SPA Conference: Panelists are optimistic about 2013 despite pricing challenges

By Emma Trincal

New York, March 7 - Panelists shared an optimistic forecast for 2013 during Wednesday's 2013 Structured Products Association's conference on distribution.

The comments were made at various times of the day but mostly during the last panel dubbed "the crystal ball," which traditionally closes the conference just before the cocktail hour.

"We're off to a really good start of the year," Keith Styrcula, chairman of the Structured Products Association, said in his final address.

Issuance volume excluding exchange-traded notes is $7.02 billion this year as of March 2, a nearly 11% increase over the $6.34 billion priced during the same period of last year, according to data compiled by Prospect News.

"I'm very confident about the year ahead because we don't have the same headline risk that we had for the past two years," said Joe Castelluccio, managing director at PrinceRidge.

"The Dow Jones moving to new highs is a tremendous confidence booster. It creates opportunities for investors who are not overly risk-averse. ... I'm optimistic."

History lessons

John Tessar, head of structured products at JVB Financial Holdings, shared the same confidence in the growth of the U.S. structured products business for this year just by looking at how the structured products marketplace has evolved in the past.

He said he believed that the industry was innovative enough to adjust to most market changes in order to match clients' demand.

"You can draw a parallel between the growth of the industry and the way advisers evolved in adopting new products," Tessar said.

"What was the first structured product? Advisers got comfortable with index-linked CDs or notes. That's where the vast majority of our industry started. The end buyer wanted to do that because they were scared to lose money in the market. Eventually that kind of trade went out of favor.

"Then they were looking to get nice yields without having to be involved in high-yield bonds. We created reverse convertibles. That's the second type of products.

"Things continued to evolve when people began to be willing to take coupon at risk. That's when you see principal-at-risk range accrual notes, a popular type of product right now and one that's exceptional for those who understand it."

Another currently popular structure was the trigger note, he noted.

"Innovation and necessity: that's what drives scalability," he said.

Rates, challenges

Low interest rates and low volatility continue to be difficult conditions for pricing, panelists noted.

While most speakers were hesitant to predict what volatility will be like in three, six or nine months, the consensus about rates was that levels will continue to be flattish or slightly higher if market anticipations begin to push up yields but that rates are not about to jump up any time soon, at least as long as the Federal Reserve does not reverse course.

"Back two years from now, we didn't think rates would continue to decrease and yet they have. It has had an impact on our business," said Eric Greschner, portfolio manager of Regatta Research & Money Management.

"We're seeing a shift: investors are looking for the likelihood of a payout, whereas they used to focus on eye-catching coupons."

Downside protection has become increasingly expensive, but demand for it is still high.

"Buffered products have done very well," he said.

If pricing conditions are difficult, the challenge may also have positive effects, said Raul Perez, director at BNP Paribas.

"Issuers have to be more creative, and they have to introduce more products, especially on the notes side of the business," he said.

Low interest rates also reinforce the quest for yield trend.

"Investors need more yield, and they continue to use structured notes to find the yield," he said.

"Ninety percent of the interest among our reps is on the income side," said Dean Zayed, chief executive officer of Brookstone Capital Management, who said his firms divides its product list into two categories: income oriented and growth oriented.

"Our reps are gravitating around yield enhancement products. The most popular product is range accrual right now. We're not seeing that much principal protected."

But the market remains overwhelmingly equity-centric, Greschner noted.

"Hopefully, maturities won't continue to extend. I see a fairly static year in terms of product mix," he predicted.

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