Blackouts, equity rally, low volatility drop volume to $234 million as summer begins in earnest

By Emma Trincal

New York, July 22 – The combination of summer finally kicking in, banks in blackout mode and record low volatility did not make for a strong structured product market last week.

Agents sold $234 million in the week ended Friday, the slowest weekly issuance pace this year so far, according to data compiled by Prospect News. The previous week was already thin with $340 million.

Sixty six deals priced last week with only two in excess of $20 million.

“It looks like summer is finally here. Things are slowing down. We’ve seen that for the last couple of weeks,” said a sellsider. July so far is down 46% from June. Volume dropped nearly 55% from a year ago, according to the monthly data through July 22.

Record low volatility

Factors other than seasonal ones apply, among them record low volatility, sources said.

Investors piled into stocks last week. The CBOE Volatility index, or fear index, closed at its lowest level for the year so far on Friday, down more than 22% last week.

Investors have priced a rate hike sometime this year. In Congressional testimony last week, Fed chair Janet Yellen confirmed that it is her intention to lift rates this year, which helps reduce uncertainty on that point.

Stocks rallied globally, encouraged by positive developments in Europe toward a third bailout in Greece.

In the United States, positive earnings boosted tech stocks, pushing the Nasdaq to a new record high.

Blackouts

On top of that, most issuers reported their earnings last week, which put new deals on hold as companies refrain from issuing new debt prior to the announcements.

JPMorgan reported its results on Monday, Wells Fargo on Tuesday, Bank of America on Wednesday and Citigroup and Goldman Sachs on Thursday. Morgan Stanley released its earnings this week on Monday.

An industry source explained that blackouts may alter volume for the week. However, banks are likely to “catch up” later in the month, especially as the closing week nears.

“Blackouts definitely have an impact, but usually banks can work around that with some mid-month deals closing prior to blackout,” this source said.

“When banks report their earnings in the middle of the month, they’re not going to settle their deals during that week of earnings,” the sellsider explained.

“They have to wait for after the earnings before issuing new deals. It doesn’t mean they can’t trade.

“For instance, Citi reported on Thursday. If a client calls them on Wednesday, they can price the deal but they won’t be able to trade until Friday or Monday.”

His conclusion was that the negative impact of blackouts is overrated.

“It doesn’t really impact volume,” he said.

“It happens to everybody; it affects every bank that has a registered shelf. It’s not just structured notes. Blackouts affect all debt offerings.

“When there are some earnings, you try to plan accordingly. Your issuing date is going to be planned in relation to that.

“Treasury will send emails to the trading desk telling them when the blackout is.

“Because trading desks can plan around their calendar way before the blackouts, it has a limited impact.”

This may bode well for this week as issuers may be trying to catch up, he predicted.

Slow month

Blackouts are self-imposed by the companies, said Dick Bove, bank analyst with Rafferty Capital Markets.

As a result, the rules vary from firm to firm.

Some companies impose a blackout period beginning around the time a quarter ends and through the earnings announcement, according to the Securities and Exchange Commission website.

This may explain why July had such a slow start.

As the second half of the month is underway, the slow trend could easily revert, especially if banks have a lot of deals waiting to be priced, sources said.

Rates

Some market factors continue to weigh on volume, however.

“Low interest rates are killing the rates-linked products side of the business,” said the industry source.

“Many distributors are shying away from the low returns of munis, agencies and corporates and are looking to buy secondary market pieces of previously issued rates-linked structured notes that have more compelling payouts than newly issued notes.”

In fact, not one interest-rate structured note was brought to market last week, based on Prospect News’ definition, which excludes lightly structured notes such as step-up notes, step-down notes, fixed-to-floating notes and capped floaters.

More stocks

On the other hand, stock deals prevailed.

Equity-index-linked products, which usually carry a heavy load of the volume, showed a smaller than usual market share of 36%. Single-stock deals accounted for 53.3% of the total. In contrast, the yearly average proportions are 64% for indexes and 19% for stocks, according to the data.

The favorite structure was autocallable reverse convertible deals, also known as contingent coupon autocallables. Those deals made for nearly half of the volume with 46.6% of the total, an unusually high level compared to the annual average of less than 20%.

Here again, earnings season may have played a role.

“I don’t know exactly what the underlying stocks were, but I would guess that a lot of them were stocks of companies reporting their earnings last week. Some people may have made earning bets, especially in this bullish market,” the sellsider said.

The top deal last week was linked to the stock of JPMorgan Chase & Co., which reported its earnings on Monday. Other deals were linked to Apple Inc., which reported its quarterly results this week on Wednesday. Facebook Inc., another popular underlier, is due to report its earnings next week on Wednesday.

Best sellers

Few things could better illustrate the weakness of last week’s volume than the size of the “top” deal – Barclays Bank plc’s $20 million of contingent income autocallable securities due July 20, 2018 linked to JPMorgan shares. The contingent quarterly coupon was 8% a year with a coupon barrier of 80% of the initial price. The redemption level, also observable quarterly, was 5% higher than the initial price, and the final barrier was 80%. Morgan Stanley Wealth Management handled distribution

The second-largest deal was also linked to a single stock but it used a different structure. Barclays brought to market $16.95 million of one-year 7.5% STEP Income Securities linked to Masco Corp. Investors received an extra coupon of 3.02% if the final stock price was above 107.5% of the initial price. The agent was BofA Merrill Lynch.

The top agent was Barclays with $66 million in eight deals, or 28.32% of the total. It was followed by JPMorgan and Bank of America.

“It looks like summer is finally here.” – A sellsider

“Low interest rates are killing the rates-linked products side of the business.” – An industry source

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