Structured products issuance rebounds from ‘bad’ year, up 37% year to date; coupons, digitals eyed

By Emma Trincal

New York, May 17 – Structured products issuance declined in the second week of the month ended Friday. Agents last week sold $355 million in 140 deals, a 21% decline in volume from the previous week’s $449 million issued in 167 offerings, according to preliminary data compiled by Prospect News.

Those results are highly subject to upward revision however due to delays between pricing and filing dates.

On a brighter spot, the year-to-date issuance pace continues to be robust.

More deals

Agents sold $18.36 billion so far this year through May 12, about 37% more than last year’s $13.38 billion, the data showed.

Simultaneously the number of deals has jumped up 76% to 4,742 from 2,693.

“The number of deals is up so much, probably because more firms are using automation,” a market participant said.

“If you can do more deals, that will clearly help the dollar amount all things being equal.

“We have more smaller deals that are still growing your volume numbers.”

The average deal size is slightly higher at $4.96 million this year versus $3.87 million last year.

Recovery mode

On the volume side, the surge so far suggests either an exceptional year or a strong rebound from “Annus horribilis” as a source characterized last year.

To get a sense of last year’s attrition, sales through May 12, 2016 had already declined by 25% from the same period in 2015.

A sellsider made the case that this year’s growth is more of a recovery story.

“I’m not surprised by those numbers,” he said, commenting on the 37% growth.

“The start we had last year was pretty dismal. It makes sense that we’ve rebounded from some good lows.

Last year was a “pretty bad year,” he said.

“We had the market dislocation followed by the DOL announcement followed by Brexit.”

The “announcement” referred to the Department of Labor’s release in April last year of a new fiduciary rule applying to brokers selling securities, including structured products. The rule had to be interpreted. Compliance processes had to be put in place. Many sellsiders have said that time and money spent on compliance and legal work reduced the time normally devoted to business.

In reverse, this year showed the opposite, he said.

“We didn’t have dislocation in the beginning of the year but instead a Trump rally based on expectations of lower taxes and reduced regulations. The French elections with the risk of a “Frexit” came out OK. A pro-European Union, pro-Euro president has been elected. That’s a big relief,” he said.

Comparing the volume decline recorded last year versus the previous year with this year’s uptrend from 2016, he concluded that: “The growth we’re seeing this year is probably more of a rebound than it is a strong improvement.”

Locking in gains

The dominant products last week were geared toward income or fixed returns. Autocallable reverse convertible notes accounted for 40% of total volume. For the most part the coupon was offered on a contingency basis and the exposure was to multiple underliers delivering a worst-of type of payout. But investors also bid on digital notes.

“Anything that gives you a target return is attractive in this market,” the sellsider said.

He attributed the bid to current market valuation. In his view getting a coupon or target return was preferable to participating in the equity markets as the averages are near all-time highs.

“The S&P keeps on going up and volatility is still low. We reached 2400 on Monday. How long can it continue to go up before we see some level of dislocation? That’s the question most investors are asking,” he said.

“If you think that with the risk of a thermonuclear war with North Korea, with Russia, Syria, the S&P can still be going up then you can try to leverage more growth. That may be OK if we can hit a breakout above the 2500 level. But if not, if I really can’t see that then I’d rather clip the coupon.”

The bullish momentum had been on hold last week with four sell-off days partly as the result of political uncertainty after president Donald Trump fired FBI director James Comey. Earnings for the first quarter have exceeded forecasts but retail showed weak results last week, pushing down stock prices.

The market traded in a range to finish flat.

At the same time the CBOE Volatility index (VIX) fell to a new low below 10.

For the market participant, the principal motivation behind the bid on income notes remained the search for yield.

“Rates have gone up but still... For most people who have been investing for a while they are historically low,” he said.

“Getting 1.25% on a two-year Treasury is not all that sexy, neither is 2.30% on a 10-year.”

Top deals

Barclays Bank plc priced the No. 1 deal of the week with $35.05 million of five-year trigger autocallable notes linked to the lesser performing of the Russell 2000 index and the S&P 500 index.

“Barclays has pretty good funding on autocalls,” the sellsider said.

Investors received a call premium of 7.05% per year if each index closed at or above its initial level on any quarterly observation date after one year. For the final call, the notes would be called on the maturity date at par plus 7.05% per year if each index was at or above its downside threshold, 60% of its initial value.

There was a 60% barrier at maturity.

Barclays and UBS Financial Services Inc. were the underwriters.

“This is an autocall that pays no coupon. Traditionally people prefer getting a coupon even if it’s not a guaranteed coupon. This deal was a good size offering maybe due to pricing or because it was appealing to the customer,” the market participant said.

Developed markets

Next was JPMorgan Chase Financial Co. LLC’s $34.82 million of 18-month leveraged notes linked to a basket of indexes.

The basket consisted 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 offered five times the index gain up to a 25% cap. Investors were exposed to losses of 1% for each 1% decline.

J.P. Morgan Securities LLC was the agent.

This basket with all or most of its components in a variety of weightings has been used quite often. A total of $6 billion of products tied to this basket or baskets composed of the same components have priced this decade, according to the data.

“It’s an allocation piece. That has to be for investors looking for a certain type of exposure to Europe,” the sellsider said.

Worst of three

Credit Suisse AG, London Branch priced the third deal – or $25.84 million of three-year trigger callable contingent yield notes with daily coupon observation linked to the least performing of the Euro Stoxx 50 index, the Russell 2000 index and the S&P 500 index.

The contingent coupon of 9% a year was payable quarterly if each index remained above its coupon barrier – 70% of its initial price – on any day during that quarter. The notes were callable quarterly. The barrier at maturity for the worst-of index was 60%.

UBS Financial Services Inc. acted as distributor.

The top agent last week was BofA Merrill Lynch. It priced seven deals totaling $72 million, or 20.24% of the total. Coming next were Barclays and JPMorgan.

Barclays Bank plc was the top issuer with 11 deals totaling $96 million, or nearly 27% of the total.

“The start we had last year was pretty dismal. It makes sense that we’ve rebounded from some good lows.” – A market source

“Anything that gives you a target return is attractive in this market.” – A sellsider

© 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.