Structured products issuance thin at $200 million as year-end nears; bid on single stocks seen

By Emma Trincal

New York, Dec. 13 – December structured products issuance began slowly as the holiday season is gradually taking hold, dampening sales. The start of a new month is not helping either.

Agents priced $200 million in 95 deals, with the largest deal at less than $25 million in size, according to preliminary data compiled by Prospect News.

“It’s slowing down already. People are shopping and making holiday plans. That’s usually during this time of the year when things begin to quiet down,” a sellsider said.

But there is already a lot to celebrate as the year is ending. Issuance sales this year have climbed 32% to $46.75 billion through Dec. 8 from $35.38 billion last year. The number of offerings has jumped 45% to 12,527 from 2016.

Roller coaster

Last week began with a technology sell-off pushing the CBOE Volatility index above 13. The sell-off extended on Tuesday but turned into a rally on Wednesday. A positive job report on Friday helped the S&P 500 index finish up 0.4% while the VIX index closed the week below 10.

In terms of deals, two distinct highlights could be seen. Larger and fewer leveraged notes made for 42% of the total volume. But it was a numbers game as a myriad small autocallable contingent coupon deals topped the volume with a 53% market share.

Leverage with safety belts

On the leverage side eight deals priced totaling $85 million. One particularity: they all offered some sort of protection in the form of a buffer or barrier.

It is impossible to tell what incites investors to seek protection, said an industry source.

“A lot of the time when people are buying structured notes, or any other investment for that matter, they’re not always doing what they should be doing,” he said.

“When the market is up, they don’t want to be adding protection. Of course that’s when they should do it.

“It doesn’t always make sense why and when they’re adding protection or not.”

Top two

The top three deals, all leveraged notes with buffers, shared similarities, especially the first two, which led the sellsider to guess they may have been designed for the same client.

On Dec. 7, Morgan Stanley Finance LLC priced $23.66 million of leveraged buffered notes due Jan. 10, 2020 linked to the S&P 500 index. The upside leverage factor is 1.5. Gains are subject to a 21.75% cap. There is a 12.5% geared buffer on the downside with a 1.1429 multiple.

The same day, BofA Finance LLC priced another S&P 500 index-linked deal with the same structure maturing a month later: $14.43 million of leveraged buffered notes due Feb. 12, 2020. The payout at maturity is 1.5 times the index return up to a 21.675% cap. The geared buffer is identical to the Morgan Stanley notes.

“They wanted to split the credit between the two issuers. It sounds like they knew the terms that they wanted. I need a 1.5 times and a 12.5% buffer and they got those terms with slightly different maturities,” the sellsider said.

Three for one

A third deal came out, adding an extra month in its maturity date of March 10, 2020. It priced two days earlier.

Morgan Stanley Finance LLC sold $13.05 million of buffered Performance Leveraged Upside Securities linked to the Euro Stoxx 50 index. Unlike the other two the structure was uncapped but otherwise the same.

Leverage on the upside was 1.83 times. The 10% downside buffer was geared at a rate of 1.111.

“On this third one, it may have been the same client but it’s hard to tell. The maturity comes just another month later but it could just be coincidental,” the sellsider said.

“I think the maturity was the result of the terms they had already preset, but it’s just my guess. They ended up printing this thing with the shortest maturity they could get.

“Here there’s no cap. It’s doable when you’re using the Euro Stoxx. There’s a pricing advantage.”

Appetite for stocks

Sales of income-related products showed some interesting patterns last week. Single-stock deals were in greater demand than usual, making for 29% of the total. The year-to-date average for stocks is 12%.

Worst-of deals still prevailed volume-wise with $48 million. As usual they were tied to indexes. Less common was the fact that none of the worst-of deals were linked to either stocks or exchange-traded funds. Even if worst-of deals represented a quarter of the market, the top deals in the income category were pure volatility plays linked to a single stock.

Many of the underlying stocks were in or related to the technology sector, such as Apple Inc., Amazon.com, Inc. and Alibaba Group Holding Ltd.

VIX is not a factor

Was the stock bid due to a short-term burst in volatility?

“Not likely,” the sellsider said.

“Short-term volatility as measured by the VIX is just the spot price. Most structured notes don’t trade off the spot price. They trade off the forward,” he said.

“Like a whip, the front-end moves very fast. It takes very little movement to change it. But on the back-end, where the structured notes are actually pricing...it takes a lot to move that part.”

Keep’em rollin’

Instead of short volatility trades designed to take advantage of market conditions, this sellsider said that most of the stock deals of last week were probably rollovers.

“These single-stock deals were probably notes being called out either by the issuer or automatically,” he said.

“When you want to keep the client happy, you have to find the volatility somewhere.”

The top income-oriented deal was distributed by UBS. It was Credit Suisse AG, London Branch’$11.1 million of three year autocallable contingent yield notes linked to Celgene Corp.

The notes pay a quarterly contingent coupon of 8% a year based on a 61.5% coupon barrier. After six months the notes are automatically callable on a quarterly basis above par. The barrier at maturity is 61.5% of the initial price.

Morgan Stanley Finance LLC offered a similar deal for $10.59 million tied to Amazon.com, Inc.

Equity nears 100%

More than ever the market was equity-centric with more than 95% priced in this asset class. The average for the year so far is 88%.

The market last week priced no interest rate deal ahead of the Federal Open Market Committee set on Dec. 13.

The Federal Reserve as expected hiked the rates 25 basis points on Wednesday.

“Issuers are reluctant to strike deals like that when the Fed is scheduled to move. Everyone or 99% of investors expected the Fed to raise rate. But banks don’t want to take a chance with that 1%,” the sellsider said.

There have been very few notes linked to interest rates this year. According to the data, only 87 deals have been issued for a $733 million notional this year. This category does not include lightly structured notes on Libor.

Morgan Stanley was the top agent with $83 million in nine deals, a 42% market share.

It was followed by UBS and JPMorgan.

The top issuer was Morgan Stanley Finance LLC.

“It’s slowing down already. People are shopping and making holiday plans.” – A sellsider

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