Agents price single-stock structured products; emphasis on leverage, fixed coupon, digital payouts

By Emma Trincal

New York, Feb. 18 – Agents sold $281 million in 58 structured products deals in the week ended Friday ahead of the Presidents Day holiday weekend, according to data compiled by Prospect News. It was much less than the $385 million priced the week before, but not all deals were filed with the Securities and Exchange Commission, making last week’s data subject to changes.

Single stocks were the leading asset class with 43% of the total volume ahead of 40.5% for equity indexes, a ranking in market shares that is uncommon as indexes tend to be the No. 1 asset class. There were 31 single-stock offerings versus 14 for indexes, the data showed.

“I don’t read anything into that. The large amount of stock issuance is probably related to the month cycle. You always see more indices at the end of the month,” said a sellsider.

Fixed coupons

Another development seen last week was the decline in autocallable reverse convertibles, which represented 8.35% of the total versus 46% the week before. Those structures offer a contingent coupon paid on an observation date when the underlying is above a coupon barrier usually below par. When the price is above the initial level, the notes get automatically called.

Investors however continued to chase yield but did so with non-contingent coupons. The bid went to step income securities, which offer a fixed interest similar to a reverse convertible with an additional bonus when the underlying – most often a stock – hits a certain threshold or step level.

Additionally, the market showed a greater number of digital products, which pay a set payout when the underlying price is above either the initial price or a lower strike giving in some cases investors a chance to make money when the underlying declines within a range.

Yield-seeking

“The interest in yield is still very strong,” said the sellsider.

“In part we saw in the past couple of weeks a gradual increase in rates. Maybe as we start to climb up, people will start to be satisfied with traditional fixed-income. We may see the first steps of a change in trend, but it’s not going to happen overnight. The 10-year Treasury for the first time went to 2.15% [on Tuesday]. It went up by almost 40 basis points since earlier this year. But it needs to go up several percentage points before people switch to the conventional paper. Until we get to that level, they will continue to buy those step income and other reverse convertibles, equity products that pay a fixed coupon.”

The sellsider explained the recent Treasury sell-off as a switch in investors’ sentiment.

“Maybe people have gotten used to the shocks around us – uncertainty around Greece or Ukraine. The recent QE may have contained some of the fears, and so people are back to a focus on the strength of the U.S. economy,” he said.

Reverse convertibles

Bank of America Corp. priced the top deal of the week with $80 million of 8% floored participation notes due Feb. 17, 2016 linked to the common stock of Corning Inc.

It was the only offering in excess of $25 million. The structure was a complex reverse convertible with several upside and downside thresholds. Investors were getting at least 72.93% of par at maturity.

An example of a step income note – and the No. 4 offering of the week – was Royal Bank of Canada’s $12.84 million of 9% STEP Income Securities due Feb. 26, 2016 linked to JetBlue Airways Corp. shares. The step level was 109% of the initial price. If the shares finished above that, investors received an extra coupon of 8.01%.

Between the initial price and the step level, the payout was par. The exposure to losses was full below the initial price.

Royal Bank of Canada priced another STEP Income deal with its $12.78 million of 10% STEP Income Securities due Feb. 26, 2016 linked to United Rentals, Inc. shares. Also sold by Bank of America, which is the agent for those structures, the product featured a step level of 110% and a step payment of 4.61%. It was the fifth offering in size.

Dual directional, digitals

Investors also showed some appetite for gains offered in a downside scenario. Those deals were alternatively dual directional structures, which offer a positive return if the underlying declines within a specific range, or some digital notes that paid the digital payout even when the underlier price is negative as long as it closes above a barrier below par.

Barclays Bank plc for instance priced $10.05 million of a 13-month digital notes offering tied to the Euro Stoxx 50 index. Investors received a 5.3% digital payout if the index finished above an 85% threshold level. Below that, they lost 1.1765% for each 1% decline beyond 15%.

“I can see the appeal for that with the markets bouncing along the top,” said the sellsider.

“The S&P is at its highest level. It just set a new record on Friday. One day it sets the record. One day it sells off a little. It’s trading right along all-time highs since the last six weeks to two months. At those levels people are wondering: how much better can this get?”

JPMorgan Chase & Co. priced two one-year dual directional deals linked to the S&P GSCI Crude Oil Index Excess Return. The smaller one offered a 27% call premium versus 15% for the bigger one, but the absolute return range and therefore protection was greater for the note bearing the lower premium.

“Those deals make sense. The rally began back in 2009. Markets have been up for six years in a row. Most people believe that the party is going to end pretty soon. Whether it will trend sideways with very mediocre gains or whether the market will crash, in either case, those types of structures are becoming more attractive,” said the sellsider.

Leverage with no downside protection continued to be the structure of choice with 29.5% of the total notional.

UBS distributed the No. 2 and No. 3 deals, one linked to the S&P 500 index for $25 million and issued by Deutsche Bank AG, London Branch; the other brought to market by UBS AG, London Branch for $24.5 million linked to the MSCI EAFE index. Both structures featured a one-year tenor, three times leverage on the upside with a cap and no downside protection.

Oil, Europe in focus

Fewer oil-based deals were seen last week based on the temporary data, at least compared to previous weeks. Oil prices have been rallying with crude oil posting a fresh one-month high on Monday at $53.53 a barrel.

“We were in a downtrend and we saw last week a correction from the downtrend. Rising prices reduce volatility, so the fear trade of oil going to 20 bucks is now on hold. Those short-volatility notes are tougher to sell,” said a New York trader.

The Euro Stoxx 50 continued to be popular competing against the S&P 500 index with $32.46 million in notional issued in five deals versus five S&P 500 index-based deals totaling $34.32 million, according to the data.

“Whether the Euro Stoxx 50 is the right investment at this point, from my perspective, it’s too early to tell. But it does price out well,” an industry source said.

“People want the exposure. If you want exposure across asset classes, you’re going to look at indices where you feel the economics work well.”

Bank of America was the top agent with $106 million, or 37.58%, of the total in three deals. It was followed by UBS and Goldman Sachs.

“The interest in yield is still very strong.” – A sellsider

“Whether the Euro Stoxx 50 is the right investment at this point, from my perspective, it’s too early to tell. But it does price out well.” – An industry source

© 2015 Prospect News.
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