Credit Suisse issues top deals, including No. 1 for year; appetite for uncapped notes seen

By Emma Trincal

New York, April 30 - Agents last week sold $1.4 billion in 199 deals, and Bank of America played an exceptionally big role, selling 68% of the total, according to data compiled by Prospect News.

Among those deals, Bank of America distributed the largest deal of the year so far. It was Credit Suisse AG, London Branch's $260.29 million of market-linked step-up notes due June 26, 2015 linked to the Euro Stoxx 50 index.

Sources noted the increasing visibility of Credit Suisse as the issuer of choice right now among the various credits used by Bank of America in its open architecture platform.

Credit Suisse so far this year has been Bank of America's most widely used issuer, accounting for 26% of its deals, according to Prospect News. This issuer alone brought to market half of Bank of America's volume this year.

Credit Suisse

"With these large deals, you see different issuers. This time, it's Credit Suisse. Another time it will be Barclays or Royal Bank of Canada," a sellsider said.

"Bank of America continues to be the dominant wirehouse in the market. They prevail in the space, but they use different issuers.

"It takes a lot of time for a firm to approve an issuer, and if Bank of America deals with other names than itself - Credit Suisse, Barclays, RBC, HSBC, Deutsche Bank - it's because investors want that open architecture. They don't want to put all their money in Bank of America."

Portfolio managers and advisers themselves are "forced" to diversify, said a market participant.

"Not having enough credit diversification can be problematic for portfolio managers," this market participant said.

"You can't put 20% in structured products from the same issuer in your portfolio. You have a fiduciary duty to diversify. You can't overweight your portfolio with the same name. If you don't diversify, you can't increase the amount of structured products that you're using."

Year-to-date growth

The market for structured products continues to show growth so far this year. Volume as of Friday has grown 15.5% to $14.04 billion from $12.16 billion, according to the data.

"It's been an up year, which is good," the sellsider said.

"Every month, volume was up consistently from the previous year."

In January, sales were up 14.75% from January 2013. In February, volume rose by 15.75% from the year before. March was up 8.4%. As of Tuesday, volume in April has increased by 15.5% compared to the same period last year, according to the data.

Despite recent sell-offs in the Nasdaq and geopolitical uncertainties, some sources believe that structured notes tied to equity will continue to be in demand in 2014. Equity-linked notes make for 84% of the total issuance volume this year versus 79% last year. Their volume represents $11.76 billion, a 22% increase from last year, according to the data.

"Stocks are highly valued. We've seen that in the correction of the tech stocks. But at the same time, people are still fairly bullish because what are the alternatives?" the market participant said.

Top deal of 2014

The top deal of the year, which priced April 24, was characteristic of a new trend in the market with investors demanding the removal of caps, the sellsider said.

The notes offer no downside protection. The payout is calculated point to point. There is a step-up value of 12.9%. If the Euro Stoxx 50 finishes flat or positive but not higher than the step-up, investors will get a digital payment of 12.9%. If the index is higher, they will participate in the index.

"It's a fine product, and it's the right structure to do," the market participant said.

"With the step-up structure, you're buying digital calls which pay 13% if at maturity the index is up by less than that. In this low-volatility environment, it makes sense to do that. It's relatively cheap."

Strategic trend

According to the sellsider, the size of this deal reflected a move from tactical plays to strategic allocations.

"We're seeing investors increasingly using notes as a strategic allocation," he said.

"Somehow this Credit Suisse step-up is an illustration of that trend. People are using structured notes as core investments. The main characteristic of those investments is probably the fact that they are uncapped.

"You're more focused on the index. This step-up is long the Euro Stoxx. It's a strategic story. These simpler, uncapped structures are closer to buying the view itself. You use them as an asset allocation tool or something that can give you exposure to a hard-to-access asset class."

He analyzed Credit Suisse's $260.29 million step-up deal as a "perfect example" of that trend.

"It's short term. It has no downside protection and no cap. It's pretty much one-to-one except for the step-up. Yes, there is a little bit of return enhancement. But what people like is the combination of the step-up and the possibility to participate in the upside if the Euro Stoxx really takes off," he said.

"I think the market increasingly wants to get exposure to those benchmarks, and they want to do that without a cap.

"A lot of the bigger deals now go uncapped. The big trackers recently seen are part of the same trend. They offer no leverage and no protection, but they're not capped."

For this sellsider, the appeal of uncapped products signaled that structured notes are gaining traction.

