As the year winds down, structured products issuance slows with $358 million priced in rally week

By Emma Trincal

New York, Dec. 24 – Agents priced $358 million of structured products in the week ended Dec. 19, or nearly half less than the prior week, which saw $653 million sold, according to data compiled by Prospect News. Most of the December volume priced in that second week of the month, a source said, which means that Bank of America will not close its monthly calendar on the days preceding Christmas.

“Everything was priced early this month,” this source said.

Fed rally

While quiet in structured notes issuance, last week was in raging bull mode. The year’s last Federal Open Market Committee triggered an early Santa Claus rally after it signaled that the Fed will be “patient” before raising rates. Some noted that the statement did not contradict the well-anticipated rate hike in the middle of 2015 as “patience” could very well mean waiting for only a couple of meetings. But stock prices jumped up nevertheless.

The S&P 500 rallied for three days following the Wednesday statement with the week closing up 4%, one of its best in two years.

Equities-linked issuance made for 77% of the total issued last week with a strong amount of single-stocks, which represented 36% of the total versus 41% for equity indexes.

Slippery oil

Oil plays were common with the commodity prices still falling, generating more volatility and therefore eye-catching coupons.

“It makes sense to bet on oil at this point, with prices as low as they are,” a fixed-income trader said.

There were only three deals greater than $20 million in size, with the top one less than $30 million. Barclays priced the top three offerings.

The first was a reverse convertible product based on a technology stock paying a 10% fixed interest rate. Barclays Bank plc priced $28.88 million of 10% annualized Yield Enhanced Equity Linked Debt Securities due June 22, 2015 linked to the common stock of Lam Research Corp.

The payout was capped at 108.35%.

The second deal offered a similar structure but focused on oil offering correlated exposure via equity.

Barclays sold $28.81 million of 10% annualized Yield Enhanced Equity Linked Debt Securities due June 22, 2015 linked to Schlumberger NV shares. The notes offered a total return including the 5% fixed interest paid over the six-month period plus the participation up to a 114.4% cap.

“People are so desperate for vol., they go into super short-term notes, risky sectors and volatile stocks. Honestly I think this could explode,” a sellsider said.

“This recklessness reflects the entire year. People have been stretching volatility in the most hazardous places.”

Sector funds a focus

Two other energy deals used sector funds rather than a single stock.

One was Morgan Stanley’s $19.63 million of 0% dual directional trigger Performance Leveraged Upside Securities due Dec. 22, 2017 linked to the Energy Select Sector SPDR fund.

The upside leverage factor was two with a 42% cap. On the downside, any decline by up to the 85% trigger level offered the absolute value return, but once the barrier was breached, investors had full downside exposure.

The following deal, a digital note, was brought to market by Goldman Sachs Group, Inc. with $19.35 million of 0% digital notes due Jan. 21, 2016 linked to the SPDR S&P Oil & Gas Exploration and Production ETF.

If the fund return was at least negative 15%, the payout at maturity would be 16.9%.

Otherwise, investors shared in losses at a rate of 1.1765% per 1% drop beyond 15%.

“This one is better than the Schlumberger,” the sellsider said.

“You have a 15% protection and a 17% potential upside. It’s done on an index, not a stock. And you have more time to see prices moving up in one year than you have in six months.”

The sixth offering was tied to an industrial stock.

“This is not a play on oil, but Caterpillar is correlated to oil,” the sellsider said referring to Caterpillar Inc., the underlying stock used for the structure.

The Morgan Stanley’s $13.44 million notes paid a 9.35% contingent coupon observable quarterly if the stock closed above a barrier of 80%. An autocall was triggered at or above the initial price. At maturity, the 80% barrier applied to determine the repayment amount.

Barclays also priced a leveraged structure with no downside protection in its $27.736 million of 0% Accelerated Return Notes due Feb. 26, 2016 linked to the Euro Stoxx 50 index. The upside participation is 300%, the cap 16.92% and investors had full downside exposure. BofA Merrill Lynch was the agent.

Year’s tally

Issuance is up 10.85% for the year as of Dec. 19 to $40.857 billion from $36.853 billion, according to the data.

The month is also up to $1.377 billion from $929 million, a nearly 50% increase.

Some sources expressed surprise.

It’s strange. I’m not getting the same feedback from the desks. What I’m hearing is that we only had 11 months of business,” the sellsider said.

“Besides BofA controlling half of the business it’s not really a healthy market. I’m not sure the banks are making as much money as they would like to.

“Derivatives cost a lot, and some desks, especially guys in commodities, have lost tons of money.”

Methodology

Data compiled by Prospect News does not include every structured product. Figures are extracted from the Securities and Exchange Commission filings, therefore do not include off-shore issuance and market-linked CDs.

Exchange-traded notes are also excluded from the database.

Finally, plain-vanilla rates products, which Prospect News names “structured coupons,” are not part of the totals. Prospect News counts them separately.

Those lightly structured notes often tied to Libor include step-up notes, step-down notes, fixed-to-floating notes and capped floaters.

Depending on the types of products dealers see, opinions can vary, a source said.

Equity-linked notes issuance for instance has increased by 14% this year.

Even rates-linked notes based on Prospect News definition (with an underlier and some optionality) have seen their volume rise by 27% from 2013. Those would include notes tied to CPI or to CMS spreads for instance.

But again, these would not include structured coupons, which Prospect News considers plain-vanilla fixed-income products.

Some segments of the market in a broad sense have seen severe declines in volume. Structured coupon issuance for instance has dropped nearly 40% this year.

“It’s been a difficult year for us,” the fixed-income trader said.

“Everybody I talk to, guys issuing paper, they’re not telling me ‘we had a decent year.’ It’s been a tough year.

“That said, we’ve seen appetite for equity products because of the rally.

“When I look at those reverse convertibles, I really hope that people are not selling them as fixed-income substitutes because let’s be clear, these are equity products. They have a coupon but it’s equity risk.”

The top agent last week was Barclays with $87 million in nine deals, or 24.34% of the total. It was followed by Morgan Stanley and UBS.

“It makes sense to bet on oil at this point, with prices as low as they are.” – A fixed-income trader

“It’s been a difficult year for us. Everybody I talk to, guys issuing paper, they’re not telling me ‘we had a decent year.’ It’s been a tough year.” – A fixed-income trader

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