Agents price $173 million of structured notes for week; commodity offering tops list of deals

By Emma Trincal

New York, Sept. 19 – It was a quiet week for structured notes in this second week of September. Sixty deals were issued totaling $173 million with only one larger than average, according to data compiled by Prospect News. At $30 million, it was an add-on from Goldman Sachs’ issuing subsidiary based on commodities, a typically dormant asset class.

Holiday, China

“Trying to price deals these two weeks before Labor Day and this one week after is very hard,” a market participant said.

“We often find it difficult to bid and structure in that timeframe, and last week was no exception.”

The market continued to oscillate driven by trade war headlines, reacting to or sometimes shrugging off alarming news and rallying at the least glimpse of hope. The week ended on a positive note as the U.S. and China were reportedly trying to resume negotiations, pushing up the S&P 500 index 1.2% for the week.

Underlying assets

Asset classes were mixed. Equity indexes represented 56% of total notional versus 14% for single-stocks.

For a change, commodities, which accounted for 17% of the notional with just one $30 million deal, were ahead of stocks volume-wise.

There were two interest rate deals totaling $15 million, an 8.5% share of the total volume.

Milder growth

September so far does not look good compared to August. Volume this month through Sept. 14 is down 58.5% to $395 million from $952 million, the data showed.

From the same period a year ago, which saw $791 million sold, volume dropped by half this month.

For the year the trend is still up but progresses have slowed. Through last Friday, agents sold $39.33 million this year versus $35.16 million last year, a 12% increase. It’s better than last year but not as robust as in the earlier part of the year.

At the end of the first quarter, volume was up nearly 30% from a year before, according to the data. This growth rate is almost half of that now.

Rolls wanted

For the market participant the explanation cannot be just seasonal. He attributed the milder growth in volume to a slowdown in the rate of rollovers.

“When deals don’t get called it has a definite impact on volume. Earlier this year we were still getting called on. But not now, so there are fewer rolls,” he said.

The market ultimately is causing this situation anytime an underlying fails to rise.

“A bunch of benchmarks are at their 52-week lows, and we’re not having a lot of calls.”

He pointed to the Euro Stoxx Banks index, the MSCI Emerging Markets index, the MSCI EAFE index and the MSCI ACWI ex USA index, all off their 52-week lows.

With fewer calls compared to earlier this year, issuance volume is not growing as fast as it did a few months ago, he explained.

“People replacing deals with new ones is really a factor that impacts our deal flow versus Oh my God! It’s a good time to do a new deal!”

This market participant pointed to another factor.

“You had those fairly large deals as far as notional earlier this year, like those notes linked to Voya.”

A few mega deals tied to Voya Financial Inc. priced indeed in the first quarter, one of which even reaching the $600 million mark.

U.S. equities still hot

Despite this slowdown, which is still probably seasonal as well, the year continued to surpass last year.

Agents so far have priced $39.33 million through Sept. 14 from $35.16 million last year.

The U.S. equity market should be credited for those gains, said Jason Barsema, president and co-founder of Halo Investing, Inc.

“We’re the best house in an ugly neighborhood. China is in a bear market. Emerging markets have been crushed. Europe hasn’t done anything. Where else do you go?” he said.

One factor behind the stock market rally this year and consequently the appetite for equity derivatives has been the so-called “fear of missing out,” he said.

“The U.S. equity markets have done great this year,” he said.

“We have a reflationary environment. Rates are up, asset prices are up, the dollar is strengthening. People expect more growth ahead at least for a little while. The view is that it may not be the end of the cycle.

“People don’t want to risk missing out on what remains a solid rally.”

The S&P 500 index is up 9.7% for the year. The Nasdaq Composite has gained 13%. In comparison emerging markets, China, the Euro Stoxx 50 index and the MSCI EAFE index are all down for the year at various degrees, he noted.

