Structured products issuance $330 million for week; income, stock underliers dominate flow

By Emma Trincal

New York, April 17 – Agents priced $330 million of structured products in 131 deals in the second week of April, according to data compiled by Prospect News. It was a decent issuance volume for this early part of the month especially ahead of the tax deadline.

Stocks were up for a third week in a row. One Friday, the S&P 500 index finished up 16% for the year and close to its September all-time highs.

The Dow Jones industrial average gained 1% on the week helped by strong earnings released by JPMorgan on Friday as well as a jump in the share price of Walt Disney Co. after it announced a new streaming service.

But what’s good in the stock market does not seem to push issuance of structured notes to levels comparable to last year.

Sales this year accounted for $11.26 billion through April 12 versus $18.27 billion last year, a stunning 38.4% decline.

Meanwhile the bull market continued in full speed.

Too high, too fast

Paul Weisbruch in charge of ETF/options sales and trading at Esposito Securities, offered an explanation.

“The December lows lasted such a brief time. A little bit more than three month later we’re almost back to the all-time highs. The average investor, institutional managers and issuers just can’t adjust that quickly,” he said.

“By the time you structure a product you think might be well received, the market has turned already.

“It’s moving so quickly.

“It just turns a lot of small investors and institutions on their head.”

Going long

Investors’ attitude toward risk has shifted rapidly as volatility continued to decline to levels not seen in more than a year.

“Convention tells you that you should manage your risk at all times. You should use hedges and options. Structured products often serve the same purpose,” he said.

“However, if you sat in cash or sold short since the beginning of the year, you would be fired as an adviser.

For a brief time at the end of last year, investors bought hedges. The thinking, he explained, as stock prices went up, was that it was just a “bear rally.” But the strength of this recent leg of the bull market caught many by surprise.

Hedges out the window

“Protection in risk management is important. But if you hedged out in December, this market sprung back so quickly, you didn’t do well.

“Investors, if they can get a return without hedging, they’ll do it. It’s only when they’re in a bear market that they turn back to protection. I don’t look at it that way. By then, it’s often too late.”

For the year, leveraged notes featuring some protection either through buffers or barriers accounted for $3.45 billion, a 10.3% decline from a year ago, the data showed.

It’s unclear whether this statistic helps explain the overall drop in issuance volume. But some raised the possibility that investors are flocking into ETFs directly, finding the returns more rewarding than those offered in structured products.

“If you’re bearish, you’re running out of steam. I think people want to position themselves long. They don’t want to miss out on the rally,” he said.

The Federal Reserve offered a strong incentive to be bullish rather than neutral right now, he said.

“They don’t seem to be inclined to raise rates soon; some even think they may cut, so people think they have the Fed put. It’s easier to be long the market,” he added.

Income for neutral

Uncertainties however remain, and many investors continue to be somewhat skittish. Overall, expecting the market to trade sideways or decline modestly is still a fairly common view among structured notes buyers, said Matt Rosenberg, sales trader at Halo Investing.

What better way to express neutrality than an autocallable product? he noted.

To be sure both autocallable contingent coupon and pure autocalls prevailed last week.

The proportion of deals linked to single-stocks was much higher than usual: 23.5% of the total volume versus the 11% yearly average, according to the data.

Income products prevailed over leverage in a rare magnitude in proportions of 50% and 13% of the total, respectively.

It was a sharp contrast with the average for the year, which showed a balance of 30% for income and 40% for leverage.

“People look for stocks that they like. They’re neutral or see the stock trading sideways, especially after a big price drop,” said Rosenberg.

“Income notes are one of the best ways to use structured notes in a portfolio. We educate our clients. We show them how they can monetize their view and generate income even if the stock is down as long as it doesn’t breach the barrier.”

Among the underlying stocks seen last week were JPMorgan Chase & Co.; BlackRock, Inc.; Boeing Co. and Newell Brands, Inc.

“We’ve seen a good healthy mix of single-stocks,” he said.

Earnings, volatility

Using bank stocks ahead of earnings may be for some an opportunity to capture some volatility, he said.

In other cases, investors gravitated around beaten down names in order to secure a margin of safety and more premium.

“People are tracking the highest volatile stocks,” he said.

An example was Newell Brands, Inc. used in a $7.56 million one-year deal of contingent coupon autocallables issued by JPMorgan Chase Financial Co. LLC. The structured paid an 11.1% contingent coupon based on a 50% coupon barrier.

“Not surprising, this name was on the top list of the most volatile stocks last week,” he said.

The company is in search of a new chief executive. Its stock has dropped 30% in the past two months.

Two digitals

Citigroup Global Markets Holdings Inc. issued the top deal last week with $30.7 million of 0% buffered digital notes due July 13, 2021 linked to the S&P 500 index.

Investors will receive a fixed payout of 14.85% if the index at maturity is greater than or equal to 85% of the initial level.

If not, they will lose 1.1765% for each 1% decline beyond the 15% buffer.

The agent is Citigroup Global Markets Inc.

The third deal of the week showed very similar terms, including the maturity date, the underlying index and the downside threshold and gearing. It was Canadian Imperial Bank of Commerce’s $14.45 million of 0% digital index-linked notes paying a 15.3% premium.

CIBC World Markets Corp. is the underwriter.

“Those digitals are very easy to explain. I think that’s one of the reasons you see bigger tickets,” said Rosenberg.

Merrill on Amazon

BofA Merrill Lynch distributed the second offering of the week – Barclays Bank plc’s $20.42 million of one-year 8.5% STEP Income Securities linked to Amazon.com, Inc.

At maturity, investors get an additional 3.8% if the share price reaches 108.5% of the initial share price, but the downside is not protected.

Correlations spectrum

The use of ETFs in worst-of deals was common last week. Sometimes, dispersion risk is increased with more underliers and less correlation.

One noteworthy example was Credit Suisse AG, London Branch’s $9.33 million of two-year contingent coupon autocallable yield notes linked to the least performing of the Health Care Select Sector SPDR fund, the VanEck Vectors Semiconductor ETF and the SPDR S&P Retail ETF.

The contingent coupon is 13.25%. The coupon barrier and repayment barrier at maturity is 75%.

A market participant noted that the coupon could have been higher given the number of underliers and their low correlation.

Another worst-of example showed an opposite use of correlation.

Credit Suisse AG, London Branch priced $3 million of one-year leveraged notes linked to the lesser performance of the Hang Seng index and the iShares China Large-Cap ETF.

If both assets finish positive, the payout at maturity will be par plus 200% of the return of the lesser performing asset, capped at 30%. There is no downside protection.

“There’s an overlap but it’s by intent. Adding another underlying, even if it’s correlated is a way to create better returns. It’s an interesting way to get exposure to China,” said Rosenberg.

The top agent last week was UBS with 66 deals totaling $70 million, a 21.2% market share. It was followed by Citigroup and JPMorgan.

Barclays Bank plc was the No. 1 issuer with $83 million in 25 deals, a 25.3% share.

“The December lows lasted such a brief time. A little bit more than three month later we’re almost back to the all-time highs. The average investor, institutional managers and issuers just can’t adjust that quickly. By the time you structure a product you think might be well received, the market has turned already.” – Paul Weisbruch, in charge of ETF/options sales and trading at Esposito Securities

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