Issuance continues to decline amid banks' earnings blackouts, tough pricing environment

By Emma Trincal

New York, July 13 - Structured products issuance remained subdued last week as banks' earnings season put deals on hold, summer began in earnest and growing market uncertainty made offerings more challenging to price for the sellside and far less exciting for investors, sources said.

Last week, the first of the month and the July 4th holiday week, was sluggish with $261 million sold in 36 deals excluding exchange-traded notes, down 73% from the week before, according to data compiled by Prospect News.

More significant was the 20% volume decline on a month-over-month basis. Issuers priced $412 million from July 1 to July 9, compared with $512 million during the same time in June. But then again, the holidays may have contributed to the decreased volume, sources said.

Earnings halt

"People were coming off the holiday weekend, so obviously you had a slowdown," a New York sellsider said.

"I saw lightly structured deals, step-ups, stuff like that.

"For a lot of issuers, it's financial reporting season. A lot of banks are in some form of blackout, which contributes to limit the types of products they can issue."

Asset classes

All asset classes declined in volume last week including equities, which were down 61% at $198 million.

Issuance of stock- and equity index-linked deals both declined, although stock deals held up a little bit better than indexes.

On a month-over-month basis, however, the volume of equities-linked notes grew 9.3% to $303 million.

"Equities is OK, but you still have the macroeconomic overhang," the sellsider said.

Talking about the current discussions around the debt ceiling in the United States, he said, "A lot of people don't think there will be a debt crisis. But as we're getting closer to the deadline, there is more uncertainty."

Among all asset classes, the big loser for the month was commodities, with volume down 78% to $25 million from $112 million. On a percentage basis, commodities-linked notes, which in the beginning of June accounted for 22% of the total, dropped to only 6% this month.

No direction

"It's very choppy, very spotty. It's hard to find a trend in this market," the sellsider said.

"You have a combination of summer overhang and macroeconomic uncertainty, which leads to very little conviction on the part of investors."

Structural trends were hard to pinpoint, sources said.

Leveraged return deals without downside protection grew by two-thirds in volume last week versus the week before, a natural result of the pricing calendar.

But on a monthly basis, the trend went the opposite way. This type of structure fell 36% to $45 million this month from $70 million during the same time in June.

As expected, reverse convertibles fell strongly last week, the early part of the month. But they grew on a month-over-month basis to $55 million in July from $45 million in June.

For this sellsider, however, reverse convertibles are no longer in favor.

"Reverse convertibles are definitely down," he said.

"When the market is up, people's expectations for the types of coupons and barriers are just not matching.

"And when volatility is finally up and the market down, people get scared. It's a catch-22."

The risk aversion is indeed a factor for many brokers and advisers.

"We're staying away from reverse convertibles. We're seeing more quick swings in the market, and the barriers are getting broken," said Andrew Valentine Pool, main trader at Regatta Research & Money Management.

Goodyear, Topix

Two-thirds of last week's volume was represented by hybrid structures that do not fit into a clear category.

The top two deals were part of this group.

The first one was issued by Barclays Bank plc, which priced $49.93 million of 10% STEP Income Securities due July 20, 2012 linked to the common stock of Goodyear Tire & Rubber Co. using a structure used by Bank of America Merrill Lynch, which was the agent on the deal.

Investors will get a 4.57% step payment in addition to their coupon if the share price at maturity is 110% or more of the initial price. If the price finishes between 95% and 110% of the initial price, investors will get par. Below the minus 5% buffer, they will lose 1% for each point of decline.

This deal was a repeat of a similar offering with slightly different terms from June, Bank of America Corp.'s $50.29 million of 9.5% STEP Income Securities due June 25, 2012 linked to Goodyear.

Another example and the deal No. 2 for the week was Deutsche Bank AG, London's $15.96 million of 0% autocallable return enhanced notes due July 25, 2012 linked to the Topix index.

The notes will be automatically called at 107.24% of par if the index closes at or above 104% of its initial level on Oct. 20, Jan. 20, 2012 or April 20, 2012.

If the notes are not called and the final index level is greater than the initial index level, the payout at maturity will be par plus 1.81 times the index return, subject to a maximum return of 7.24%. Investors will be exposed to any index decline.

Deals were smaller in size during the week ended Friday, according to data compiled by Prospect News.

There were only 12 deals that exceeded $10 million last week versus 34 for the previous week.

So far this month, three deals of more than $20 million have priced against seven during the same time in June.

Lackluster offerings

Some market participants said that the quality of the deals being offered is on the decline as well.

"We've looked at the offerings for the last two weeks, and they were very weak. And June was horrible," said Pool.

"We were disillusioned with the off-the-shelf products brought to market. We were looking for an enhanced growth note and couldn't find anything.

"We felt we could do better by having a note custom-made. We talked to an issuer, and he will do it for us. This gives us two benefits: one, we get what we want. Two, we can ladder it."

Pool said he understands from a pricing standpoint why supply has become less appealing to investors as structurers are more vulnerable to wide price fluctuations.

"Products are kind of boring when volatility goes up because issuers have to be more cautious as the cost of options goes up," he said.

"The options have to be in a range, but within days, if the market swings enough issuers can run into trouble.

"They do hedge to cover their basis, but with volatility swings they do need to have a margin of error. They have to cover that. As a result, the deals are not very exciting.

"I also feel that issuers are kind of laissez-faire about it."

The top agent last week was Bank of America with three deals totaling $71 million, or 27% of the total. JPMorgan was next, followed by UBS.

"It's hard to find a trend in this market." - A New York-based sellsider

"We've looked at the offerings for the last two weeks, and they were very weak." - Andrew Valentine Pool, main trader at Regatta Research & Money Management

© 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.