were showing and pricing bear notes with a down and out put option. A knock-out triggered the mere return of principal with no other payout than a meager rebate when applicable.

Sometimes named “shark notes,” those short-term principal-protected notes offer absolute return on the downside up to a barrier. When the barrier is knocked out, investors lose their gains. In a bear note, the gains are only made if the index is above the barrier and lower than the initial level. If the index is positive or breaches the barrier on the downside, investors only receive their money back plus (but not always) a very small bonus.

“I think you’re not seeing so many right now because of the structure itself,” the market participant said.

“It’s not so much because the market is up. People are always interested in bear notes as a hedge. We’ve heard inquiries and positive feedback. But these are not working. People like to be right. But they don’t like the idea of being too right and not being paid for it,” the market participant said.

“If you’re right and hit a cap, that’s one thing. You just don’t get more. But if you have to lose your return, that’s another thing.”

Better hedging alternatives exist for investors, he noted.

“You can earn a fixed yield, lock in a fixed amount of income and benefit from the barrier at maturity,” he said.

Lookback coming back

One structure seen since January, which is picking up as a new trend is the use of so-called “lock-in” or lookback.

Those products guarantee a minimum return of par plus the greater of the index gain and the lock-in observed on a specific observation date. The lock-in is the equivalent of a high-water mark.

“This reflects the potential of this industry always able to create more unique structures,” the market participant said.

“People are always nervous about holding a single maturity date impacting their return. Having the choice of other dates used as reference either through averaging at maturity or through a best-of like those lookbacks is a positive for investors.”

While no lock-in notes priced last week, a few were announced for pricing at the end of the month. Morgan Stanley Finance LLC is showing a five-and-a-half year lock-in on the Euro Stoxx 50 index. Barclays Bank plc will price two five-year deals on the S&P 500 index. Those three deals are set to price on Feb. 28.

Top deals

JPMorgan Chase Financial Co. LLC priced the top deal of the week with $39.27 million of 14-month leveraged notes linked to the S&P 500 index.

The payout is par plus three times the index gain up to a 16.5% cap.

Investors will have one-to-one exposure to the decline.

Morgan Stanley Finance’s $26.34 million 10-year trigger gears tied to the S&P 500 index is an unusually long-dated product with a 65% barrier on the downside and two-times upside uncapped exposure.

Morgan Stanley & Co. LLC and UBS Financial Services Inc. are the agents.

The third deal, another JPMorgan Chase Financial-issued note, consists of $23.42 million of one-year autocallable contingent interest notes linked to the lesser performing of the Nasdaq-100 index and the S&P 500 index.

The contingent coupon is 10.5% per annum based on a 65% coupon barrier observed quarterly. The notes are autocallable on a quarterly basis if each index closes at or above its initial level. The repayment at maturity is based on a 65% trigger level observed during the life of the notes.

The payout at maturity will be par unless either index finishes below its initial level and either index ever closes below its 65% trigger level during the life of the notes, in which case investors will be fully exposed to any losses of the worse performing index.

Nasdaq reigns

The Nasdaq is becoming an index of choice for referencing worst-of notes linked to equity benchmarks. It was used in 11 deals last week totaling $36 million in conjunction with the S&P 500, the Dow Jones industrial average or the Russell 2000, according to the data.

While this amount seems small it is still higher than the use of the Euro Stoxx in combination with one of the U.S. indexes, which amounted to only $2.27 million in four deals.

“It goes back to December when tech got beaten up. Now people see opportunities in the sector. Valuations are much better now,” the market participant said.

The Nasdaq also offers the benefit of more diversification.

“You have 100 names versus only a few for the Dow. People like broader indices,” the market participant said.

UBS was equally ranked as JPMorgan last week with $188 million in 57 deals, or 26.78% of the total. It was followed by Barclays.

The biggest issuer was JPMorgan Chase Financial with 29.9% of the total in 63 deals totaling $210 million.

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