Mild $117 million structured products issuance for week amid volatile week, holiday, conference

By Emma Trincal

New York, Oct. 16 – Agents priced $117 million of structured products in 59 deals during the week ended Friday, according to preliminary data compiled by Prospect News.

“The business had just launched the calendar for October. So, volume is going to be a little soft,” said Keith Styrcula, chairman of the Structured Products Association.

A few other factors may have led to this result as well.

Conference, blackout

The SPA in conjunction with law firm Mayer Brown hosted the 15th Annual Summit of the Structured Investment Industry on Oct. 8 at the Harvard Club in New York City. Several of the panelists were sellsiders heading the desks at wirehouses, including at Bank of America, UBS and JPMorgan.

“The event had over 270 registrants from 177 firms in the industry and it was the most highly attended event of its kind in the last 10 years,” Styrcula said in an e-mail.

Styrcula however did not believe had an impact on last week’s sales.

Another possible factor behind a softer issuance volume last week was the Jewish holiday of Yom Kippur, which fell in the middle of the week, beginning Tuesday evening and ending Wednesday night.

Finally, the three-business day blackout period restricting trading for banks prior to their earnings release may have reduced the flow somehow.

Last week preceded all major banks’ earnings announcements. JPMorgan, Citigroup and Goldman Sachs released their results on Tuesday; Bank of America on Wednesday and Morgan Stanley will report on Thursday. Only UBS is set to announce its earnings later in the month, on the 31st.

Banks’ earnings may have contributed to a weaker issuance volume last week, said Matt Rosenberg, sales trader at Halo Investing.

“During the blackout, you can still look at terms, maybe price deals. But the banks can’t issue,” he said.

Stocks and income

A major theme last week was the surge in single-stock deals, amounting to more than a quarter of total notional with $30 million. Thirty-three deals used this asset class, or nearly 60% of the offerings. The yearly average for single-stocks as a percentage of total volume is 12%. Those deals make for 21.5% of the total deal count year to date.

In line with the resurgence of stock deals last week, income-oriented structures dominated the flow with 54% of total notional. Specifically, 47% of the total came in the form of autocallable contingent coupon deals while the remaining 7% were snowballs. These figures are way above the year-to-date market share for income products, which is 38%.

“Both the use of stocks and the uptick in income notes is a byproduct of earnings season coming up,” said Rosenberg.

“For people tracking some of those stocks, you can get higher coupon as volatility during that time.

“Volatility rises ahead of earnings season. It’s perhaps the best time to invest in those autocalls and other income products.

“I expect a continuation of this during the rest of the earnings season. We’ll see more tactical and opportunistic trades as opposed to core allocations.”

Stocks used in deals last week were: Netflix, Inc., AT&T Inc., Boeing Co., CVS Health Corp., Microsoft Corp., Facebook, Inc. and Johnson & Johnson, just to name a few.

Last week was another volatile week with price action dominated by fast-changing headlines as the U.S. and China negotiated over trade issues. Stocks were down in the early part of the week but rallied on perceived progresses on a deal with the possibility of a partial agreement between the two countries.

The S&P 500 rose 0.6% on the week, ending at 2,970.27.

It’s getting better

Revised figures for the previous week, which included the last day of September showed $840 million issued in 310 deals, raising the total monthly volume through Oct. 11 to $586 million in 197 deals. This tally was flat from the same period last month.

This year’s issuance story is one that is evolving better than it started as measured by year-over-year comparisons.

January for instance saw a 42% drawdown from 2018. The same happened in February with a 41% drop.

The monthly gaps from a year before began to lessen in March (minus 27%) and April (minus 17%). May was the first month of rising volume with a 6% increase, followed by July, with volume up 5%. June was a parenthesis in this summer period with a 20% drop, but the decline was not as striking compared to first-quarter months.

Overall progresses in May and July have helped contain the decline. August was flat and September negative by only 5%.

From a quarterly perspective, the improvement started in the second quarter. In the first quarter, volume was down 37.4% from the same period a year before. Sales dropped 10.6% during the second quarter. In contrast, this year’s third quarter at $12.90 billion caught up with last year’s $12.97 billion.

Given the softer issuance trend observed throughout the year, “flat” is as close to good news as it can get.

“The third quarter was not so bad,” said Rosenberg. I think it’s due to the market’s fundamentals. You had more uncertainty over a variety of geopolitical issues starting with trade. It was a more active summer than usual. As a result, we certainly saw a pickup in volume.”

Year to date

This year’s tally through Oct. 11 is $37.03 billion, an 18.3% drop from $45.35 billion a year ago. The number of deals however has remained notably even at 12,098, down 5.5% from 12,804 during the same period a year ago.

Such was not the case earlier in the year. For instance, the deal count in the first quarter registered 3,532 offerings, a decline of more than 20% from a 4,534 count in 2018.

But so far, the year remains disappointing. This issue and how to resolve it was one of the main themes discussed during last week’s 15th Annual Summit.

“At the conference, several firms attributed the softness in 2019’s year-to-date notional amounts to a trend among investors to take profits by moving to cash. Many other investment vehicles such as ETFs and mutual funds have experienced a similar flight-to-safety so far this year,” Styrcula said.

Bespoke deals

Wirehouse top executives said during last week’s conference that the business model was shifting toward customization, which is the direction they’re heading to. It does not mean the end of the “calendar business” of course. But banks want to cater more to the independent financial adviser channel. At the same time those customized deals are smaller in size. For many issuers the use of technology platforms is no longer optional as they must make this transition more cost-efficient.

Would the push toward deals that are “bought” rather than “sold” be enough to offset this year’s decline?

It’s too soon to tell. But Rosenberg said the transition makes sense.

“Banks want to grow the asset class. If investors start looking at structured products as a core part of their portfolio, the industry will do well. Banks want to become more opportunistic in order to grow structured notes as a more mainstream investment vehicle, competing with ETFs,” he said.

“If you can find more reasons for people to invest in structured notes, even if you start with smaller deals, it will end up leading to more volume overall.”

Top deals

UBS AG, London Branch priced the top deal in an $18.7 million issue of contingent income autocallable securities due Jan. 13, 2022 linked to the common stock of Uber Technologies, Inc.

The contingent coupon payable quarterly is 17.75% based on a coupon barrier of 50%. The notes will be called a par plus the contingent coupon on any quarterly determination date if the share price is at or above its initial level. The barrier at maturity is also 50% observable point-to-point. Morgan Stanley Wealth Management handled the distribution of the deal.

Citigroup Global Markets Holdings Inc.’s $16.5 million of 13-month notes linked to the S&P 500 index was the second deal. The note offers one-to-one upside exposure up to a 12% and a 10% downside buffer.

Royal Bank of Canada priced $11.39 million of three-year autocallable worst-of notes linked to the Nasdaq-100 index, the Russell 2000 index and the S&P 500 index, the third offering of the week. The quarterly contingent coupon of 10.25% is paid above a 70% barrier. Each quarter, the notes are callable automatically above initial price. The principal-repayment barrier at maturity is set at 60%. UBS Financial Services Inc. and RBC Capital Markets, LLC are the underwriters.

UBS was the top agent last week with $34 million in 35 deals, or 29.4% of the total. It was followed by Citigroup and Morgan Stanley.

UBS AG, London Brach was the leading issuer bringing to market 34 offerings for a total of $36 million, a 30.7% share. The top issuer during the previous week was JPMorgan Chase Financial Co. LLC.

For the year, Barclays Bank plc is the No. 1 issuer with $5.27 billion in 1,323 deals, or 14.23% of the total.

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