September structured products issuance sluggish at $92 million for week amid tech pullback

By Emma Trincal

New York, Sept. 12 – The month started slowly after the long Labor Day weekend, with agents pricing only $92 million of structured products in 45 deals, according to preliminary data compiled by Prospect News.

A tech sell-off did not help, keeping investors on the sidelines as the Nasdaq Composite fell 2.6% for the week.

The uncertainty around trade talks with China and Canada had a negative impact on the broader market.

The S&P 500 index dropped 1%.

Stocks prevail

The small volume may also reflect the nature of the deals coming to market last week.

With the big BofA Merrill Lynch trades already priced during the previous week, single-stock deals were center stage but for once the so-called “FANG” stocks did not drive the action.

The acronym “FANG” stands for “Facebook,” “Amazon,” “Netflix and “Google’s” parent company Alphabet.

Single-stock deals made for 45% of last week’s total volume, an unusually high share compared to the annual average of 17%, according to the data. Equity indexes accounted for 30% of the market, versus 77.5% the week before when BofA Merrill Lynch priced a number of large S&P 500 index-linked notes. The annual average is two-thirds of the volume for this asset class.

Social media in Washington

With volatility surging in the technology sector, the FANG deals were virtually absent last week.

UBS AG, London Branch was the only issuer to price such deals, but it selected Amazon.com, Inc. (three deals totaling $500,000) and Netflix, Inc. (four offerings for $845,000).

“As soon as you see a dip, buyers freeze. I’m not saying they are necessarily scared. But they wait for additional information,” a sellsider said.

There were no deals on Facebook Inc. as the company’s chief operating officer Sheryl Sandberg testified before Congress. No deal tied to Alphabet Inc. came out either. The chief executives did not show before the Senate for the hearings as expected.

The hearings on Wednesday caused the share prices of Facebook and Twitter to tumble. Jack Dorsey, chief executive of Twitter, Inc., also testified before Congress.

Branching out

“The FANG are in consolidation mode right now. We’re going sideways, coming off the recent highs,” said David Chojnacki, portfolio manager at Sabretooth Advisors, the firm that manages the AdvisorShares New Tech and Media exchange-traded fund, which focuses on FANG stocks.

“They’re holding above all three major averages. But with the Congress hearings, people are a little bit hesitant.

“Facebook was already hit last July with lower number of users. The share price hasn’t regained from its previous high.”

A diversity of single-stock underliers were used, not necessarily in the technology sector, such as for instance Altria Group, Inc., Alcoa Corp., AbbVie Inc., Delta Air Lines, Inc. and Freeport-McMoRan Copper & Gold Inc.

Yearly volume

Volume for U.S. structured notes this year is still up. Agents priced $38.15 billion through Sept. 7, a 10.3% increase from $34.59 billion during the same time last year, according to the data.

Trailing figures showed a similar increase of 10.7% in the 12 months to Sept. 7 from a year earlier, to $53.76 billion from $48.55 billion.

“There’s no real discernable trend. We’re just kind of floating with the market,” the sellsider said.

Looming rise in rates

He said the market may see a switch toward more principal protection if interest rates continue to move higher.

“When rates start to really increase, principal-protection will have more merit,” he said.

“The cheaper the zero-coupon, the more money you have to purchase the options to buy the upside on the underlying.

“You won’t need such long maturities. A five-year would do depending on how much rates go up.

“You also may see more simplicity, structures without so many moving parts.”

If rates do rise significantly however, issuance of equity-linked notes may find new challenges, he added.

“The 10-year is at 3%. Imagine it’s at 10%. It’s not impossible. Are you going to turn away from the 7% risk-free paper or move to that riskier equity basket bond?

“Even a Morgan Stanley bond if it goes from 4% to 6% – and it will happen in one year or one-and-a-half years – seems like a good alternative to a principal-at-risk structured product.

“Right now people are already having that conversation. They make comparisons all day. Should I abandon the safety of a bond for something riskier? We’re not there yet because investors are still hungry for yield.

“However, as interest rates rise, it will have an effect.”

Tesla on top

Despite last week tech’s sell-off some investors went bargain hunting unafraid of negative news.

JPMorgan Chase Financial Co. LLC priced $25.77 million of six-month contingent income autocallables tied to Tesla, Inc. stock.

The notes will pay a contingent monthly coupon at an annual rate of 24.5% if the stock closes at or above the 50% downside threshold on the determination date for that month.

The notes will be automatically called monthly above initial price.

The barrier at maturity is 50%.

CPI underlier

The second largest offering was a rate product.

Citigroup Global Markets Holdings Inc. priced $12.5 million of three-year floating-rate notes linked to the Consumer Price Index. Interest to be paid monthly is equal to the year-over-year change in the CPI plus 65 basis points. The payout at maturity will be par.

Oil trade

UBS AG, London Branch’s $10 million of 18-month phoenix autocallable notes linked to the SPDR S&P Oil & Gas Exploration & Production ETF was the No. 3 deal.

The contingent coupon to be paid quarterly will be 11.03% a year based on a 75% barrier. The notes are automatically called above initial price.

The principal barrier at maturity is also at 75%.

Big BofA trade

An update of the previous week should be noted.

August closed at a higher pace than previously reported with 350 deals totaling $1.54 billion, according to updated data compiled by Prospect News.

BofA Merrill Lynch alone distributed nearly half of it in 28 deals totaling $721 million.

It was the week ahead of the Labor Day weekend, which saw BofA Merrill Lynch pricing its typical large trades.

As they priced late in the week (on Thursday and Friday,) they could not be reported previously due to filing delays and the holiday weekend.

The top deal then was BofA Finance LLC’s $123.3 million of 0% 14-month leveraged notes linked to the S&P 500 index. The notes offer three times leverage up to a 10% cap with full exposure to losses.

This deal sold under the firm’s brand “Accelerated Return Notes” was the fifth largest one of this kind for the year, according to the data.

Last week’s top agent was JPMorgan with three deals totaling $31 million, or 34.3% of the total. It was followed by UBS and Citigroup.

The top issuer for last week and also for the year is JPMorgan Chase Financial Co. LLC.

“As soon as you see a dip, buyers freeze. I’m not saying they are necessarily scared. But they wait for additional information.” – A sellsider, commenting on the impact of market volatility

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