"We've heard it in conferences, and it's proven by the numbers: people are starting to look at structured notes more as core investments or beta. They've used ETFs or mutual funds, and now they're saying, 'Wait a minute, I'm getting a better deal using structured notes,'" he said.

Other strategic plays

Another example of a deal fitting the strategic allocation model was the No. 4 offering last week, Credit Suisse's $47.33 million of 0% autocallable market-linked step-up notes due April 28, 2017 linked to the Euro Stoxx 50 index.

The notes will be automatically called if the index closes at or above the initial index level on either of two observation dates. The call premium is 11% if the notes are called after one year and 22% after two.

If the notes are not called and the final index level is greater than the step-up value, 139.5% of the initial 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 39.5%.

If the index is negative, investors are fully exposed to the decline.

"Even though it's an autocall, this is another uncapped deal if you get to maturity," the sellsider said.

"There is no cap, no leverage. If the market is really high, there is no constraint. The only different feature you have is the autocall. But this is not your typical barrier autocall, which offers no upside participation beyond the coupon.

"The standard autocall is not very much different from the leveraged buffered note with a cap. In both cases you have some form of return enhancement and a cap. You're willing to give up some of the upside for the barrier or the buffer. That's not the case here."

Buffers

Leveraged deals, however, with or without a buffer were still very much in favor last week, with Bank of America pricing large offerings.

The largest two after the $260.29 million step-up offer three times leverage over a 14-month period, no downside protection and a cap.

"I'm not saying nobody is doing leverage anymore. These are tactical plays. They have a cap. They have leverage. You need to have a more specific view of the market. You want leverage because you think the index won't go up that much," the sellsider said.

The first one of those deals was Credit Suisse's $129.75 million of 0% Accelerated Return Notes due June 26, 2015 linked to the S&P 500 index. The cap is 10.71%

The second was Bank of America Corp.'s $52.82 million of 0% Accelerated Return Notes due June 26, 2015 linked to the PHLX Housing Sector index, with a 20.13% cap.

Pricing

The multiplication of uncapped deals was the result of current pricing conditions as much as the reflection of investor demand, the sellsider said.

"It's not because investors have turned more bullish that they want to remove the cap and go without protection. Believe me, they do want the protection. I think it's more due to the market environment. Rates are still low and protection is still expensive, which makes the structures very unattractive. Very often, the caps are too low," he said.

"In a way, people are forced to move into deals that offer very little protection, if any."

Last week, however, saw large buffered deals. Credit Suisse issued the biggest one, ranked No. 6 in size, which was also distributed by Bank of America.

It was Credit Suisse's $44.86 million of 0% Capped Leveraged Index Return Notes due April 29, 2016 linked to the S&P 500. The structure offers 200% upside participation up to a 10.74% cap with a 10% buffer.

"With those tactical deals, the emphasis is more on the structure: How much leverage am I getting? What's my downside protection? Of course leverage, caps and protection remain popular. The structured products market is really for all seasons," the sellsider said.

Low vol

The market participant agreed that the environment continued to be challenging for structurers.

"The market is not even volatile. It's just not trending. The swings are very low. You'll see the implied volatility of the S&P going to 16 or 17 then back down to 13. These are not high volatility levels. The market is just directionless," he said.

However, some aspects of the market may help in the manufacturing of some products, he said.

"There are ways to offer higher coupons, better products," he said.

"For a high coupon product you need high volatility, which we don't have. But we also need low correlation, which we have. In order to get some protection, you could structure a worst-of reverse convertible. We just did one recently with a one-year maturity, a 59% barrier, a 3% coupon tied to three equity indexes.

"Another way to increase the coupon is to include an autocallable feature. It helps compensate for the low volatility."

Rates

Among non-equity products, interest rate deals have seen the biggest growth, nearly doubling this year. But at about 5% of the total, they still represent a small portion of the market.

The top offering in this asset class last week was Barclays Bank plc's $40 million of callable leveraged steepener notes due April 30, 2029 linked to the 30-year Constant Maturity Swap rate and the five-year CMS rate.

The first-year interest rate is 10%. The leverage factor applied to the spread is five. The payout at maturity will be par.

It was the largest deal after Bank of America's top six deals. Bank of America priced $957 million in 26 deals as of Friday.

The second agent was JPMorgan followed by UBS.

"People are starting to look at structured notes more as core investments or beta." - A sellsider

"The market is just directionless." - A market participant

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