Structured products agents price $572 million for week amid heightened uncertainty in markets

By Emma Trincal

New York, Aug. 7 – Structured products issuance volume for August kicked off at a decent pace with $572 million sold in 187 deals, according to preliminary data compiled by Prospect News. The week ended Friday extended last month’s final calendar week, which saw the pricing of $1.47 billion in 310 deals, according to updated data.

That left July’s tally at $3.58 billion, on par with June’s volume. But the best three months this year have been in the spring with May, April and March being the best months in decreasing order.

The year-to-date picture continued to improve. While the overall sales through Aug. 2 continued to lag last year – $27.2 billion versus $35.6 billion – the 23.6% rate of decline has narrowed compared to a couple of months ago when the gap was at about a third.

Bombshells

Last week was memorable for equity performance and not in a good way. After cutting interest rates for the first time in 10 years, the Federal Reserve disappointed investors who had expected half a point rather than a quarter of a point cut, pushing stock prices lower. President Donald Trump delivered the coup de grace the next day, intensifying trade tensions by threatening a 10% tariff rate on $300 billion of Chinese goods. The menacing tweet rattled investors worldwide and caused the S&P 500 index to post its worst week of the year, down 3.1%, and settling at 2,932.04, about 3.2% lower than the all-time high record of July.

These unpredictable developments have mixed effects on the pricing and selling of structured notes.

“Hedging? You can’t even hedge the notes,” a structurer complained.

“Having Trump is like having a black swan in the black box. It’s like a time bomb.

“If anything, you’re lucky if you can catch the right pricing at the right time.

“Our industry is so solid. There’s always a deal for a given environment. When vol. is low, you get principal protection. When it moves up, you have buffered deals. But when you’re in a chaotic market, nothing makes sense anymore.”

Uncertainty prevails

Matt Rosenberg, sales trader at Halo Investing, pointed to the rapid changes in the market last week, saying that many investors are wondering if the long running bull market is not starting to show some cracks.

Major U.S. indexes are still near their all-time highs, but confidence seemed shaken after the sell-off.

Money managers lack the tools they usually rely on to make investment decisions, he said.

“We don’t have strong signals one way or the other. Not for future rate cuts and not for when the trade war is going to end,” a source said.

“The lack of guidance on whether the Fed is heading toward lower rates is a concern,” Rosenberg agreed.

“The oil market has been volatile. People are wondering what impact the trade war is going to have not just on the stock market but on commodities as well.

“Volatility is picking up. Even if the market is trying to rebound, I don’t see this sell-off as a one- or two-day story.”

Seizing the opportunity

But for structured products issuance, such developments can be positive.

“With this heightened volatility, we’re going to see continued activity in the structured notes space,” he said.

For a small shop like Halo, sudden volatility swings are conducive for business.

“People see the uncertainty as a call to action to consider structured notes.

“We do a lot of customized deals. We don’t depend on the calendar with trades that are shown weeks in advance. We can jump in when volatility spikes and do customized deals with better terms,” he said.

He offered an example: on July 29, his firm was about to price a Phoenix autocallable contingent coupon deal with a rate of 6.2%. As volatility soared on Friday, the trading date was pushed to Monday. As a result, the coupon was raised to 8%.

“You get a lot of new opportunities from single-stocks reverse convertibles to autocallable contingent coupon deals and buffered notes,” he said.

Many of those structures sell options to generate the coupon. As risk increases so do the premia on the options, which translates into higher yields.

“Fear is starting to establish itself. People see this market making a turn. They want more protection, more compelling terms,” he said.

Since last week’s sell-off, Rosenberg said deal terms have been improved by 25%. For instance, a 6% coupon would rise to at least 7.5% as a rule of thumb.

Product-sensitive

For the structurer, the impact of surging volatility varies based on the product types.

“For certain deals, yes, it helps. As a general rule, deals that don’t have hard protection, for instance barrier notes or principal-at-risk notes, those will show better terms,” he said.

But nothing is written in stone.

“When volatility is spiking like now, sometimes it only affects short-term volatility. It might not have an impact on long-term vol. You can’t generalize as a result,” he said.

Rosenberg said volatility makes products more enticing.

“Coupons were pretty weak so far. Now they see much better yields. The rationale has become: I want to execute now. I don’t want to execute in three weeks,” he said.

New trade-off

Recent pricing last week reflected market conditions prior to the sell-off. Prospect News spotted a couple of trends. One for instance consisted of increasing buffer sizes at the expense of leverage.

For instance, a five-year note with a 20% buffer, a 50% cap and a one-to-one upside exposure on a major U.S. equity index was recently seen. Some registered advisers will always resist the existence of a cap when the upside is not leveraged, according to interviews with some of them. But those notes do get sold, and for their buyers, the rationale is the need to protect principal.

The question is whether buffers have become so expensive that it has forced investors to not only give up the full upside (cap) but also the leverage.

Not necessarily, said the structurer.

“I’m not sure they’re doing this because buffers are more expensive,” he said.

“Everything starts with a choice: do you want a lot of leverage or do you want a strong buffer? Then you try to price it with the cap. If the cap is too low, for some it makes sense to give up the leverage. Other times, some people will say: forget about the buffer. It’s all about leverage,” he said.

No autocall

Another interesting structure was Bank of Montreal’s $482,000 Bullish Booster Percentage Notes worst-of on the Russell 2000 index and the S&P 500 index. The notes pay a minimum return of 20% at maturity or the gain of the worst-performing index if both underliers are positive. The downside has a 70% barrier.

The structure mimics BofA’s market-linked step ups. A significant difference however is that it does not come with an autocallable feature.

10-year calls

Extending maturities is a classic remedy against weak coupons. Barclays Bank plc used the concept last week in the pricing of two 10-year contingent coupon deals for $25.16 million and $22.29 million, respectively. The deals were somewhat similar yet with notable differences.

The first one was tied to the S&P 500 index only, while the second gave exposure to the lesser performing of the Nasdaq-100 index and the Russell 2000 index.

The first one was callable with a 6.65% coupon on a 75% coupon barrier. The second was automatically callable. Its 6.5% coupon was paid based on a coupon barrier set at 70%.

Finally, barriers at maturity were set at 60% and 50%, respectively. The dealers were Morgan Stanley on the first deal and UBS for the second one.

The offerings were the top two and three of the week in size.

“These are probably retail deals. Investors have a certain coupon in mind. They have a target return to shoot for. In order to get it, I guess they have to go as far as 10 years,” the structurer said.

“Longer tenors will give you higher coupons. The longer the term, the greater the risk. You get paid a premium accordingly.”

Top deal

Morgan Stanley Finance LLC priced the top deal in $26.3 million of three-year dual directional trigger Performance Leveraged Upside Securities linked to the S&P 500 index.

If the index finishes above its initial level, the payout at maturity will be par plus 200% of the index return.

If it closes negative but above 80% of the initial price, the payout will be par plus the absolute value of the index return. Otherwise, investors will be fully exposed to the index’s decline from its initial level.

The top agent last week was UBS with $191 million in 61 deals, or 33.47% of the total. It was followed by Morgan Stanley and JPMorgan.

JPMorgan Chase Financial Co. LLC was the No. 1 issuer with $129 million in 34 deals, or 22.63% of the notional.

For the year to date, Barclays Bank plc is the top issuer with $4.17 billion in 1,028 offerings, a 15.33% share.

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