Year kicks off inconclusively with $358 million of structured products issuance; blackouts eyed

By Emma Trincal

New York, Jan. 14 – The first full week of the year saw the pricing of $358 million of structured products in 100 deals, a not very telling figure early on in the month and the year cycle, said sources commenting on data compiled by Prospect News.

From Jan. 1 to Jan. 9, volume declined from the same period in December ($436 million versus $604 million last month), but it was up nearly 5% from a year ago.

“It’s not surprising at all. Most advisers didn’t come back until the 5th, so of course you’re going to have a reduced activity on this early part of the month compared to December. January is often a busy month. We have to wait and see,” said Andrew Valentine Pool, main trader at Regatta Research & Money Management.

Blackout periods eyed

Investors in structured notes “should do well in a volatile market because volatility gives opportunities,” he noted. Right now, though, it was hard to say whether the year was starting on a strong footing.

“I think we have a high probability of a pullback, perhaps not this quarter but in the second quarter. Unless oil makes a strong comeback, the percentage of people who believe that low oil prices will affect the bottom line will increase. On the one hand, low oil prices are good for a lot of companies, like shipping, trucking business. But the strong dollar also hurt a lot of U.S. companies that sell overseas.”

“There are no real inputs – blackouts may have impacted some issuance,” said an industry source.

A blackout is a “quiet period” before a company’s earnings release during which securities offerings are limited or suspended in order to prevent insider trading.

JPMorgan reported its fourth-quarter earnings on Wednesday. Bank of America and Citigroup release their earnings on Thursday and Goldman Sachs on Friday. Morgan Stanley’s earnings are due for announcement on Jan. 20.

Last week was dominated by Goldman Sachs Group, Inc. as the top agent. It sold $90.55 million of 8% equity-linked notes tied to Macy’s, Inc., the No. 1 deal. The structure offered a grid of payouts based on different strike prices – 113.5% of the initial price for the upper strike; 110.5% for the lower strike; and 85% for the protection strike. Investors received only par between the lower and the upper strike. The 10 basis points fee led sources to assume the client was an institution.

“I’m glad I’m not creating those types of deals. I would have to quit in a year,” said Pool.

Volatility offers opportunity

The market was choppy last week as it has been since the New Year. Sources said they were not sure about what the market direction will be and therefore volume for structured products amid the collapse in oil prices remains a wildcard.

“I have no clue,” said a distributor.

“We’re seeing sell-offs followed by big rallies. I don’t know what’s the sentiment. It’s very early.

“In a way, I’m not really sure we’ll see a pullback. A lot of people see spikes in volatility as an opportunity to sell more vol. But it doesn’t mean the market is in freefall.

“It’s not necessarily bad for us. We may see an increased appetite for downside protection, including full principal-protected notes. That’s a good sign for market-linked CDs.”

Besides its $90.55 million Macy’s deal, Goldman also priced the second and third top offerings.

The No. 2 deal was $25 million of 0% notes due April 9, 2015 linked to the Topix index. The payout was one-to-one.

Number three deal was a relative value play between a basket of three S&P sector indexes (finance, health care and consumer discretionary) and the S&P 500 index.

If the sector average return and the S&P 500 return are both positive, investors get par plus 115% of the sector average return, subject to a 23% cap; if the sector average return is positive but the S&P 500 return is negative, the return is the sum of both performances; if both are negative, investors receive the negative return of the S&P 500 index.

“It seems like a lot of moving parts. You’re bullish on both but you think that the three sectors will outperform the broader market,” a sellsider said.

Stocks

The week was dominated by single-stock issuance, which accounted for $178 million or 50% of the total. This market share is well above the 25% to 27% average for this asset class. Half of this single-stock sales volume came from the top deal, but the other half was the result of 59 transactions much smaller ($1.5 million in average) with the largest one at $13.43 million.

“People buy stock deals because volatility is higher. We may have seen higher levels of volatility in the S&P, but on an historical basis, the market is still at a very low level of vol.,” the distributor said.

Technology stocks were in favor, such as Micron Technology, Inc., Apple, Inc., Facebook, Inc. and Yahoo! Inc.

“You’ll continue to see deals tied to technology stocks simply because of this sector’s performance,” said Pool. Talking about technology manufacturers, he said that: “You don’t have that many players and there is a huge need for it. I’m talking about the big microchip manufacturers, the Intel and the AMD. There is such a high barrier of entry in this field to be a leading technology designer or manufacturer. And everybody needs those companies. We all need batteries, semiconductors, processors.”

Oil in focus

Energy deals based on oil were also one of the main themes seen last week.

Investors made bullish bets on oil mostly via exchange-traded funds or stocks. Some of the underliers used included the Market Vectors Oil Services ETF; the Energy Select Sector SPDR fund; EOG Resources, Inc.; Phillips 66; and Halliburton Co.

The top oil deal was brought to market by JPMorgan Chase & Co. with $11.8 million of 0% trigger jump securities due July 14, 2015 linked to the SPDR S&P Oil & Gas Exploration & Production ETF. The notes paid a digital payment of 19.5% over the six-month period and offered a downside barrier of 90%.

The top agent last week was Goldman Sachs with six offerings totaling $139 million or nearly 39% of the total. It was followed by JPMorgan and UBS.

“A lot of people see spikes in volatility as an opportunity to sell more vol. But it doesn’t mean the market is in freefall.” – A distributor

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