Structured products issuance in February so far beats last month, up 75%; tally flat year over year

By Emma Trincal

New York, Feb. 15 – Structured products issuance volume last week was solid at $474 million, a decent level for the start of a month, according to data compiled by Prospect News.

The month-to-month picture is so far very positive. Volume has jumped to $841 million through Feb. 10, a 75% increase from $481 million sold during that first third of the month in January.

For the year to date, however, volume is flat at $5.23 billion compared to $5.20 billion in the year-ago period.

This year-over-year result is temporary. The pricing in January last year of a $1 billion deal so far is skewing the data. The trend will not be clear until this month is over.

“It’s hard to see early in the month what’s going to be the real full calendar picture,” said a market participant. “But on our end, we’ve seen things picking up.

“There’s a significant increase of reverse inquiries.”

Outside of the structured note space, this market participant said he expects to see more structured investments in unit investment trust wrappers in the next few weeks.

“I’m hearing about new products, more buffered notes tucked away into UITs.”

No fear is scary

Equity markets rallied toward the end of the week bolstered by U.S. president Donald Trump’s talk of a “phenomenal” tax cut plan, with the S&P 500 index reaching another high. The benchmark closed up nearly 1% for the week.

Market sentiment remains overwhelmingly bullish, and the CBOE VIX index is below 11 near its 52-week low of 10. The VIX measures the implied volatility of the S&P 500 index options.

For some analysts, this extreme low level of volatility is a red flag indicating that investors have become too complacent.

Volatility seems to spike on a very short-term basis propelled by tweets or announcements from the new president.

Traders have coined the new phrase: “Trump-on/Trump off” in place of the old “risk-on/risk-off,” a source noted.

But overall, the VIX index is still at very depressed levels, which does not help the pricing of notes. As a comparison, the “fear index” in July was at 27.

Stay put

“I think retail investors realize there can be a correction anytime. At the same time, the bullish momentum is still on,” the market participant said.

“Structured products buyers are definitely looking for a way to keep the market exposure but hedge it.

“Hedged beta is a lot more interesting right now, as a strategy.

“Except for a few Street cheerleaders, people are not foolish. They see that the market is overpriced.

“But it could go another 1,000 points.”

This environment for now supports the sale of structured notes, he explained, because of the protection that comes with those products.

While no one knows if the market will continue to be up and for how long, many have no choice but to remain invested.

“When the market gets irrational, there’s no rule. Things can stay irrational and it can stay like that for a while. If it’s your mandate to invest in equity you have to stay.”

A sellsider was disappointed with the issuance figures.

“Last year wasn’t so great. The fact that we’re only flat from last year is not a good sign to me. There isn’t much there,” he said.

“The market is up and keeps going up. But people are reluctant to play it because they don’t like to buy the highs,” he said.

Darling Apple

Last week saw relatively small deals. The number of deals dropped 14% to 159 from 185 the week before.

The largest deal was Barclays Bank plc’s $31.18 million of one-year notes linked to the common stock of Apple Inc. It offered a 16.51% digital payment at maturity but no downside protection. BofA Merrill Lynch was the agent.

Apple share surged at the end of last month after releasing strong earnings. Since then, the stock has gained nearly 12% to $135 in early Wednesday trading. The deal struck on Feb. 6 at $131.53, according to the prospectus. The news of Warren Buffet making big bets on Apple contributed to pushing the bullish momentum even further, the sellsider said.

“The stock is already in the money,” he said, referring to the inception price.

“Apple is a retail name. The market keeps on making new highs. This trade is just the expression of what’s in the news along with the bullish sentiment,” he said.

3X short commodities

The second deal offered commodities exposure but on an inverse basis.

Commodities notes have fallen out of favor and become rare. This product is only the eighth one so far this year for a notional of only $36 million. It is the largest one for this asset class so far.

Citigroup Global Markets Holdings Inc. priced $21.67 million of 13-month securities linked to the S&P GSCI Total Return index. The payout was three times the inverse performance of the benchmark. The notes were automatically called if the index closed at or above 115% of its initial level. A floating-rate Libor minus 14 basis points was paid monthly.

The notes were putable at any time.

Goldman follows the steps

The third deal from GS Finance Corp., Goldman Sachs’ issuing arm, was $18.55 million of four-year buffered digital linked to the Euro Stoxx 50 index. The notes were guaranteed by Goldman Sachs Group, Inc.

The notes offered a one-to-one exposure to the index with a minimum digital payout of 43.85%. The downside was protected by a 15% buffer.

This type of structure – a digital return that does not cap the upside but instead allows for unlimited one-to-one exposure when the underlying closes above the digital level – has long been the signature of Bank of America with its “market-linked step up” brand. Morgan Stanley has also produced the same type of product which it calls “trigger jump securities.” Goldman Sachs apparently is following suit with this note, according to a source.

Esoteric ICE worst-of

One Morgan Stanley deal is worth mentioning for its innovative structure despite its very small size. This deal, priced by Morgan Stanley’s issuing subsidiary, combined a fixed-to-floater rate, a range accrual with equity components and a worst-of. The rate spread was leveraged. It worked as follow:

Morgan Stanley Finance LLC priced $2 million of fixed-to-floating rate securities linked to the S&P 500 index and the Russell 2000 index.

Interest was payable monthly. It was 10% for the first 1.5 years. After that, it would accrue at 15 times the 30-year ICE swap rate minus the two-year ICE swap rate for each day both indexes closed above 65% of their initial levels, up to a maximum rate of 10% a year.

The payout at maturity would be par unless either index finished below its 50% barrier level, in which case investors would be fully exposed to the loss of the worse performing index.

“That’s a pretty interesting one,” the sellsider said pointing to the low barrier.

“Most people feel comfortable writing a put on equity at 50%.

“These are tail risk options... it would be very difficult to do this on a 20 year. It’s not a simple put but a worst-of. That makes it even more interesting.

In addition, the notes offered a “play” on the Treasury curve, he said.

“It’s an interesting growth play. I can see people wanting to buy these options as a bet on a steeper curve.

“The curve steepens, meaning more growth...equity prices going up.

“It was probably for one buyer.

He commented on the 5% fee.

“It’s high and that’s good for the firm. But it’s justified on a 20-year. Besides this is a complicated trade to put together and to hedge...a trade you can’t replicate very easily.”

The top agent last week was Goldman Sachs with 10 deals totaling $87 million or 18.35% of the total. It was followed by Barclays and JPMorgan.

“There’s a significant increase of reverse inquiries.” – A market participant

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