Year kicks off with big stock rally, mild structured products issuance pace below $150 million

By Emma Trincal

New York, Jan. 10 – The year in U.S. equity markets had its best beginning in more than a decade. The S&P 500 index and the Dow Jones industrial average both hit new record highs with the Nasdaq rising above the 7,000 mark for the first time on the first trading day.

Slow start

But structured notes issuance was slowly moving in the shortened holiday week with agents pricing $146 million in the first week of the year in 51 deals, according to preliminary data subject to upward revisions compiled by Prospect News.

Only five deals exceeded the $10 million size. None was above $20 million.

“People are not rushing to do anything in the beginning of the year. The rally didn’t help even if people have money to put to work,” a sellsider said.

In some cases, it’s because investors are surprised, even cautious about the strength of the bull market. But the main factor was the very low volatility.

“Pricing was not so attractive,” he said.

After a remarkable year marked by near record levels in issuance volume and a strong bull market, investors may not be willing to just jump in right away, said a distributor.

“I’m optimistic for this year. I think we’ll have pretty much the same as last year volume-wise,” he said.

“I don’t see a correction for at least six months. In fact we may not have one for another couple of years. I don’t see a trigger for a pullback to be honest.

“When you see high-yield spreads widening out, volatility picking up, then these might be signs that the bull market is about to end. We’re not there yet.”

This distributor attributed the slow pace to the calendar.

“There was not a lot going on last week. I got some inquiries, some small trades but nothing interesting,” the distributor said. “People are just coming back. Our business as you know is driven by the calendar. It’s a bit more back loaded in terms of new issues.”

Many stocks

Last week’s distribution of deals was characterized by an unusual volume of stock trades. A total of $63 million in 31 deals were linked to single stocks, a 43% market share.

This asset class usually does not exceed 15% of total volume on an annual average basis.

Also unusual was the fact that those stock deals were linked to one asset. There were no worst-of structures but rather reverse convertible autocallables paying a contingent coupon.

As a result, the underliers included a fair number of high-volatility Nasdaq stocks, such as Netflix, Inc., Microsoft Corp., Facebook, Inc. and Amazon.com, Inc.

Bank stocks were used as well.

Earnings bets

The top single-stock deal and the third in the list of last week’s top trades was GS Finance Corp.’s $13.39 million of three-year contingent income autocallables linked to Bank of America Corp. The contingent coupon of 8.3% a year will be paid if the stock price closes above an 80% coupon barrier on a quarterly basis.

The notes will be called if the shares close at or above the initial share price.

Morgan Stanley Wealth Management is the dealer.

“Anytime you have earnings announcements, it’s a great time to sell volatility if you are an investor in income-oriented structured products,” the distributor said.

Bank of America will report its fourth-quarter earnings on Wednesday.

Income

Among single-stock deals, one of the few structured as a worst-of deal was the No. 5 deal in size: Deutsche Bank AG, London Branch’s $10 million of two-year review notes tied to Goldman Sachs Group, Inc. and FedEx Corp. with a 14.5% call premium and a final barrier of 80%.

Income-oriented notes made for nearly half of last week’s volume, according to the data.

Sources were not surprised.

“Rates are a little bit higher but still really low,” the sellsider said.

“You’ll continue to have this yield-chasing trend going on for some time. You would need a lot more increase to justify a switch.”

The top deal last week, a plain-vanilla leveraged product, was brought to market by a Canadian issuer.

Bank of Nova Scotia priced $16.63 million of two-year enhanced participation notes linked to the MSCI EAFE index.

The upside participation rate is 150%; the cap is set at 27.37%. There is a 10% geared buffer with 1.11 multiple.

Rate deal

Also of interest was the No. 2 deal, a decent-sized 10-year interest-rate-linked note.

Morgan Stanley priced $15 million of fixed-to-floating rate notes paying a 4% rate for the first two years followed by a rate equal to the 10-Year U.S. Dollar ICE Swap rate plus 31 basis points, with a floor of 0.25%.

“We see more of these fixed-to-floaters. If interest rates go higher, you get paid for it,” said the distributor.

“People are bearish on bonds from a supply perspective with the Fed letting stuff roll off. Plus you’ll have to finance the deficit. It makes sense.”

The top agent last week was Morgan Stanley with $48 million in five deals, or 32.55% of the total sold. It was followed by UBS and Goldman Sachs.

GS Finance Corp. was the top issuer with seven offerings totaling $32 million.

“People are not rushing to do anything in the beginning of the year.” – A sellsider

“I’m optimistic for this year. I think we’ll have pretty much the same as last year volume-wise.” – A distributor

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