Issuance volume up 43% for year; digitals with downside threshold top week’s list

By Emma Trincal

New York, July 26 – Issuance volume continues to be strong this year to date even if July so far is showing a slight month-to-month decline, according to data compiled by Prospect News.

For the year, sales amounted to $27.9 billion through Friday, July 21, a 43% increase from $19.5 billion last year. The number of deals grew to 7,226 from 4,351.

A different July

July offers a different picture, with a decline, which is unlikely due to the slower season. Rather it is because last year’s July saw blocks of large trades from Bank of America as this agent modified its calendar, skipping its June business to carry it over into July in an attempt to hedge the spike in volatility related to the Brexit vote at the end of June. This made July the fifth best month of last year while summer months are slow historically.

Volume for this part of July through the 21st is down 9% at $1.31 billion versus $1.44 billion in June. It has dropped 8.25% versus a year ago, the data showed.

Figures for the month are subject to upward revision, however. Last week’s totals may not be finalized yet. Some deals take longer than others to be filed on the Securities and Exchange Commission website. In addition, the month has not yet closed. Any figures a week after the end of July will be more reliable.

How long?

Sources focused on the big picture and the good news: the pace of issuance is robust this year.

“We’ve been very busy. The market is buoyant. Everybody is investing. We see a lot of volume,” said Tom May, partner at Catley Lakeman Securities.

“We’ve had a very good month. I wonder when we’re going to get a big sell-off.”

This question is on everyone’s mind.

Politics, economic and monetary uncertainty as well as global tensions raise questions about the longevity of the bull market, sources said, even though the bull market remains resilient. The S&P 500 index hit another record high last week along with the Dow Jones industrial average and the Nasdaq. Volatility continues to be depressed. The CBOE VIX index, which measures the implied volatility of S&P 500 futures, closed below 10 each day of last week.

Forecast

Talking about structured products issuance sales, a sellsider said, “I have a feeling that we’re going to keep our lead from last year. Last year was bad, so we should finish ahead. What I can’t say is that we’re going to keep the same pace of growth for the rest of the year.”

According to preliminary data compiled by Prospect News, agents priced $371 million in 110 deals last week. The revised figures for the week before show 180 deals totaling $599 million.

Again, those figures are likely to be corrected to account for more deals and greater volume in the days ahead.

Coupon versus participation

Coupon or digital deals prevail over leverage.

The trend, already visible last year, has not failed to be seen this year as well.

For instance, autocallable contingent coupon notes account for 42% of the volume this year while leveraged notes make for 24% of the total notional.

“There is definitely more autocall deals than leveraged deals,” the sellsider said.

“There is a pricing element here, which is that with low volatility, you have to worry about a drop in volatility in the higher strike. With an autocall, you don’t care about the appreciation. It’s more like as long as the price doesn’t drop below 85, 90, I get my coupon.

“But I don’t think it has much to do with volatility and pricing. In both cases a low volatility makes it harder to price good terms.”

Focus on protection

“What drives this trend is really market sentiment,” the sellsider said.

“With markets at all-time highs, people want to get a buffer on the downside and a coupon rather than appreciation.

“It totally makes sense.”

Catley Lakeman’s May seemed to agree, pointing to high valuations in equity assets.

“People think the market is too rich. Why look for appreciation in those conditions?” he said.

“You still have to invest your money somewhere, but cash pays nothing, and the bull market is not going to carry on forever.

“So you cap the upside, build a fixed return over a barrier, and you drop the barrier.”

Top three

The top three deals last week illustrated such trend: all were digital notes. The three products were very similar as a strike below par triggered the digital payment

The first one in this series was Morgan Stanley Finance LLC’s $60 million of two-year buffered jump securities linked to the S&P 500 index. The structure offers a digital return of 10.3% if at maturity the index is above 85% of its initial level. Below 85%, the 15% cushion operates as a geared buffer. Investors will lose 1.1765% for every 1% that index declines beyond 15%.

JPMorgan Chase Financial Co. LLC’s $43 million of one-year buffered digital notes linked to the S&P 500 was the second largest deal of the week.

It has the same structure only the 3.65% digital return is lower given the shorter maturity. Otherwise, the downside threshold of 85% and the 15% geared buffer are the same.

Next, Deutsche Bank AG, London Branch priced $14.75 million of one-year digital notes linked to the Energy Select Sector SPDR fund. The structure again is the same as the previous one, except for the higher digital amount of 5.95%, which may be due to a more volatile underlying as tenors and other terms are equal.

Each deal was distributed by the issuing firm.

Sources said they ignored the reason why the trio of deals offered such similar structures.

Defensive digitals

“These are defensive plays similar to an autocall,” said May.

“You would get a higher coupon if it was an autocall, but the idea is the same. You’re using equity to get a positive return if the market falls to some degree.

“An autocall or a digital are better ways to extract equity returns than leverage when stocks are expensive.”

The sellsider said that such digitals with a lower barrier are a variation on the contingent coupon autocallable theme.

Investors receive a coupon above a barrier situated below the initial price, just like a contingent coupon reverse convertible, he explained.

The only difference is the absence of an autocall and the fact that the digital is paid at maturity and not on a set observation date, he noted.

“It’s only a repackaging of the old reverse convertible. They’re just making the coupon conditional. It’s a reverse convertible with a digital,” the sellsider said.

The top agent last week was JPMorgan with $102 million in 19 deals, or 27.5% of the total. It was followed by Morgan Stanley and UBS.

JPMorgan Chase Financial, the bank’s issuing subsidiary, was the top issuer with nine deals.

The three deals distributed by JPMorgan but not issued by its affiliate were all issued by HSBC USA, Inc. for a total of $9 million.

“We’ve had a very good month.” – Tom May, partner at Catley Lakeman Securities

“It’s only a repackaging of the old reverse convertible.” – A sellsider

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