Another slow week for structured products, making prospects for growth in 2015 slim, sources say

By Emma Trincal

New York, Dec. 9 –The week ended Friday was another lackluster start for structured products issuance into a new month. And with the end of the year near, sellsiders lack optimism about current market conditions and investors’ appetite for structured notes.

Agents last week priced $379 million in 103 deals, with the top one barely above $20 million, according to preliminary data compiled by Prospect News.

Volume so far for the year is up only 3.35% to $41.02 billion from $39.69 billion as of Dec. 4. The number of offerings has dropped by 8.5% to 7,846 from 8,574 during that period.

Many attribute the slowdown to the abrupt August sell-off, making the year’s second half less than impressive.

Cruel August

“The overall market as well as our business has been really strong in the first half of the year. We had very high growth rates in terms of notional and ideas put forth in the marketplace,” said a sellsider.

Indeed, volume in the first half was at $24.97 billion, a 17% increase from the first six months of 2014, the data showed. Unfortunately volume from July 1 to Dec. 4 dropped 12.5% this year.

“We had this huge pullback in the summer, something I’ve never seen before in terms of price swings. The market sold off,” the sellsider said.

“A lot of experienced investors came back in, people who are pretty savvy. So soon after the correction we saw volume jumping up in just about a week when volatility was around 30%, 35%. We had a lot of reverse inquiries, a lot of trades. It was great. But right as we were beginning to feel good about it, the activity for structured products went dead.

“People who came in to take advantage of the volatility, those investors did what they intended to do. The rest was sitting on cash. We had a rally in October, but nobody reacted.

“In the third quarter, it started to really slow. Now we’re caught in the seasonality of year-end and volume is much more muted.”

No growth

While the year has not yet ended, this sellsider along with many other sources is betting that the year was not strong.

“The market in 2015 is probably going to be flattish.”

Four more weeks remain before the closing of the month (as of Friday) but part of the bet derives from the observation of current market conditions while another part of it is based on seasonality factors as December is traditionally a weak month.

Last year, December was the worst month of the year for issuance.

Distribution

There have been acquisitions or shutdowns in the distribution channel this year, and some said those changes are having a negative impact on sales.

Back in June, Stifel Financial Corp. bought Barclays’ U.S. wealth and investment management unit. In October, Credit Suisse AG announced the closing of its U.S. private bank business combined with a recruiting agreement with Wells Fargo.

Last week, Raymond James bought Deutsche Bank’s private client services unit.

“Yes we’re seeing some changes in distribution, but I think it has nothing to do with the slowdown in issuance because those brokers are going somewhere else,” a structurer said.

“I think it’s mostly the market.

“There’s so much volatility and uncertainty, people don’t know what to do.

“The S&P came back pretty strongly after the summer, but the highs were rejected twice in November and December and we haven’t come back to the peak prior to the August sell-off.

“We’ve had a rally recently, but people aren’t buying into this rally.”

Easing, tightening

Another factor of inertia and indecision for investors was the conflicting global monetary policies.

“People are confused. With Europe easing and the U.S. tightening, uncertainty continues to prevail,” he added.

“Europe recently disappointed in terms of how much easing they were willing to do. The market has survived on stimulus not just from the Fed but also from the European Union. Now those two are going in different directions and Europe may not be easing as much as anticipated.”

Finally collapsing oil prices is another factor making investors uneasy. Crude oil prices on Tuesday hit new lows not seen since 2009.

“Obviously it’s an issue and not just for equity markets,” he said.

“The impact of oil on the bond market with bonds issued by the oil companies has been pretty drastic. People tend to underestimate that. With the bond market pretty nervous right now, structured notes are under pressure as well.

“The uncertainty out there is leading people to be on the sidelines.”

Volatility plays

A few exceptions were seen last week.

Some investors are attempting to monetize volatility in short-volatility plays in some of the most volatile stocks, sectors or asset classes. But those “risk-on “deals remain small in notional size and numbers.

Some notes last week were structured around the SPDR S&P Biotech exchange-traded fund for instance. In the IT sector, Apple, Inc., Amazon.com, Inc., Netflix, Inc. and Facebook, Inc. were the usual suspects.

Braver investors are returning to oil plays with some notes based on the SPDR S&P Oil & Gas Exploration & Production ETF and the S&P GSCI Crude Oil-Excess Return index.

A rebound in oil prices is likely to set a new trend of oil-based products as investors may regain confidence in the asset class, sources said.

“You’ll always have investors trying to take advantage of the sell-off in oil. Oil may be oversold, so it’s a good time to sell volatility and buy notes linked to oil stocks or oil funds,” the structurer said.

“Problem with that is the risk of catching a falling knife of course.

“My sense is that this market is not going back up very fast, so there’s no need to rush to catch a falling knife.”

Top Deals

The top deal last week was an autocallable reverse convertible.

JPMorgan Chase & Co. priced $20.29 million of three-year contingent income autocallable securities linked to Apple Inc.

The coupon barrier was 80% of the initial share price with an annualized contingent coupon of 1.4% determined quarterly. The notes were automatically called above the initial price on the same quarterly observation date. The final barrier was also 80%. J.P. Morgan Securities LLC and Morgan Stanley Smith Barney LLC distributed the notes.

Credit Suisse AG, London Branch priced the No. 2 offering with $18.86 million of two-year leveraged notes linked to the S&P 500 index.

The payout at maturity was par plus 300% of any index gain, subject to a 23.7% cap. Investors were fully exposed to any losses.

The top agent last week was Morgan Stanley with 18 deals totaling $74 million, or 19.40% of the total. It was followed by JPMorgan and UBS.

“In the third quarter, it started to really slow. Now we’re caught in the seasonality of year-end and volume is much more muted.” – A sellsider, commenting on the pace of structured products issuance

“There’s so much volatility and uncertainty, people don’t know what to do.” – A structurer

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