Issuance of non-ETN products falls 36.6% to $281 million amid choppiness, Greece concerns

By Emma Trincal

New York, June 22 - As summer began, issuance of U.S. structured products fell all across the board last week, and deals also shrank in size.

Despite a pick-up in sales of exchange-traded notes - the volume for these products doubled from the week before - issuance of all products fell by 20.5% to $399 million in 117 deals for the week ended Friday from $501 million in 76 deals the week before.

The drop therefore was worse for non-ETN products, which saw their volume decline by more than a third to $281 million in 107 deals from $443 million in 69 deals.

"This is a disaster. I'm hearing rumors of lay-offs. Some say 15% cuts for some banks," a New York sellsider said. "It's not great. And revenues are down."

More deals priced last week but in smaller sizes. The average size for a non-ETN offering decreased to $2.62 million from $6.42 million.

Moreover, the number of deals in excess of $10 million decreased to five from 14.

Brighter month, year

The picture was a little bit less bleak on a month-over-month basis, although sales for all products fell 8% to $1.16 billion from $1.26 billion. The decline was driven by a 37% drop in ETN issuance.

Sales excluding ETNs held up a little bit better. They posted a tiny 1.67% growth to $965 million during the June 1-18 period from $949 million in the same period of May.

"Unless you have a private bank, good luck finding new clients," said the sellsider.

"And with banks' proprietary trading out of the picture, you really have to find new sources of revenues. It takes time."

On a lighter note, year-to-date issuance for all products grew 26.8% to $35.77 billion this year from $28.21 billion last year.

But most of that growth was driven by ETN sales. When excluding ETNs, issuance only rose by 3.63% on a year to date basis to $20.53 billion from $19.81 billion.

Greece, Chicago

A market participant said that last week's sluggish activity could have been partly due to circumstances as Incapital, a structured products distribution firm, held an informal conference in Chicago on Thursday and Friday. About 200 issuers and dealers of structured products, certificates of deposit and agencies attended the event, he said.

But for the most part, the slowdown was market-driven, he noted.

"What's happening in Greece is starting to make people skittish. And market sentiment may be switching to double-dip fears. That could be it," he said.

Equity down

Almost all asset classes for non-ETN offerings declined in volume last week, especially notes linked to single stocks.

Commodities were the only asset class that grew albeit at a slow pace.

For non-ETN deals, equities-linked notes dropped by nearly half to $177 million from $340 million. As a percentage of total non-ETN sales, equities fell to 63% from 77% the week before.

Within equities, stock deals declined the most to $73 million, down 56% from the week before.

Equity index-linked notes declined by 38% to $104 million.

"The market is a little bit choppy. It's down 6% this month. Usually that gets retail a little cautious," the market participant said. "People are starting to stay on the sidelines.

"It's also the start of the summer."

Commodities deals fared better. They grew 15% to $47 million from $41 million, and their slice of the non-ETN pie grew to 17% from 9%.

"Deals linked to metals or other commodities are still very much in demand. People look for it in notes and also in [exchange-traded funds]," said the sellsider.

"It's capital-at-risk products. But people need the yield."

Volatility still low

It's unclear whether the drop in equities-linked issuance is due to a change in market sentiment or if it is simply because the supply is not able to price enough yield due to volatility that paradoxically remains low, sources said.

Volatility, as measured by the CBOE Volatility index, or VIX, surged to nearly 23 on Thursday, its highest level since March.

But it is back below 20 and has been trading most often in the teens since April, the sellsider noted.

The structure that has done the best either on a week-over-week or month-over-month basis is leverage, especially without protection.

At the same time, products that short volatility have been declining, especially reverse convertibles but also autocallables, which recorded a monthly decline.

Reverse convertibles fell by 48% to $25 million last week from $48 million the week before. The structure recorded a 35% decline to June from May.

Autocallable notes rose by 28% on a month-over-month basis but dropped by 69% to $16 million week over week.

For the sellsider, volatility is to blame.

"You need a high volatility for these products to sell. Otherwise, there is no coupon. Volatility went up a little bit, but it's not enough.

"People need to do better than their 50 basis points on their money markets. They go for callable, range accrual or commodities. Not reverse convertibles."

For the market participant, issuance of reverse convertibles is on pause due to recent headlines.

"There have been negative articles about reverse convertibles. Finra put out a piece. People are reviewing it, making sure that all reps understand it," he said.

Last year, Finra issued an investor alert focusing on the complexity of reverse convertibles. In April, it fined Santander Securities $2 million for "unsuitable reverse convertible sales."

Earlier this month, Finra issued an alert about structured notes with principal protection.

Top deals

On the other hand, leveraged deals with no protection rose by 128% to $41 million from $18 million.

An example of this type of deal last week was Goldman Sachs Group, Inc.'s $32 million of floating-rate excess return index-linked notes due July 18, 2012 linked to the S&P GSCI Excess Return index.

It was the third-largest deal and offered at maturity par plus triple the index return, with upside and downside leverage. The interest rate is Libor minus 17 basis points.

Some of the most popular structures did not fit into a traditional category. Such was the case of the top-two offerings, both knock-out notes linked to the S&P 500 index and both sold by JPMorgan. One was $46.26 million sold on the behalf of HSBC USA Inc., the other $40.18 million for Barclays Bank plc.

JPMorgan tops

JPMorgan was the top agent last week with $101 million sold in 25 deals, or 36% of the non-ETN total.

It was followed by Bank of America with $45 million in three deals and Goldman Sachs with $44 million in four.

During the prior week, JPMorgan was first, followed by UBS, second, and Goldman Sachs, third.

"This is a disaster. I'm hearing rumors of lay-offs." - A New York sellsider

"Market sentiment may be switching to double-dip fears." - A market participant

© 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.