Structured products action slow with $393 million sold; volume up by meager 5% for year

By Emma Trincal

New York, Oct. 21 – Agents continued to face a tough market, pricing a modest volume of $393 million of structured products in 77 deals during the four-day week ended Friday, according to data compiled by Prospect News.

This volume size fell into the last quartile of the year’s weekly volume table, according to the data.

Sources did not believe the Columbus Day holiday was a factor.

Uncertainty

“I don’t think Columbus Day has anything to do with that. The reasons are broader,” said a sellsider.

“It’s a continuation of what we’ve seen in the later part of the summer, start of the third quarter, a slowing down and caution on the part of investors and maybe advisers.

“It really started with the situation around China and by extension the sell-off in commodities and energy. That’s what kicked of the slowdown.”

He pointed to the uncertainty around the Federal Reserve Bank as an additional factor.

“Since September, the market got the message that the Fed is going to hold off for the year. But nobody knows for how long. The Fed could play this game forever,” he said.

“Governors are talking, voicing conflicting opinions. Some say the Fed should not hike rates soon, others are more hawkish. They send mixed signals.

“The market still is a little bit on edge: when is it going to happen and how much of an increase are we going to get?

“All those factors have put some pressure on issuance volume. People are hesitant to invest in this environment.”

Bad market

A market participant was even gloomier.

“This market is terrible. Rates, China... People are not buying,” he said.

“Our industry suffers from this environment. A bunch of people in derivatives have been laid off at several banks in the last couple of weeks. Regulation is another problem. Strict capital requirements are hurting the derivatives business in a major way. In my opinion, we just had the worst third quarter since the financial crisis.”

Rescuer

Volume would have been even thinner without the large input of Bank of America, as this agent sold 10 offerings totaling $166 million, or 42% of the volume.

The next largest agent was Goldman Sachs with $45 million, or 19.45% of the market, followed by UBS with $39 million, or 9.90% of the total. Those banks priced nine and 24 deals, respectively.

“Without Bank of America I don’t know what this market would look like. They do 40% because the rest of the market is not doing much,” the market participant said.

“They distribute their deals internally. That gives them a lot of flexibility, a lot of clout.”

Leverage, indexes

The most popular types of deals last week were leveraged notes with full downside exposure tied to equity indexes, the data showed.

Leverage with no protection made for nearly 40% of the volume. Equity index-linked products represented more than 72% of the total.

“Rather than trying to do some stock-picking, clients are looking for more diversified exposure, they want safety,” the market participant said.

Leveraged notes with buffers or barriers only accounted for 15.35% of the total.

“It’s pretty much because vol. is high right now. You get better pricing without a buffer...at least, more upside. People always want to outperform the market,” he noted.

Deals

The top deal was Bank of America Corp.’s $41.09 million of 0% Leveraged Index Return Notes due Oct. 30, 2020 linked to the Dow Jones industrial average. The structure featured a 1.82 leverage factor and no cap on the upside as well as no downside protection.

The next two issues were also leveraged notes lacking protection but shorter in duration with 15-month maturities. Both were capped. Goldman Sachs Group, Inc. was the issuer. The pair offered a 300% upside participation rate.

The first one, which sold for $24.18 million, was linked to the Euro Stoxx 50 index and had a 21.35% cap; the second, which priced at $22.43 million, was based on the S&P 500 index with a maximum return of 17.35%.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.