“Since investors are going to have allocation to U.S. equites anyway, if you’re even slightly bullish, you might as well participate and have downside protection that will cushion your losses if you’re wrong,” Barsema said.

Growth and income

Last week’s top structure was leverage with downside protection, accounting for 22% of the volume. Autocallable contingent coupon deals made for 10% of the market.

“When you believe there is room for further gains in the market, you’re going to see a combination of growth and income products. Leverage certificates plus Phoenix. These are the best of both worlds. I’m buying both myself for my own portfolio,” said Barsema.

The term “Phoenix” is a brand name which is often used to designate a structure that is the equivalent of autocallable contingent coupon notes.

In both types of structures – autocallables and leveraged notes with protection – the upside tends to be limited.

For Barsema, investors are now less reluctant to cap their return as more investors are inclined to believe that the market will be trading range bound.

“People are comfortable with a cap or a coupon. They don’t think we’re going into another 2008 crisis. They see a potential for a pullback but not a 20% or more bear market. They tend to anticipate a market trading sideways.”

A $30 million commodity deal

In an unusual way the top deal last week was a commodity-linked notes offering.

Commodities only make for 1% of this year-to-date volume with $411 million in 70 deals. Last week’s deal, which was issued by GS Finance Corp., was a $30 million of additional 0% notes due Aug. 19, 2019 linked to the Bloomberg Commodity index.

GS Finance priced the original $62.15 million of notes on July 11 at par.

The payout at maturity will be par plus any index gain. Investors will be fully exposed to any index decline.

“People are more willing to have exposure to commodities,” said Barsema.

“The asset class has been challenged, and this deal is somewhat of a value play. It’s also – and has always been – a way to diversify a portfolio.

“Obviously people who buy commodities don’t believe the dollar will continue to strengthen, perhaps because they think the tariffs concerns are overblown. They also see that the economy is doing well, which is also bullish for commodities,” said Barsema.

Two, three year

The next two top deals were a pair of three-year digital buffered notes priced by JPMorgan.

Barsema said he is seeing “a lot of demand” for two- and three-year maturities from his clients.

“A lot of banks are putting out two-, three-year deals. It makes sense. A lot of analysts on Wall Street are predicting that a recession wouldn’t come until 2020 or 2021. People think there is still some potential upside,” he said.

“You also have a pricing factor. You’re going to get better terms on a two or three year than on a 13 month.”

Two JPMorgan deals

Among those two deals following the commodities offering, the first one was JPMorgan Chase Financial Co. LLC’s $24.5 million of three-year buffered digital notes linked to the S&P 500 index.

If the index finishes at or above its initial level, the payout at maturity will be par plus 22.75%.

If the index falls by up to 17%, the payout will be par.

Otherwise, investors will lose 1% for each 1% decline beyond 17%.

Next, JPMorgan Chase Financial priced $13.12 million of three-year digital buffered equity notes linked to a basket of international indexes.

“If you believe the market is going to trade sideways, which I am a believer in, then this investment is interesting.

“The cap is just a bit below the historical average return of the S&P 500. But you get a decent buffer,” Barsema said.

The basket, which is very commonly used, consists of the Euro Stoxx 50 index with a 36% initial weight, the Topix index with a 27% initial weight, the FTSE 100 index with a 20% initial weight, the Swiss Market index with a 9% initial weight and the S&P/ASX 200 index with an 8% initial weight.

JPMorgan tops

The top agent las week was JPMorgan with $69 million in 10 deals, or 39.65% of the total.

It was followed by Goldman Sachs and Morgan Stanley.

JPMorgan Chase Financial Co. LLC was the No. 1 issuer with $65 million in eight deals.

The two deals JPMorgan distributed aside from its own deals were issued by Credit Suisse AG, London Branch.

JPMorgan Chase Financial Co. LLC is also the top one for the year. It priced 1,532 offerings totaling $6.14 billion as of Friday, a 15.6% market share.

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