Week’s structured products issuance resilient despite election jitters; top commodity deal prices

By Emma Trincal

New York, Nov. 9 – Despite a market sell-off marked by nine consecutive days of losses and as investors focused on U.S. election polls, issuance volume of structured notes held on relatively well given the uncertain environment and the fact that it was the early part of the month just kicking off, sources said.

One surprise last week was the pricing of the biggest commodity deal of the year, which took market participants off-guard as action in this asset class has significantly slowed down over the past few years.

Volume

Agents priced $445 million in 115 offerings. The volume size was a median point in the distribution of weekly totals for the year to date, according to data compiled by Prospect News.

Meanwhile the S&P 500 index closed the week down nearly 2% as investors had plenty to fret about from the elections to the Federal Reserve’s monetary policy move in December.

The CBOE Volatility index jumped 35% last week from 16.48 to close at 22.30, giving some pricing leeway for short-volatility structures.

Volatile week

“We thought there was so much trepidation through the upcoming elections, we haven’t looked at structured products deals for two weeks. We’re probably not going to do anything this month,” said Andrew Valentine Pool, main trader at Regatta Research & Money Management.

“The market was volatile last week, mostly because [FBI director James] Comey and the FBI had just announced that they were reopening the investigation of the Clinton e-mails. After they closed the case again, the market went back up with the consensus built in that she would win. What we’ve seen last night is like Brexit: totally unexpected event and volatility spiking again. It’s hard to tell which way the market is going to go and for how long things are going to be up in the air,” a structurer said.

He was referring to the election of Donald Trump at the White House late Tuesday night.

Top commodities deal

Citigroup’s issuing arm, Citigroup Global Markets Holdings Inc., brought to market the largest commodity offering of the year and last week’s top deal in $50.86 million of 13-month notes linked to the S&P GSCI Total Return index. The notes offered a small coupon equal to one-month Libor minus 12 basis points. It gave investors triple exposure to the index minus the T-Bill amount minus a fee of 0.15% per year.

The notes were automatically called at par plus the supplemental return amount if the index ever closed at or below 85% of its initial level. The notes were putable at any time. Citigroup Global Markets Inc. was the underwriter.

“This is an institutional deal. It’s a structure for a mutual fund,” the structurer said.

“That’s my guess because it’s just a tracker. It tracks the index total return.

“It’s more than one-year so you get long-term capital gains. A tax-exempt institutional investor, like a pension, wouldn’t care about that. But a mutual fund would.”

He said he ruled out a retail product based on the fee amount and the type of delta one structure.

“Some of the large mutual funds with a commodity mandate to buy would be looking into that. It could be a big rollover or just money coming back into the market.”

This structurer predicted that commodities may become more attractive again.

“Prices are coming back since the lows of the first half and that’s because there is some signaling of a resurging inflation. If it continues to be that way, we may see more deals in the space over the upcoming months.”

Over 30 club

Citigroup’s deal was not the only large offering. The next two deals were priced over the $30 million mark.

Barclays Bank plc issued the No. 2 deal with $39.42 million of 15-month lookback notes linked to the S&P 500 index. The payout at maturity was par plus 200% of any index gain capped at 11.75%. The downside was not protected. The initial price was the “lookback” or the lowest closing level from pricing up to Nov. 14. Morgan Stanley & Co. LLC was the distributor.

Royal Bank of Canada priced $32.8 million of one-year 7.5% STEP Income Securities linked to Apple Inc. Interest was payable quarterly.

If the final price of Apple stock was greater than or equal to the step level, 107.5% of the initial share price, the payout at maturity will be par of $10 plus 3.36%.

If the final share price was greater than or equal to the initial share price but less than the step level, investors would receive par. There was no downside protection.

BofA Merrill Lynch was the agent.

“It has become really hard to price a pure reverse convertible that gives you a compelling coupon. It’s too expensive. Reverse convertibles only work when volatility is high,” the structurer said.

“Many of the so-called equity-linked step up offer unlimited upside participation. This one only gives you a bonus.”

“It’s probably geared toward income investors. They had to break the bonus into two pieces, with one fixed coupon and a contingent coupon. It’s just a way to boost the coupon,” he said.

Balanced mix

The top deals offered some diversity in terms of structure types and also asset classes.

Commodities obviously earned a big lion’s share of the volume due to the Citigroup offering.

This deal alone made for 29% of commodities-linked note issuance for the year, which is $177 million. Volume this year for this asset class at $177 million has dropped 78% from last year, according to the data.

Single stocks last week represented 28.5% of the issuance, or $64 million in 43 deals. The RBC notes tied to Apple made more than half of that.

Euro plays

Morgan Stanley and JPMorgan priced the fourth and fifth deals, which were both leveraged bets on the euro zone.

Morgan Stanley Finance LLC’s $24.83 million of two-year notes linked to the Euro Stoxx 50 index provided 1.5 times leverage on the upside up to a 34.56% cap. The downside offered a 15% geared buffer with a 1.1765 multiple.

JPMorgan’s $23.39 million noteslinked to the same underlying index provided a dual directional feature. It was brought to the market by the firm’s issuing arm, JPMorgan Chase Financial Co. LLC, which priced the three-year leveraged barrier notes with two-times leverage on the upside up to a 56% cap and an 80% barrier on the downside above which if the index was down investors would receive the absolute value of the index.

Morgan Stanley was the top agent with $82 million in 13 offerings, or 18.49% of the total. It was closely followed by Barclays, which priced $79 million in 12 deals, or 17.79% of the market share. JPMorgan and Citigroup were next.

Volume for the year to date has dropped 15.70% through Nov. 4 to $32.15 billion from $38.13 billion, according to the data.

“It’s hard to tell which way the market is going to go and for how long things are going to be up in the air.” – A structurer

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