Agents price $298 million of structured products in pre-holiday week; volume month to date down 21%

By Emma Trincal

New York, Nov. 22 – Structured products issuance was light in the week prior to the Thanksgiving holiday with agents pricing $298 million in 108 deals, according to preliminary data compiled by Prospect News.

For the month through Nov. 17, sales are down 21.5% to $1.1 billion from $1.4 billion in October. Figures will be updated upward, however, once all deals get filed with the Securities and Exchange Commission and added to Prospect News database.

November

“November tends to be a slow month, and I’m not surprised we’re seeing a little bit less volume at this point with all the macroeconomic concerns and uncertainty,” said Jason Barsema, co-founder of Halo Investing.

“When we’re speaking to our clients they want to see a tax reform.

“But once we get through Thanksgiving, once you get into the first couple of weeks of December, it’s housekeeping time for the portfolio and volume will start to pick up.”

Barsema said he gives little credit to month-over-month figures.

“Volume is overly hard to gauge month to month because you don’t know who’s rolling what. You could have a slow first half of the month and then a $100 million rollover. Some chunky deal could hit the market,” he said.

“It’s hard to read the tea leaves about November versus October, especially when the month is not over yet.”

Year so far

The year so far continues to outpace last year in volume, and the advance keeps on growing. That’s because September, October and so far November have exceeded their comparable months of last year by 8%, 13% and 24%, respectively.

“There is a lot of liquidity in the overall market. You have to place your money somewhere. The bullish conditions are still here, which doesn’t mean that people are not scared. They are,” said Barsema reflecting on his clients’ desire to participate in the rally while weighing the risk of a bull market top.

Sell-off, rally

The U.S. market declined last week for a second week in a row after strong gains in September and October.

The Dow industrials finished the week down 0.3%, while the S&P 500 declined 0.1%.

Yet after a sell-off on Wednesday triggered by a drop in crude oil prices, the rally resumed the next day with the House voting a tax bill.

The CBOE Volatility index climbed over 14 during Wednesday’s sell-off but went back below 12 on Thursday.

“We had a nice jump on the VIX last week,” Barsema said.

“But the VIX is still very low.

“I wouldn’t equate this low VIX with complacency though. Despite the fact that it’s called the fear gauge, the VIX is not always the best indicator. A better indicator to me is the yield curve. We’ve seen the curve flattening, in particular the spread between the two- and the 10-year Treasury narrowing quite a bit. When that curve starts to invert, people’s views on the market will change rapidly.”

Protection wanted

Investors, he added, are demanding more protection than they did a couple of months ago.

“People want the growth. They don’t want to miss out on the upside. But now they want protection on the downside, and not just protection...I mean, not just barriers. They want hard buffers. At least that’s what we’re seeing with our clients,” he said.

A total of $105 million of leveraged products was issued last week in 14 offerings. About 40% of this notional was not protected while the other 60% featured barriers or buffers, according to the data.

Contingent coupon deals

Autocallable contingent coupon deals made for 34.5% of last week’s volume with 67 deals totaling $103 million.

The break-down between those income-oriented products and leverage was even.

For the year, however, autocallable contingent coupon deals now exceed leverage in volume with $16.12 billion versus $14.35 billion.

“That’s exactly what we’re seeing with our clients. Half of them do those income deals either autocalls or worst-of or both on a repeat basis. They’re very familiar with the product,” a distributor said.

“Since your income is linked to equity you’re not taking on interest rate risk. That’s why people use them a lot as a bond substitute even though they’re not getting a fixed rate.”

Autocalls

Other structural characteristic seen last week: pure autocallable plays – those giving investors a call premium upon the early redemption as opposed to a coupon that can be collected without a call – made for a greater market share than usual. Agents priced $36 million in 10 autocallable deals, or 12.20% of the total versus an average of 4% for the year.

“You probably get a higher coupon since you’re giving up the possibility of getting paid during the life of the notes,” said Barsema.

Nearly all those deals were worst-of structures built on indexes or index funds.

“People tend to do worst-of on indices more because they like the safety of an index; they don’t have to take a view on a stock,” said an industry source.

Two Scotia deals

A recurrent deal came out against last week: it used a basket of international benchmarks, which has become extremely common. Sellsiders consider this basket as a proxy for the MSCI EAFE index, the developed market index.

Goldman Sachs & Co. priced two such deals on the behalf of Bank of Nova Scotia. Both were linked to a basket 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 first Scotia deal, a five-year $33.6 million offering, offered 1.38 times leverage, no cap and a 45% geared buffer with a 1.8182 multiple. It was the top deal of the week, according to currently available data.

The second one – and the No. 4 in size – priced at $13.65 million. It was a three-year note with a 1.7 times leverage factor and a 15% geared buffer with a 1.1765 gearing on the downside.

“People use this basket in structured notes as a natural hedge against actively managed international developed market positions,” said Barsema.

Top, rate deals

Barclays Bank plc’s $25 million of two-year leveraged notes linked to the Euro Stoxx 50 index was the second largest deal. The payout at maturity will be par plus 2.437 times the index gain. Investors will be fully exposed to any losses. The placement agent was JPMorgan.

Last week also saw two decent-sized rate deals with Wells Fargo & Co.’s $12 million fixed-to-floating notes linked to the 10-year Constant Maturity Swap rate and BofA Finance, LLC’s $10 million of autocallable capped steepeners linked to the spread between the 10-year and the two-year Constant Maturity Swap rate.

“We’re seeing more interest in rate deals because people think interest rates are going higher. Everybody is looking to add yield to their fixed-income portfolio,” he said.

Goldman leads

The top agent last week was Goldman Sachs with 11 deals totaling $66 million, or 22.26% of the total. It was followed by UBS and JPMorgan.

Bank of Nova Scotia was last week’s top issuer with $47 million in two deals, or 16% of the total. Last week was Morgan Stanley Finance LLC. The top agent for the year is Barclays Bank plc.

“Volume is overly hard to gauge month to month because you don’t know who’s rolling what. You could have a slow first half of the month and then a $100 million rollover. Some chunky deal could hit the market.” – Jason Barsema, co-founder of Halo Investing

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