Agents price $463 million of structured products amid volatile market, Fed fears

By Emma Trincal

New York, Sept. 21 – While global equity markets declined last week on increased expectations of a Federal Reserve rate hike, volume in the U.S. structured notes market remained strong.

Agents sold $463 million of structured products in the week ended Friday –the second of the month – in 154 deals, according to data compiled by Prospect News.

This notional was on the top half of all weeks since the beginning of the year, which includes bulky weeks ending each month, the data showed.

Nice summer

Seasonal volume patterns changed somewhat this year with an exceptionally healthy summer, a trend reversal.

July and August were respectively the second and third best months of the year after January.

July’s figures, however, are skewed as it is when Bank of America double-priced its notional sales, adding to its July volume that of June as a result of its decision in June to postpone pricing due to the unpredictable impact of Brexit on the markets.

However, August, usually one of the dullest months of the year was strong with $3.18 billion versus $4.68 billion in January, which is typically the best month. August volume was close to July’s $3.31 billion even when July accounted for two of Bank of America’s sales cycles in the same month.

Month, year

So far September looks inconclusive for some.

“September has been slower so far, but I think it’s been on hold because of the holidays,” said a sellsider at a top firm.

But the data is showing a positive picture through Sept. 16, with sales up nearly 18% to $789 million from $671 million during the same period in August.

From a year ago, however, September issuance is slightly lower, down 4.70% from $828 billion.

While the year-to-date volume is significantly less than a year ago, the gap has been progressively narrowing through the summer. At the beginning of July, year-to-date volume was down by 25%, but today the negative gap is about 21% with sales through Sept. 16 at $25.35 billion this year versus $32.18 billion, the data showed.

BofA Merrill Lynch

Last week’s deal sizes were modest except for the top deal, at about $36 million, much below the $50 million mark.

Three of the top four were distributed by BofA Merrill Lynch, which is not typical as the top agent usually prices and leads at the end of each month.

However those deals were smaller than the firm’s typical larger block trade; also, none included leveraged structures, often sold by Bank of America.

Leverage

Leverage made for only 16% of the volume last week versus a year-to-date average of 45%, the data showed.

The “largest” leveraged note offering was the No. 9 deal. Distributed and issued by Bank of America, it priced at $10.7 million and was linked to a basket of three stocks, another unusual feature for this agent. Among the top 10, Merrill Lynch priced the first, second, fourth, six and ninth deals.

Commenting on the contribution of Bank of America to the sale of the top offerings at this early stage of the month, a retail distributer said that: “A lot of that has to do with Merrill selling directly to wealth management. Anything over $10 million is usually wealth management. Retail would be more like, $1 million, $5 million pieces.”

Market-linked step ups

The No. 1 deal was Barclays Bank plc’s $35.94 million of three-year autocallable market-linked step-up notes linked to the S&P 500 index.

The notes will be automatically called at par of $10 plus a call premium of 10% per year if the index closes at or above the initial index level on one annual observation date and near maturity.

If the notes are not called and the final index level is greater than the step-up value, 125% of the initial index level, the payout at maturity will be par plus the index return.

If the final index level is greater than or equal to the initial level but less than or equal to the step-up value, the payout will be par plus the step-up payment, 25%.

Below the initial level, investors will have one-to-one exposure to the decline.

Market-linked step up notes autocallables are one of the signature products of BofA Merrill Lynch, according to the data.

While those products offer full upside participation above the step, many view the digital payout as a form of a coupon, albeit one that does not cap the upside. In addition, investors can receive a premium if the notes are called.

Sources said that this type of note fits the needs of income investors without penalizing them on the upside.

The second offering was also a market-linked step up with an autocall. The issuer, Bank of Nova Scotia, priced $28.51 million of seven-year notes linked to the S&P 500 index.

The autocallable will be observed once a year. The call premium will be 6.4% a year. The step-up payment is 35%. The issuer offered a 15% buffer.

Coupon deals

The No. 3 offering, with UBS Financial Services Inc. acting as the distributor, was Credit Suisse AG, London Branch’s $18.96 million of two-year trigger autocallable contingent yield notes linked to the SPDR S&P 500 ETF trust. The contingent coupon is 7% a year with an 80% barrier observable quarterly. The notes will be automatically called at the initial price strike on a quarterly observation basis.

The No. 4 offering was entirely designed for income.

Royal Bank of Canada priced $17.64 million of one-year 8.75% STEP Income Securities linked to the common stock of Whirlpool Corp. Interest is payable quarterly.

If the final price of Whirlpool stock is greater than or equal to the step level, 118.75% of the initial share price, the payout at maturity will be par of $10 plus 5.92%.

If the final share price is greater than or equal to the initial share price but less than the step level, investors will receive par.

If the final share price is less than the initial share price, investors will be fully exposed to the decline.

Income solution

“Look, people are hunting for yields,” the distributor said.

“We’re still at historic lows. If yields move up a little bit, it’s great but it’s not going to satisfy investors.”

Investors have been searching for yields in dividend stocks, but some strategists have warned that the trade may be crowded, he noted.

“I haven’t seen people moving out of dividend stocks yet, but if it happens it would be a fairly logical thing.

“While dividend stocks are not expected to see huge declines, they’re not immune to large drops and they’re still subject to market moves.

“We’re seeing a lot of income deals right now. It may be people diversifying out of dividend stocks, moving over to structured notes. At least they can get some level of protection.”

Equity comfort zone

A structurer said that uncertainty around future rates explained why structured notes offering income themes were currently so popular.

Sources were interviewed prior to the Federal Reserve’s announcement on Wednesday to hold rates steady.

“People still need to place their money somewhere. But it’s a challenge. Everything is expensive and rates are looking like they may go up surely but slowly,” he said.

“People want to stay away from fixed-income where interest rate risk is the greatest.

“But they’re getting comfortable with equity. The economy is not doing badly. U.S. companies are doing pretty well. People don’t expect a big correction.

“With that outlook, if you don’t expect a big tail risk, using equities to generate income is not a bad idea.”

The top agent last week was Bank of America with $122 million priced in eight offerings, or 26.40% of the total. It was followed by JPMorgan and Barclays.

“September has been slower so far, but I think it’s been on hold because of the holidays.” – A sellsider

“People still need to place their money somewhere. But it’s a challenge. Everything is expensive and rates are looking like they may go up surely but slowly.” – A structurer

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