March remains chilly as fear subsides among structured products investors amid recent rally

By Emma Trincal

New York, March 23 – As the end of the first quarter nears, the usual jump in structured products issuance volume seen during this time of year is not yet happening, according to data compiled by Prospect News.

Agents this year have priced $7.88 billion of structured products as of the end of last week, on March 18, a 20.6% drop from $9.93 billion sold during the same time last year, the data showed.

Trading activity is usually the most active in the first three months of the year across business lines and for most Wall Street firms. This year is different at least so far. Sellside sources however are not overly concerned as they attribute the lackluster volume to the correction seen during the first month-and-a-half of 2016.

Sell-off’s lasting impact

“Obviously in the beginning of the year we had a lot of volatility and uncertainty in terms of what’s going on with interest rates. Maybe people are just kind of holding back,” a market participant said.

“That discourages people from bringing new products.”

Since its low in Feb. 11, the S&P 500 has recovered in the course of five consecutive weeks of rally. On Friday, the benchmark was up 13% off its February low, erasing its year-to-date losses.

But sources think it is too soon for investors to feel confident yet.

“I think we’re seeing a residual effect from the fear investors felt in the early part of the year. While it’s true that the market has rallied over the past few weeks, people are not yet sure what to make of it,” the market participant said.

“Next week will be a better indicator when most of the deals are coming to the market.”

Catch 22 for market

A distributor explained that the forces driving volume are sometimes opposite and that investors are trying to make sense of the recent recovery in the stock market.

“It’s a catch 22: too much volatility and people flee the market; not enough and they don’t like the terms,” he said.

“I don’t know about you but the January sell-off was pretty scary to me. Now the market is rallying. Rallies are good. People are less emotional. The market stabilizes. It’s all good,” he said.

But then, the volatility component is missing. At 14.60, the CBOE Volatility index is at its lowest point since just before the August sell-off.

“The rally is good for the market because it’s the end of panic. But you need to see that stability for a while before investors start to jump in again,” he said.

“Meanwhile, with volatility low again, the terms don’t look as attractive as what they were a month ago.

“The audacious investors who have bought products in January or February got good terms and good entry points. They did well.

“So now advisers look at terms that priced two months ago or even last month and they tell you – but you did better a month ago. We try to educate them and to tell them that today is a different market. We tell them to compare a product with today’s stock prices not with last month’s structures. But it’s hard. It’s very frustrating.”

Meanwhile, investors are waiting for either a confirmation of the market uptrend or for better terms.

“People panic in bad markets when the terms are enticing and the prices attractive. Then they sit and wait. I think it’s going to take some time for investors to buy structured notes again.”

Top deals

Goldman Sachs priced the top deal through its issuing subsidiary. GS Finance Corp. issued $44.14 million of five-year trigger notes linked to the S&P 500 index. If the final index level is greater than or equal to 65% of the initial level, the payout at maturity will be par plus 1.5 times the index return, subject to a minimum payout of par. Otherwise, investors will experience a loss proportionate to the index’s decline.

“The index definitely needs to go up. There are investors who prefer the appreciation more than the income,” the distributor said.

“While we all hope the market will go up further, do you really need to go no cap at this time when markets are at an all-time high?

“What we hear from the field is that people are more interested in income. They want a fixed return. Obviously this note doesn’t reflect that trend, which goes to show that supply is pretty diversified.”

The second deal was an autocallable note.

Credit Suisse AG, London Branch priced $26.03 million of 0% three-year trigger autocallable optimization securities linked to the least performing of the S&P 500 index and the Russell 2000 index. The notes will be called at a call return of 6.65% per year if each index closes at or above its initial level on any annual observation date. The final barrier at maturity observable for both indexes was 50% of each final index price. UBS Financial Services Inc. was the agent.

“With this one, you don’t get any coupon unless you get called,” the distributor said.

“It’s not exactly an income deal. It’s not like a contingent coupon Phoenix-like.”

Phoenix contingent coupon autocallables give investors the opportunity to earn the coupon usually at a lower level than the initial price, when the underlying price is above a coupon barrier below the initial price. The observation dates tend to be more frequent, usually quarterly or even monthly.

“With the Phoenix you are more likely to get your coupon. The barrier is lower. The observations are more frequent than just annually. Selling this deal is like telling you: you’re only allowed to go once in a casino. Many people would rather visit the casino more often than once a year, don’t you think?”

Goldman Sachs was the top agent last week, capturing 23.53% of the total in six offerings totaling $73 million.

It was followed by JPMorgan and Royal Bank of Canada.

“The rally is good for the market because it’s the end of panic. But you need to see that stability for a while before investors start to jump in again.” – A distributor

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