Structured products volume weakens as summer progresses; single-stock autocallables make a push

By Emma Trincal

New York, July 20 – Structured products issuance volume was relatively slow last week at $179 million, a strong decline from the previous week’s $818 million, but one explained by the unusually high issuance in the first week of July due to Bank of America’s delayed pricing of its June deals, which the agent decided to postpone because of Brexit.

The size of last week’s volume was lower than the weekly average of approximately $670 million, according to data compiled by Prospect News.

Only 85 deals priced, and none exceeded the $20 million mark.

Equity or nothing

Investors did not tire of equity-linked products as those made for 98% of the total. The breakdown was 51% in equity indexes, 32% in single-stocks and 15% in equity exchange-traded funds.

Not one commodity-linked deal priced last week while only one rate-linked note offering was brought to market for $3 million.

“I’m almost surprised that we don’t see more commodities. I know there aren’t many in general. But there are some good tactical plays to be done in commodities, I’m thinking about oil in particular,” a sellsider said.

The price of Brent crude oil, he explained, has jumped from about $28 a barrel in the beginning of the year to $48 now with a push up to $52 last month.

“Maybe people think the oil rally has lost its momentum, but I think it’s still a good play,” he said.

“People are not sure where to invest their money right now. Equity markets are far from being under-valued but it’s still the place to go when you look at the other asset classes. Will it last? A lot depends on what central banks do or don’t do. No one pays attention to companies’ fundamentals anymore. What drive the markets are political decisions. Investors when they look at credit spreads, interest rates are quite discouraged,” he added.

Uncertainty also prevailed around the global economy, he noted, pointing to the International Monetary Fund’s decision on Tuesday to cut its global growth expectations.

Month, year totals

Because of the postponed pricing of June into the early part of July, volume turned out to be exceptionally, if not artificially high on a month-to-date basis, the data showed.

Agents priced $1.25 billion in 245 deals between July 1 and July 15, a 116% increase from the $578 million sold during the same time in June.

This gap is likely to increase once July closes. That’s because the month will have exceptionally benefited from two very active weeks instead of one. The first week will be the early part of July, which saw the pricing of the halted deals formerly planned for June. The second should be the bulky final week, which as dictated by the regular calendar cycle, always surpasses the other weeks of the month.

So far however, those changes do nothing to push up sales on a year-to-date basis. As of July 15, volume continued to be nearly 25% thinner than during the same time last year with $19.31 billion sold year to date versus $25.52 billion last year.

Chasing yield

Investors last week once again jumped into income-related products bidding heavily on autocallable reverse convertibles, which made for 56% of the total. The market share for this type of structure was much higher than the 20% average on a year-to-date basis.

Single-stocks, which for the most part are used for these autocallable structures, staged a strong comeback, making for a third of the total volume versus less than 10% for the year-to-date average, the data showed.

“Here the idea is not to participate in the upside. You use stocks to get a big coupon while betting that the stock won’t drop below a certain level,” said the sellsider.

“It’s a different risk profile than buying the stock and you may in some way compare it with a fixed-income investment as long as you know your principal is at risk.

“Rates are so low, people are willing to get exposure to stocks in order to get a decent coupon.”

Tom May, partner at Catley Lakeman Securities, said he sees more income deals linked to one or two indexes than on single stocks, but that “everything can be done” under the right conditions.

Single-stocks that carry either high dividend yields or high volatility or both can facilitate the structuring of autocallable reverse convertibles, he said.

Small deals

The top offering last week was $11.86 million of Barclays Bank plc’s contingent income autocallable notes linked to Facebook, Inc. The coupon barrier observable quarterly was 70% of the initial price with a 9.2% annualized coupon rate. The notes were automatically called on any quarterly date above the initial price. Principal at maturity was protected up to the 70% barrier.

While Facebook is not a dividend stock, its 32% implied volatility is sufficiently high to permit the pricing of a competitive coupon, said May.

“We see a lot of worst of. If you want to use indexes you usually have to do that unless you have a high-yielding benchmark like the Euro Stoxx. The S&P alone doesn’t have enough yield. In combination with the Euro Stoxx, it’s much easier.”

Investors little by little have learned to modify their return expectations. This too helps.

“People used to want a 10% or 11% coupon. Now they may slowly come to terms with the fact that 6% or 7% is actually a high return. They may also understand that to get this 6% or 7% they have to take a reasonable amount of risk,” said May.

The second offering, also very small in size was similarly designed for income, using the worst-of format based on two equity benchmarks. UBS AG, London Branch priced $10.59 million of three-year trigger autocallable contingent yield notes linked to the lesser performing of the Nasdaq 100 index and the Russell 2000 index. The contingent coupon annual rate was 8% if the worst-performing index closed at or above 70% of its initial level, on a quarterly observation date.

The notes were automatically called after six months if the worst-performing index closed at or above its initial level on one of the quarterly observation date.

The final barrier at maturity was 70% of the initial price.

The top agent last week was JPMorgan with $59 million in 29 deals, or 23.15% of the total. It was followed by Goldman Sachs and UBS.

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