Issuance volume hits low at $276 million during post-holiday week amid China sell-off, Greece

By Emma Trincal

New York, July 15 – The structured products market was so quiet last week after the Fourth of July weekend that volume turned out to be the smallest for the year so far in weekly terms, according to data compiled by Prospect News.

Agent priced $276 million in the week ended Friday in only 85 deals. The number of offering for that week was also the smallest on record so far this year. Other weeks have seen up to 330 offerings.

Finally, the sizes of the top three issues were small at $27.46 million, $18.6 million and $13.71 million, respectively.

“Number one: people were coming off the holidays,” a sellsider said.

“Number two: you had the uncertainty in Greece. People were probably in a wait-and-see mode to see how it pans out before reacting.

“Number three: it’s the summer, but I couldn’t say the summer is what’s behind it really. ... I’m actually getting more trade ideas this week, and things are getting busy. When it dries up one week because of the summer, it’s going to dry up the second week and the third week. ... I don’t see that right now.”

Greece, China, Iran

It was a turbulent week in the global equity markets with China’s sharp sell-off on Wednesday followed by a rebound the next day while Europe was working on another bailout package to avoid Greece’s exit from the euro in the aftermath of a “No” vote by referendum.

At the same time, the United States was near the finish line with its deal with Iran, which did not help oil prices.

Amid the heavy headlines worldwide, investors focused more than ever on international benchmarks.

The Euro Stoxx 50 index used as a standalone underlier made for more than a quarter of total volume with 17 deals totaling $71 million, according to the data. The S&P 500 index, in comparison, used without any other reference assets made for only $25 million in four deals. Rather than using the S&P 500 by itself, firms combined the U.S. benchmark with more volatile assets such as the Russell 2000 index, the Euro Stoxx 50 and some iShares MSCI exchange-traded funds, such as the emerging markets ETF fund or the EAFE ETF.

“Vol is pretty low right now even with the pullback. VIX is under 13. So why not use other more volatile stuff combined with the S&P?” a market participant said.

“Foreign markets are in the news. There’s a lot of volatility out there. People have tons of S&P notes. Maybe it’s an opportunity to play something different. It’s a way to do cheaper bonds and have investors go for lower expected returns since they do need to play the diversification game.”

Volume for the month as of July 10 has grown nearly 8% to $428 million from $397 million in the same period of June. However, July so far compared to a year ago is lagging, down 40% from $715 million issued during the same period last year in July.

The year-to-date figures, however, are positive. So far agents have priced $25.38 billion, which is $3.33 billion more than last year, or a 15% increase.

More stocks

Last week’s single-stock issuance broke a year-to-date trend. Notes tied to stocks were up 42% from the previous week and made for 25% of the total volume. For the year, however, issuance of single-stock-linked notes has dropped more than 23% to $4.70 billion from $6.14 billion in 2014.

The prevalence of stock deals usually means more autocallable contingent coupon products, and last week was no exception. Agents sold 35 such deals totaling $84 million, or 30% of the total.

The largest one and No. 3 in size for the week was Barclays Bank plc’s $13.71 million of contingent income autocallable securities due July 13, 2018 linked to Apple Inc. shares. The 8.15% annual contingent coupon is paid quarterly based on an 80% coupon barrier. The autocallable feature is triggered on any determination date when the stock closes at or above its initial price. The final barrier is 80% of the initial price. RBC Capital Markets, LLC was the agent with Morgan Stanley Wealth Management handling distribution.

Step ups

Market-linked step-up notes distributed by BofA Merrill Lynch remained popular. An example was the top deal: Credit Suisse AG, London Branch’s $27.46 million of three-year autocallable market-linked step-up notes linked to the Euro Stoxx 50.

Those deals allow for full upside participation when the final index level is above a step-up value – 130% of the initial index level for instance in this particular product. The payout is digital when the index is positive at maturity but lower than the step-up value. Investors in this scenario receive the 30% step-up payment. The downside is not protected.

Credit Suisse’s deal has an autocallable feature, as many do. The annualized call premium is 13.5%.

“We’ve seen a few of these deals outside of Bank of America actually,” the market participant said.

Leverage with protection

Leveraged notes with buffers and barriers made a comeback last week, accounting for 26% of the total volume in 13 offerings totaling $71 million, according to the data.

Goldman Sachs Group, Inc. priced $18.6 million o two-year leveraged buffered index-linked notes tied to the S&P 500. The upside leverage multiple is 1.5, the cap is 20%, and a 10% geared buffer with a 1.11 leverage factor provides some downside protection.

Low volatility can in some cases help structurers to price barriers and buffers.

“The low volatility makes your at-the-money call cheaper, which is good for your leverage. Plus you can trade the skew, taking advantage of the fact that puts have more juice,” the market participant said.

He provided greater explanation: to create a leveraged buffered capped note, the issuer sells an out-of-the money call, for instance at a 130 strike if the initial (at-the-money) price is 100. This will cap the structure at 30%. The leverage is achieved by buying at-the-money calls, which provide the enhanced upside participation up to the cap when the final return is above the initial level, or “in the money.” To finance those calls while ensuring some level of protection on the downside, the issuer sells either at-the-money or out-of-the money puts, he explained.

“Because the volatility skew gives more premium to the puts, the net net is credit. The excess premium allows you to buy the calls and get some downside protection without necessarily having to be long a put,” he said.

“The skew and the low vol work for you in those spreads. The market makes leverage less expensive, and your spread leaves you with more premium to put together the downside protection.”

The top agent was JPMorgan with $68 million in 25 deals, or 24.60% of the total. It was followed by Goldman Sachs and Bank of America.

“Maybe it’s an opportunity to play something different.” – A market participant on the large volume of Euro Stoxx 50-linked deals

“The low volatility makes your at-the-money call cheaper, which is good for your leverage.” – A market participant

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