Structured products sales hit $348 million for week, helped by $100 million trade, amid sell-off

By Emma Trincal

New York, Oct. 17 – Structured products issuance volume was sluggish last week as investors struggled with falling stock prices and rising bond yields, but a $100 million deal saved the day, pushing the overall issuance volume to $348 million, according to data compiled by Prospect News.

Agents priced 127 deals, of which $100 million came from a single trade: JPMorgan Chase Financial Co. LLC’s five-year cash-settled synthetic convertible deal tied to Apple Inc.

Biggies are back

It was reminiscent of a few convertible bond offerings, which priced in the first half of the year. In April for instance JPMorgan Chase Financial also priced $600 million of five-year cash-settled reverse convertibles tied Voya Financial, Inc.

Several issuers used Voya to bring to market substantially large-sized deals, in excess of $100 million, early on this year. Those giant convertible deals have largely contributed to this year’s robust volume.

A market participant commenting on last week’s $100 million trade on Apple said it was an institutional deal.

“This is probably an insurance and/or convertible bond fund driven trade,” he said.

“This is what is sometimes called a ‘synthetic convertible’ since it’s not an at-risk reverse convertible. Instead, it’s a principal-protected zero coupon tied to an upside out-the-the-money call option.”

The payout at maturity will be par unless the underlying stock finishes above its 116.75% threshold price, in which case it will be par plus the final stock price divided by the threshold price, according to the prospectus.

Tough market

As last week’s market rout made pricing more compelling, there were plenty of the common kind of reverse convertibles however, those principal-at-risk products that come with autocallable features and above-average coupons.

The S&P 500 index dropped 4.1% last week due to a two-day sell-off on Wednesday and Thursday in reaction to a spike in the 10-year Treasury yield. After several weeks of price declines, the index finished the week 5.6% below its Sept. 20 record closing high of 2,930.75.

The sell-off saw the Dow Jones industrial average fall 800 points on Wednesday and by 500 points the next day.

Volatility as measured by the CBOE Volatility index (VIX) rose to highs not seen since March.

Overall the market experienced the greatest losses on a weekly basis since March.

Short-vol. prevails

As a result, autocallable or callable reverse convertible notes, which sell volatility to extract premium, took the lead last week with 40% of the volume issued versus 17% for leverage. In contrast, the year-to-date average is 34% for leverage and 31% for income-generating products.

“With volatility and the VIX double their second quarter levels, the Phoenix autocalls, autocalls, anything that sold calls made a ton of sense,” the market participant said.

“The stocks were down 7% from the high in the S&P. Of course, you’d want to do autocalls last week as opposed to two weeks ago.”

The latest low for the S&P 500 index was seen on Thursday at 2,728, a level 7% lower than the September peak.

The volatility spike encouraged issuers to price single-stock deals. Those made for more than 40% of the volume, in par with the indexes. This trend is unusual. The year-to-date average showed that notes linked to equity indexes account for 66% of the market versus 18% for single stocks.

“We had discussions internally and we’re trying to show our clients deals that we can buy at lower levels,” an industry source said.

“Personally, I think this choppy market is good. It’s better for the options.”

Tech won’t go away

The most widely used stocks last week were the usual suspects – Alibaba Group Holding Ltd., Amazon.com, Inc., Apple. Highly volatile in nature and benefiting from a tech sell-off, increasing their implied volatility even further, those stocks allowed issuers to either substantially raise coupons or lower barriers. Sometimes their use helped do both.

Credit Suisse AG, London Branch’s $501,000 15-month deal on Tesla, Inc. for instance paid a 21% coupon based on a 50% barrier. In this case the company news added even more fuel to the deal.

Certain deals showed barriers dropping below 40% when the issuer used technology underliers within a worst-of structure.

Year remains up

Volume for the year is up 1.3% to $44.76 billion through Oct. 12 from $40.58 billion, according to the data.

The deal count has also increased to 12,630 from 10,881, a 16% increase.

Recent market volatility is more of an encouraging trend than a concern for some.

“I think with the Midterm elections in 20 days and several of the geopolitical moves we have seen across the globe with interest rates higher, volatility should remain higher than the first half of the year,” the market participant said.

“Thus, many common structures have better vol, higher rates and higher spreads, which should contribute to a robust structured notes market.

“I would look for an up 12%-15% year overall growth, meaning some modest acceleration in the last three months.”

Top deals

Excluding the $100 million JPMorgan synthetic reverse convertible deal, the top deal last week was Barclays Bank plc’s $22.55 million of three-year callable contingent coupon notes linked to the least performing of the Dow Jones industrial average, the S&P 500 index and the Russell 2000 index. The annual contingent coupon payable quarterly was 8.25% based on a 60% coupon barrier. The notes will be callable on any quarter.

Two RBC

After that, Royal Bank of Canada priced the next three deals. One for $16.44 million is a less-than two-year deal (630 days) based on a basket of international equity indexes. The payout at maturity will be par plus triple any basket gain, up to a 41.1% cap and full exposure to losses.

The other was a $16.18 million offering of five-year leveraged notes on the S&P 500 index with 1.2x on the upside capped at 54% with a 40% downside buffer.

Investors will receive par if the index falls by up to 40% and will lose 1% for each 1% decline beyond 40%.

Leaders

The top agent last week was JPMorgan with $112 million in eight deals, which included the large Apple-linked note offering.

Coming next was UBS, which priced 78 deals totaling $88 million. It was followed by Royal Bank of Canada and Barclays.

JPMorgan Chase Financial Co. LLC naturally was the top issuer last week with the same priced volume and deal count as agent.

JPMorgan Chase Financial is also No. 1 for the year to date with $6.75 billion in 1,703 deals, or 15.1% of the total.

“With volatility and the VIX double their second quarter levels, the Phoenix autocalls, autocalls, anything that sold calls made a ton of sense.” – A market participant

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