Structured products agents price $201 million amid volatile market; commodities, stock deals eyed

By Emma Trincal

New York, Nov. 21 – As expected, the week prior to Thanksgiving week was quiet with $201 million of structured products sold in 111 deals, according to preliminary data compiled by Prospect News.

Deal sizes were relatively modest, with the top offering pricing at less than $15 million. Meanwhile the equity market continued to be volatile with a technology-induced sell-off in the early part of the week followed by a rebound on Friday.

“I’m not surprised it was so weak,” a market participant said.

“As we approach the holiday season things tend to slow down, and now you have those market-related concerns.”

November

So far, November’s issuance volume is half the notional of a year ago with $748 million through Nov. 16 from $1.52 billion last year.

Figures however are not yet definite and are subject to upward revisions. But November is not traditionally the best month of the year.

Last year, November was the second worst month after April, according to Prospect News. When November is not at the bottom of the list of a given year’s monthly sales, it usually is in the lowest half as it was in 2016 (fifth worst month) or 2015 (fourth worst period).

“For us, November is never the most exciting month. September and October are the best. November is usually slow. December is slow too, although a little bit better,” a structured products distributor said.

Best or second-best year

The year-to-date issuance volume however remained more than encouraging. Even if the next six weeks are sluggish, the year’s issuance is near an all-time high.

Sales amounted to $50.4 billion through Nov. 16, which is just about the $50.52 billion seen in 2008. That year was the second-best year after 2017’s $52 billion record. Since notional figures for 2008 and 2017 feature whole years unlike the data currently available for this year to date, it is likely that 2018 will be if not the best year ever, at least the second best after last year. These figures are based on data compiled by Prospect News since 2004.

Year-over-year issuance volume has increased by 11.6% to $57.2 billion from $51.3 billion.

“It’s pretty healthy,” the market participant said.

“If you had told me in January that the market was going to be flat and volatility up, I would have told you that an 11.6% increase in volume is a very good performance. And it is.”

Commodities

Despite their small size, last week’s deals offered diversity and surprises as the S&P 500 index was not on top of the list.

The first surprise – and No. 1 deal – was a commodities-linked notes offering.

Citigroup Global Markets Holdings Inc. priced $14.7 million of 13-month notes linked to the Citi Commodities F3 vs F0 – 4X Leveraged index.

This index levers four times the spread between the three-month forward versions of the single-commodity sub-indexes for each of the commodities included in the Bloomberg Commodity index and the performance of the non-forward versions of the same single-commodity. The payout at maturity will be three-times the index return.

“Definitely not a deal I would show to my clients,” a distributor said.

“So many things in there that would be so hard for a retail investor to understand...”

“It’s probably institutional.”

The rationale behind a bid on commodities, which is one of the most unpopular asset classes, however made sense to him.

“We’re at the late stage of the bull cycle and with inflation creeping up, it doesn’t surprise me that people may want to diversify away from equity in this asset class. The fear of inflation has traditionally been the rationale behind those deals,” he said.

Boeing, Tesla

Second unusual characteristic seen last week: the following two deals were based on single-stocks, a sure sign that volatility encouraged some to buy the stock low and sell volatility high.

Those two deals also offered interesting stories due to recent headlines.

The first one (and second for the week) was Credit Suisse AG, London Branch’s $14.3 million of 8% STEP Income Securities linked to Boeing Co. BofA Merrill Lynch is the agent. The notes will pay interest quarterly. If the shares at maturity finish at or above the step level – 108% of the initial price – the payout at maturity will be par plus a step payment of 7.45%. The downside offers no protection.

The note was seen as a tactical play with the stock under pressure since one of the company’s planes crashed in Indonesia last month.

The share price of the stock has dropped nearly 20% since the beginning of October.

The second single-stock deal and third for the week was JPMorgan Chase Financial Co. LLC’s $13.19 million of six-month contingent income autocallable securities linked to Tesla, Inc.

The notes will pay a contingent monthly coupon at an annual rate of 22% if the stock closes at or above the 50% coupon barrier for that month. The barrier at maturity is also 50%.

The notes will be called automatically monthly above initial price.

“It’s a one-month security given the volatility of the stock,” said the market participant.

“A 22% annualized will give you less than 2% a month and you have unlimited risk on the downside,” the market participant said.

“I don’t know if it’s worth taking that risk.

“You’re going to pay the full fee upfront for a return likely to be 2% and you’re fully exposed to the downside.”

The fee is 1.25%, according to the prospectus.

Basket, rate

JPMorgan also priced $10.32 million of two-year leveraged notes linked to an unequally weighted basket of international indexes. It was the No. 4 deal.

The commonly used basket includes the usual components: the Euro Stoxx 50 index, the Topix index, the FTSE 100 index, the Swiss Market index and the S&P/ASX 200 index.

The payout at maturity will be triple the gain up to a 90% cap.

Investors will be exposed to any losses.

“The cap is relatively high,” the market participant said.

“It gives you a diversified exposure to international equity.”

Also notable was a rate deal, the fifth one in size for the week.

Citigroup Global Markets Holdings Inc. priced $10 million of 15-year fixed-to-floating rate notes linked to the 10-Year CMS rate.

Interest will be fixed at 4.125% for the first two years. After that, it will equal the 10-Year CMS rate. Interest will be payable quarterly.

The top agent last week was Citigroup with $43 million in 15 deals, or 22% of the total. It was followed by Morgan Stanley and BofA Merrill Lynch.

The top issuer was Citigroup Global Markets Holdings with $50 million in 17 deals.

© 2015 Prospect News.
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