December kicks off with $317 million of structured products issuance as year slowly shuts down

By Emma Trincal

New York, Dec. 10 – The month started on a quiet note for structured products issuance but not as badly as some may have expected given that December is usually not an impressive month in terms of issuance volume.

Agents last week sold $317 million of structured products priced in 105 deals, according to data compiled by Prospect News.

Last month kicked off with $243 million, and last year’s first week of December saw $402 million.

October this year began stronger with $529 million, but it also was the third biggest month of the year in volume after January and July.

Slow December

“There’s a pretty consistent seasonal pattern in our industry,” a sellsider said.

“Brokers get paid at the end of the year so November and December are usually skinny months. Business pretty much shuts down in December.

“Come January, people are awakening from the two months slumber. They’re jumping back into the market in a big way. July is one of those busy months, just before taking August off. So I think we’ll see business as usual in the ending part of the year. [There’s] not a huge amount of growth in sight.”

In 2011 and 2012, December was the slowest month of the year, according to the data. It was the second worst month after April last year.

But in prior years, December, rather than being in the lowest tiers happened to be just average.

Sources said the month could still surprise as the year overall showed some robust growth.

Sales are up 12% year to date to $39.80 billion from $35.53 billion as of Friday, according to the data.

Weightings

The top deals last week were small in size, from $31.3 million to $14.6 million for the top six deals.

Except for one note tied to a single stock and another linked to the Dow Jones industrial average, all top products were based on not commonly used indexes or baskets of indexes.

The top deal for instance was Credit Suisse AG, London Branch’s $31.33 million of 0% leveraged notes due Dec. 7, 2017 linked to a basket of indexes, consisting of the Euro Stoxx 50 index with a 37% weight, the FTSE 100 index with a 23% weight, the Topix index with a 23% weight, the Swiss Market index with a 9% weight and the S&P/ASX 200 index with an 8% weight. The notes featured 1.57 times leverage and no cap on the upside but full downside exposure.

A market participant said that such deals attest to the flexibility offered by structured notes.

“Instead of allocating to the MSCI World index, this is an investor who wanted a more tailored international exposure. The thought process behind this is to overweight some countries that achieve the desired asset allocation,” he said.

“Last week, oil went down heavily. Europe stands to benefit. Japan, an oil-importer, benefits too. There might be a theme there,” he said.

The re-arranging of the weightings within an existing index was another technique used last week, as shown by the No. 4 offering.

JPMorgan Chase & Co. priced $23.99 million of 0% leveraged notes due June 10, 2016 linked to the 23 ordinary shares included in the MSCI Spain 25/50 index.

The basket included all of the constituents of the index, reweighting each of them so that none would exceed 5% of the basket.

“This was for an investor convinced that Spain is the right place to be. But if you buy the MSCI Spain, which is a market-capitalization-weighted index, you end up with an unwanted concentration,” this market participant said, adding that out of the 23 companies in the index, five exceed 50% of the capitalization.

“The notes give you exposure to something different on the same theme. They offer a new twist. By introducing the cap for each stock, you get a broader-based country exposure. You can really buy Spain and not a highly-weighted index geared to specific companies,” the market participant said.

Backwardation

Commodities issuance picked up last week making for 14.5% of the total, mainly due to a pair of deals using nearly the same underlier. Again, the structures were not tied to the most common benchmarks but to more sophisticated ones.

Bank of America Corp. priced $24 million of commodity-linked notes due Jan. 11, 2016 linked to the Bloomberg Commodity Index 2 Month Forward Total Return. In this deal, the third in size, the return was pegged to the 2-month forward version of the Bloomberg Commodity index.

Similarly, JPMorgan Chase & Co. priced $21.16 million of 0% return notes due Nov. 23, 2016 linked to the Bloomberg Commodity Index 3 Month Forward Total Return. It was the No. 5 deal last week.

Both underliers (the two-month and three-month forwards) are versions of the Bloomberg Commodity index that trades longer-dated commodity futures contracts. The index adds value in weighting its components on the basis of liquidity.

“What helped the pricing here is not so much the volatility of commodities. It’s mostly the shape of the forward. A lot of commodities are in backwardation right now,” the market participant said.

The forward curve is in backwardation when the future prices are below the current spot prices.

“The implication is a positive roll yield as the curve is downward slopping. That means the cost of rolling the futures contracts is cheaper. It’s like having dividends when you price an equity-linked note. The more yield you get, the better the pricing.”

Leverage

Leverage prevailed last week with 40% of the total notional. The supply of leveraged notes with no downside protection, at 21.5% of the total, exceed the amount of buffered or barrier leveraged notes, which amounted to 15.5% of the volume, the data showed.

“People are still bullish enough to be willing to take the downside risk in order to get the full upside,” the market participant said.

Pricing was just as important as a factor, he added.

“Getting a buffer requires being ready for some tradeoff obviously,” he noted.

Credit Suisse AG, London Branch’s $28.87 million of 0% buffered capped participation notes due Dec. 27, 2019 linked to the Dow Jones industrial average offered a sizable buffer of 30%. But the tenor was five years and the upside was unleveraged although still capped at 66.45%.

“If you want a buffer, you need to go longer. The economics of doing it on a short-dated note just aren’t there. You need the dividends over time and you still need to introduce a cap on the performance,” he said.

Single-stock deals made for 22.50% of the total last week, slightly less than the 27% average throughout the year.

Royal Bank of Canada priced the top stock deal and the No. 6 in size with its $14.61 million of contingent income autocallable securities due Dec. 10, 2015 linked to American Airlines Group Inc. shares. The coupon barrier was 70%. The observation was quarterly with a 3.375% contingent coupon for that quarter. The notes were callable quarterly when the stock was above its initial level at par plus the contingent coupon. The final barrier was 70%. Morgan Stanley Wealth Management was the distributor.

The top agent last week was JPMorgan with $82 million in 16 deals or 25.97% of the total.

It was followed by Bank of America and Credit Suisse.

“Brokers get paid at the end of the year, so November and December are usually skinny months. Business pretty much shuts down in December.” – A sellsider commenting on the pace of year-end structured products issuance

“Last week, oil went down heavily. Europe stands to benefit. Japan, an oil-importer, benefits too. There might be a theme there.” – A market participant, commenting on the weightings of investments in certain regions

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