Month begins with decent structured products volume at $331 million, but smaller deals prevail

By Emma Trincal

New York, Feb. 10 – U.S. structured notes issuance volume held up relatively well for this first week of February considering the usually slow action at this juncture of the month and the turmoil seen last week in the stock market.

The week ended with plunging stock prices in reaction to a disappointing job report.

The S&P 500 index lost 3.1% for the week.

Agents priced $331 million in 69 deals. It was in line with, although slightly lower than the $320 million to $440 million range of volume seen for weeks starting a month during last year’s first quarter, according to data compiled by Prospect News.

Agents priced $581 million in 100 deals during the first week of January ended Jan. 8.

Volume last week was 20% lighter than a year ago. Agents sold $413 million in 116 deals during the first week of February last year.

Deals last week were small in size: 10 offerings exceeded the $10 million threshold but the largest one was at $26 million.

Protection

The bid on single-stocks was nearly nonexistent. Agents priced only 5% of the total volume in this asset class with 20 offerings totaling $17 million.

Conversely equity-index issuance made for 80% of the total with $265 million in 39 deals.

Leveraged notes with barriers or buffers were the most popular structure.

“I think the volatility we’re seeing in the stock market, causing the Dow to drop massively, generates some fear among investors. As people feel that their portfolios are more vulnerable, there is a greater demand for protection,” said a structured notes trader.

“All I know is that our secondary is very spotty. We get very active days and very slow days.”

Tom May, partner with Catley Lakeman Securities, said he sees more unprotected leveraged deals on beaten down asset classes as if for some investors, lowering the entry price of the underlying could be seen as a substitute for a barrier or a buffer.

“Some people think the market is oversold and they’re investing in depreciated assets hoping for a turnaround. Whether it’s the right bet or not depends on your view,” May said.

Top deals

The No. 1 deal was Morgan Stanley’s $26.22 million of five-year leveraged buffered notes tied to the S&P 500 index. The uncapped upside was leveraged at a 1.5075 rate. There was a 15% buffer on the downside.

The second deal featured an underlying benchmark used for the first time, according to the data.

It was a rate deal issued by JPMorgan Chase & Co. for $25.1 million. The one-year 8% yield notes were linked to the 10-year U.S. dollar ICE swap rate. The downside was buffered up until 15% with a 1.1765 gearing.

Deutsche Bank AG, London Branch priced the third deal with $25 million of one-year digital return notes linked to the S&P 500 index. The barrier level was 80% of the initial price observable at maturity. The digital return was 7.75%.

Credit risk

Aside from worries about the equity sell-off, sources noted increasing concerns over banks’ creditworthiness.

The cost of insuring European bank debt in particular via credit default swaps has increased significantly since the beginning of the year. And while U.S. issuers represent the bulk of the U.S. structured notes market, the notional issued by European banks made for more than a third of the total volume last year, according to the data.

CDS spreads have been widening as well among U.S. banks, albeit not as much as with their European counterparts.

“The widening of CDS spreads starts to make people a little nervous. It affects structured notes as well. You’re buying bank debt,” said May.

“CDS spreads have moved up more than cash bonds because cash bonds are not as liquid.”

“It’s not 2008 all over again. But people are watching credit a little bit more.”

The top agent last week was JPMorgan, pricing $99 million in 11 deals, or 29.92% of the total. It was followed by Morgan Stanley and Goldman Sachs.

“I think the volatility we’re seeing in the stock market, causing the Dow to drop massively, generates some fear among investors. As people feel that their portfolios are more vulnerable, there is a greater demand for protection.” – A structured notes trader

“It’s not 2008 all over again. But people are watching credit a little bit more.” – Tom May, partner with Catley Lakeman Securities

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