Structured products tally $338 million for week; digitals, single-asset index-linked notes eyed

By Emma Trincal

New York, Nov. 15 – Structured products agents priced $338 million in 87 deals in a week dominated by index-linked issuance and digitals as both stocks and bonds rallied in the overall market, according to preliminary data compiled by Prospect News for the week ended Friday.

The equity index issuance tally of $266 million in 61 offerings made for 79% of the total, which was above the average of 67% for the year to date.

Digital, one index

One trend was the prominence of digital notes, which accounted for nearly a third of the total in 17 deals totaling $107 million.

“It’s surprising to see such a strong flow of digitals,” a sellsider said.

“It shows the broadening demand for those notes in the market. Digitals have become very popular.”

The majority of those notes are tied to single indexes. The bet is “in-the-money,” meaning that the trigger for the payout is below the initial level. Finally, the downside structure increasingly relies on geared buffers, whose levels coincide with the in-the-money digital option strike.

“They’re already in the money so you can get paid if the index is negative within a range. Geared buffers are more and more widespread. They were out of vogue for a long time. But people seem to have adopted them,” this sellsider said.

The top digital deal last week was JPMorgan Chase Financial Co. LLC’s $25.64 million of 14-month notes linked to the S&P 500 index.

If the index finishes at or above 87.5% of the initial level, investors receive a 10.42% digital payout; otherwise, they lose 1.1429% for every 1% decline beyond the 12.5% buffer.

Disney

One oddity seen last week was the presence of two small digital trades linked to a single stock.

Both 18-month notes, issued by JPMorgan Chase Financial for $2 million each, were linked to Walt Disney Co. The notes featured a 15% geared buffer, a strike of 85% and a digital payout of 21.1%.

“This is interesting. We hardly see digitals linked to a stock,” said the sellsider.

“I like the structure. In order to build those notes, the client has to have a view on the name though.

“These are small deals, but if we have a new trend picking up, tiny deals can turn into big ones.”

Fewer autocalls

Usually when digital sales exceed 30% of any weekly tally, notional, such market share remains on par with that of autocalls. The surprise last week was the lower portion of autocalls making for only 21.4% of the total in 32 deals totaling $72 million.

The year-to-date penetration rate for this structure category is 47%.

Even leveraged notes accounted for a greater percentage of total sales than autocalls last week with $81 million, or 24% of the total.

The top leveraged deal was JPMorgan’s $31.47 million of 13-month capped enhanced participation equity notes on the S&P 500 index. With a 1.5x leverage multiple and a 19.575% cap, investors were fully exposed to any index decline.

Given the strong presence of digital notes, which by default are not worst-of structures, index-linked notes tied to a single asset represented two-thirds of the total sold last week in 40 issues or $221 million. This total also represented 83% of the index-based tally. The remainder – $45 million or 13% of the total – were worst-of. Worst-of were essentially callable income-oriented products.

ETFs

ETF-linked notes were hardly visible last week with only four offerings totaling $18 million. The data remain preliminary and will be revised upward for totals and asset classes breakdowns alike.

The top deal was BofA Finance LLC’s $15 million of one-year Phoenix autocalls linked to the SPDR S&P 500 ETF Trust. The other ETFs used in three very small deals were the SPDR Dow Jones industrial average ETF Trust, the iShares Russell 2000 ETF and the SPDR Gold Trust.

As always, the use of single stocks was scarce, the asset class making for 5.75% of the total sold last week, well below the 13% share for the year to date.

New underlier

Royal Bank of Canada introduced a new underlying with the pricing of $5 million of income notes linked to Lithia Motors, Inc. paying a 14% fixed rate with a step payout of 5.35% if the stock finished at or above 114% a year from now. The notes did not offer any downside protection.

The stock of Lithia Motors, a retailer of new and used vehicles, has never been used before as a single name, according to the data. The stock has an implied volatility of 43% and is up 52% from its low of a year ago.

Other stocks used in various offerings besides Walt Disney and Lithia were Apple Inc., Advanced Micro Devices, Inc., Blackstone Inc., Marathon Oil Corp. and Nvidia Corp.

U.S.-centric market

Investors virtually ignored or perhaps avoided international equity exposure last week. Only two very small deals used non-U.S. benchmarks as underliers. Those were GS Finance Corp.’s $2.25 million of four-year notes tied to the MSCI Emerging Markets index and Royal Bank of Canada’s $1.08 million of one-year buffered notes on the MSCI EAFE index.

The Euro Stoxx 50 index was only employed as the main basket component in Morgan Stanley Finance LLC’s $13.39 million of 21-month digital notes linked to an unequally weighted basket of international equity indexes. The basket offered exposure to Japanese, Swiss, U.K. and Australian equities in addition to the euro zone.

Dividend hedging

“International equity has never been very popular among structured notes buyers. And today, people are even less inclined to invest out of the U.S. given the uncertainty in other parts of the world,” said the sellsider.

“If you take emerging markets, historically they haven’t done very well.

“The Euro Stoxx pays a fairly large dividend, but it can vary. If the companies cut their dividends, issuers hedging the dividend risk may be in trouble. They may not want to take the risk, or they may pass on the risk to the end-investor, and you probably won’t get good terms on the notes as a result.

“Either way we’re not seeing a ton of Euro Stoxx deals right now.”

Slower November

Issuance volume this month through Nov. 10 is $1.75 billion in 246 deals, according to the available data.

That’s 11% less than the $1.96 billion issued in 465 offerings during that time last month.

The decline is mostly due to the fewer number of deals as the number of larger deals was greater in November than last month.

Those figures remain preliminary and will be revised upward once all offerings are filed with the Securities and Exchange Commission.

A market participant noted a slight slowdown.

“For us, November has been slow so far and it’s surprising to me,” he said.

“Deals being sold now have been launched one-and-a-half, two weeks ago when volatility was still elevated.

“I don’t know if it’s because people are now focused on the holidays. My take is that advisers are waiting to see what comes out next month. Volatility has been dropping and they may be hoping that December will bring notes with better terms.”

Rates dropping, stocks up

Part of the volatility decline coincides with a bond rally. After hitting a 16-year high near 5% on Oct. 19, the 10-year Treasury rate dropped to 4.43% on Tuesday. The stock market, always welcoming lower rates, rallied in reaction and volatility has significantly dropped.

The VIX index rose above 23 on Oct. 23. It is now trading at 14, near its one-year low of mid-September of 12.68.

“Rates have fallen because the general consensus is that the Fed is done hiking,” the market participant said.

“Yields could rise again if inflation begins to recede. But if they continue to drop in December as they did over the past four weeks, terms are not going to be great.”

Agents so far this year have priced $81.28 billion, a 1.74% drop from last year’s $82.72 billion. The deal count fell by 22% to 19,683 from 25,258.

Last stretch

As the year draws to a close, the sellsider was relatively optimistic arguing that despite the upcoming holidays and the unavoidable year-end financial planning, demand for structured products should remain strong.

“I don’t think this time of the year is going to be a bad time for issuance. People always buy notes for one reason or another. There used to be more seasonality and things could slow down around the holidays. But I don’t think you’ll see notional drop too much this time. There are plenty of reasons to invest in structured notes,” he said.

The top agent last week was JPMorgan with $119 million in 24 deals, or 35% of the total.

It was followed by Goldman Sachs and Morgan Stanley.

JPMorgan Chase Financial was the No. 1 issuer with $120 million in 25 offerings, a 35.4% share.

© 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.