Lackluster week seen with $328 million structured products issuance amid Chinese devaluations

By Emma Trincal

New York, Aug. 19 – The week ended Friday was one of the weakest of the year for structured products issuance with agents pricing $328 million in 82 deals, according to data compiled by Prospect News.

The pace of issuance was in line with the $323 million average volume seen during the three slowest weeks of the year, which were the first week of April, the second week of July and the first week of June.

“It’s been very quiet for us. August this year has been our slowest month for quite a long time,” said Tom May, partner at Catley Lakeman Securities.

BofA Merrill Lynch’s tiny contribution to the volume did not help: the top agent only priced two deals totaling $8 million. But the agent had been unusually active during the prior week at the start of the month.

Roiled markets

Market participants were spooked by China’s surprise devaluation on Tuesday followed by a second one the next day. The market sharply dropped on Wednesday to rebound by the end of the week and finish flat.

In the midst of these ups and down, investors stayed away from the market for most of the week, sources said.

“It’s not just the summer. It’s a combination of China and the commodities bear market as well as the lengthy six-, seven-year bull run that we’ve had,” said Andrew Valentine Pool, main trader at Regatta Research & Money Management.

“Most of those runs are seven-year long give or take. Investors anticipate the end of the bull and that’s what’s kind of playing out.”

Mini deals

No offering exceeded the $20 million mark, according to the data.

International exposure, notably to the euro zone equity space, was one of the main themes for some of the “bigger” deals, perhaps prompted by China’s devaluations and the continued uncertainty around the Greek bailout, some sources said.

JPMorgan Chase & Co.’s $18.85 million offering of leveraged uncapped notes linked to the Euro Stoxx 50 index was the top deal. The upside leverage factor was 1.403. Investors were exposed to any losses.

“Doing non-U.S. is on the minds of a lot of people,” said Pool.

“It gives more variety. For the past few years, investors’ portfolios have been concentrated in U.S. equity. If the bull market starts to phase out, the best place to be will be the European markets.

“We like Europe ourselves. We’re looking two to five years out, where we see less risk.”

Issuers brought a few worst-of deals. An example was the deal No. 2 – Credit Suisse AG, London Branch’s $15.4 million of 10-year trigger phoenix autocallable optimization securities linked to the lesser performing of the S&P 500 index and the Euro Stoxx 50 index. UBS Financial Services Inc. was the agent.

JPMorgan priced another worst-of product in a $13.38 million offering of notes linked to the MSCI EAFE index and the Russell 2000 index.

Dollar bears

More unusual was the fourth deal, a currency-linked note. JPMorgan’s $14.71 million of two-and-a-half year buffered enhanced participation notes offered a bullish bet on a basket of currencies against the U.S. dollar. The non-equally weighted basket consisted in the euro, the Japanese yen, the British pound, the Swiss franc and the Australian dollar.

“It’s interesting. In a week where China and Asian currencies were in the headlines, they simply picked currencies of developed market countries versus the dollar,” said May.

“Maybe it has to do with the Fed. Maybe more people are starting to be skeptical about a rate hike for next month. If the Fed doesn’t raise rates in September, the dollar is going to drop.

“Maybe the view is also that the dollar rally is overdone. Some people may be expecting a reversal.”

CMS

Morgan Stanley priced the No. 3 deal in its $15 million of fixed-to-floating-rate leveraged CMS curve and S&P 500 index-linked notes due Aug. 19, 2030. The first year coupon was 10%. After that, investors earned 8.5 times the spread of the 30-year Constant Maturity Swap rate over the two-year CMS rate capped at 10% a year multiplied by the proportion of days on which the index closed at or above the index reference level, 75% of the initial level. If the index finished at or above the 50% barrier level, the payout at maturity was par.

Volume for the month as of Aug. 15 was $737 million, a 36% increase from the $543 million issued in the same period in July.

But from a year ago, volume is down 36% from $1.158 billion sold in the first half of August 2014.

JPMorgan was the top agent last week with 28 deals totaling $141 million, or 43% of the total volume priced. It was followed by UBS and Barclays.

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