Year ends strong with $716.5 million of structured products issuance amid holiday break

By Emma Trincal

New York, Jan. 4 – The year ended on a strong note for structured products issuance during a quiet holiday break as the stock market was slowing down, according to data compiled by Prospect News.

Agents sold $716.56 million in 124 structured products deals during the week ended Friday, just ahead of the New Year. It was less than the prior week’s $1.03 billion in pricings, which occurred just before Christmas but well above average.

Tale of two weeks

BofA Merrill Lynch priced nearly 50% of the total volume with $353 million in five offerings, according to currently available data. The week before, the same agent had sold $349 million, or 36% of the total. These two consecutive weekly volume amounts along with the high penetration rate of the top agent suggest that December pricing may have taken place over the second half of the month and not just during one week.

“It was mostly a holiday period. These volumes are pretty much in line with expectations,” a sellsider said.

December

“It looks like a solid month, considering that people were away on vacation in between Christmas and the New Year.”

December was indeed a good month, the fifth most robust in size for the year 2016, according to preliminary data.

At $3.20 billion, it closely followed July ($3.31 billion) and October ($3.66 billion). The top month was January with $4.68 billion followed by September’s $3.70 billion.

Data for last week and December may be subject to last-minute additions based on how late agents file their offerings with the Securities and Exchange Commission.

Sales of structured notes this year are down by 13.80% to $38 billion from $44.11 billion, according to the preliminary data.

Slow finish

The year-end boost contrasted with the light volume seen in the U.S. stock market, said Paul Weisbruch, vice-president of options trading at Street One Financial.

“We didn’t see a whole lot happening in equities. Trading volume last week was really below average,” he said.

“Most of the action occurred immediately post Trump elections. Then volume tapered off until mid-December. I would say from that point, trading volume took a cliff dive until the end of the year.”

The last week of the year ended on a quiet note and slightly lower in U.S. equity markets. The S&P 500 index closed the week down 0.45%. It was up 9.55% for the year.

The benchmarks trended lower beginning mid-week and for three consecutive days ahead of the New Year weekend.

Two big offerings were based on European equity markets last week, an area which offered a little bit more pricing leeway, noted Weisbruch.

“There was a little bit more volatility in Europe, just because of the headline risk around terror attacks on New Year if anything,” he said.

“In the U.S. we had a little bit of a sell-off in the last few days of last week, with the VIX spiking just to close the week. My guess is that it was also predicated on that uncertainty, on this fear of a terror event.

“Nothing happened and the rally is on again this week.”

Top deals

BofA Merrill Lynch distributed five offerings, but those included the top four trades. All four were large block deals issued by non-U.S. banks.

HSBC USA Inc.’s $171.56 million of 14-month leveraged notes tied to the S&P 500 index was by far the largest deal of the week and the seventh biggest trade of the year. It offered triple any index gain up to an 11.595% cap but no downside protection.

Bank of Nova Scotia issued the following offering, also large in size at $82.41 million. It was a three-year autocallable market-linked step-up notes deal based on the Euro Stoxx 50 index.

The notes would be automatically called at par of $10 plus a call premium of 14.75% per year if the index closed at or above the initial index level on Jan. 8, 2018 or Dec. 14, 2018.

If the notes were not called and the final index level was greater than the step-up value, 130% of the initial index level, the payout at maturity would be par plus the index return.

If the final index level was positive but lower than or equal to the step-up value, the payout would be par plus the step-up payment, 30%.

Below the initial price, investors were fully exposed to losses.

AB Svensk Exportkredit’s $49.38 million of 14-month leveraged notes linked to the Euro Stoxx 50 index was the third deal of the week.

The notes offered three times leverage on the upside up to a 19.5% cap. Investors were exposed to any index decline.

The fourth offering at $47.2 million size was issued by Barclays Bank plc. It was another autocallable market-linked step-up notes structure with a six year maturity. It was inked to the S&P 500 index. The step-up level was 135%. The notes offered a 15% buffer on the downside.

BofA Merrill Lynch priced all its offerings on Thursday.

Income, leverage

Structures were fairly balanced between leverage and income-generating products although income prevailed.

Autocallable deals with either contingent coupon or digital payout under the label “market-linked step-up” provided $371 million, or 52%, of the total. Leveraged notes totaled $324 million, or 45% of the market share, but this structure type was skewed by the $171 million top deal of the week.

“The need for income is still there,” the sellsider said.

He looked at the five-year constant maturity swap rate in November at 1.3% compared to the current level of 1.9%.

“It’s not a much higher rate,” he said.

In the past five years, this rate has been 1.4% on average.

“It has gone up but still not by that much,” the sellsider said. “We remain at historically low levels.

“The search for yield is just not going to go away overnight. There is a lot of talk about rates going higher. But if you look at historical averages, we’re not quite there yet.”

The top agent after BofA Merrill Lynch was UBS with $100 million sold in 22 deals, or 18.28% of the total. It was followed by Goldman Sachs.

“It looks like a solid month, considering that people were away on vacation in between Christmas and the New Year.” – A sellsider

“The search for yield is just not going to go away overnight. There is a lot of talk about rates going higher. But if you look at historical averages, we’re not quite there yet.” – A sellsider

© 2015 Prospect News.
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