As calendar is exhausted, volume drops by 64%; investors miss out on equity rally

By Emma Trincal

New York, Dec. 7 - Last week's equity rally did not spur investors to buy structured products. The volume of structured notes excluding exchange-traded notes fell by 64% to $365 million in the week ended Friday from $1 billion the week before, according to data compiled by Prospect News.

The number of deals from Nov. 28 to Dec. 2 decreased to 140 from 242 the week before, and their size diminished as well. Only two deals in the $20 million or more size priced, compared with 17 the week before.

"With the holidays of November and December, most issuers close their offerings before Thanksgiving and Christmas" a structurer said.

"Both last weeks on those two months are pretty slow."

The tepid volume contrasted with the euphoric mood in equity markets after several Central Banks, including the Fed, announced coordinated actions to provide liquidity to the global financial system.

The news sent the S&P 500 up more than 4% on Nov. 30, and the benchmark shot up more than 7% for the week, its biggest advance since the fall of 2008.

Calendar trap

"When you have that kind of rally, it should spur investors to action. People are afraid to miss the boat," a New York sellsider said.

"But the retail calendar is driven by a monthly cycle, and that left people out of it.

"Last week was not the end of the month. Everything had been already sold the week before.

"Clients may be more reactive to market moves at the end of the month because the products are there."

A structurer agreed.

"The general retail client who can't structure their own deal for lack of sufficient size is trapped by the calendar," he said.

The turnaround between a market event and the client's participation is not immediate, noted the sellsider.

"The market needs to move. The financial adviser needs to reach out to the client. He needs to find out what offerings are available. Then the client needs to think about it. It can take days," he said.

Last week's slow pace of issuance was probably due to supply factors rather than demand, he said.

"The offerings had already closed," the sellsider said. "Then the market rallied. Even if an investor wanted to do something, he probably couldn't. They may not have had the products."

For the structurer, the size of the deals makes all the difference.

"The larger client can time the trade better. They can take advantage of the market with a one-off."

Small investors, though, may also be able to take advantage of the market providing that they buy from agents, which may follow a shorter cycle of sales, the sellsider said.

"Some issuers don't particularly care about the monthly schedule, or for them, it's not a requirement," he said.

"Firms like JP Morgan for instance, whether they distribute their own deals or use external issuers, tend to follow a weekly cycle. That allows the client to be more reactive."

JPMorgan was the top agent for the week, pricing $86 million in 15 deals, or 23.6% of the total. It was followed by Barclays with $53 million of the volume and 14.42% of the volume sold in 13 offerings.

Popular knock-outs

One of the most successful structures last week was knock-out deals.

Those products offer a downside barrier below which investors are fully exposed to the decline of the underlying index from the initial price. At maturity, investors typically get the greater of a contingent minimum return and the index return if the final index level is greater than a particular predetermined level, which can be a barrier level or the initial level.

The top deal of the week fell into that category. Morgan Stanley priced $23.82 million of 0% trigger jump securities due Dec. 5, 2014 linked to the S&P 500 index. If the index finishes above its initial level, the payout at maturity will be par of $10.00 plus the greater of the index return and the upside payment of $4.50 per note. Investors will receive par if the index falls by up to 35% and will be fully exposed to losses if the decline is more than 35%.

The sellsider said that knock-out notes make sense for investors in today's market because they believe that equity prices are near a bottom but will recover in the span of a year or two.

"These structures fit well with investors' sentiment in the market today," he said. "They clearly show the potential advantage of using structured notes versus a direct investment in equity."

The negative aspect of those trades is that they feature a barrier rather than a buffer.

"People are willing to take on a little bit more risk," he said.

"Adding a barrier adds risk, but it can add significant upside with the upside booster feature uncapped."

Protection, liquidity, access

Leveraged return with partial downside protection - at 13.75% of the total volume last week - prevailed over straight leverage, which represented only 3.6% of the sales.

"As the market moves up, people who are investing now are aware they're getting in at the high end of the current range, so they may want protection because they may see a pullback," the structurer said.

Liquidity and access to specific asset classes was a key motivator for some investors last week.

An example was the second largest offering, JPMorgan Chase & Co.'s additional $20 million of its 0% daily liquidity notes due Aug. 31, 2016 linked to the S&P GSCI Gold Index Total Return.

The notes are putable at any time, subject to the investor fee, and are callable after one year.

The outstanding principal amount of notes is now $30.83 million.

"I think this is a type of access trade," the sellsider said.

"More clients want to get access to a specific asset class when there is no ETF or ETN.

"Access is a very valid functionality."

Every underlying asset class declined last week except for in market share. Stocks led with 21%, an increase from the 14% they represented the week before.

The market share of equity index-linked products on the other hand declined to 49% from 59%.

On the ETN front, last week was a better week than the previous one with the pricing of $47 million in eight deals versus $3 million in three deals the week before.

UBS AG, London Branch brought an innovative structure with a pair of "risk on" and "risk off" exchange-traded access securities tied to the Fisher-Gartman Risk index, introducing a new vehicle that allows investors to express and monetize their view on risk.

"When you have that kind of rally, it should spur investors to action." - New York sellsider

"The larger client can time the trade better. They can take advantage of the market with a one-off." - A structurer

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