Issuance still light amid tough pricing conditions, European concerns, summer break

By Emma Trincal

New York, July 25 - Market participants said the continued decline in structured products issuance volume seen last week but also this month does not help morale and sales.

Interest rates are said to be the main culprit, but other factors both seasonal and market-related are being mentioned as well.

Lackluster volume

Agents sold $204 million last week, a 53% decrease from the $432 million sold in the prior week, according to data compiled by Prospect News.

"That's bad," a sellsider said.

At 83, the number of deals remained the same from one week to the other. The top offering was Barclays Bank plc's $21.38 million of 0% contingent buffer enhanced notes due July 31, 2013 linked to Brent crude oil.

From July 1 to July 21, sales fell by 39% to $748 million from the $1.23 billion that priced during the same time in June, the data showed.

Volume was also down 40% month-to-date compared to the same period in July last year.

On a yearly basis, firms so far have priced $20.20 billion in 4,499 deals, an 18% decline in volume from last year's $24.74 billion sold in 3,442 products.

Figures do not include exchange-traded notes and CDs. Plain-vanilla rates-linked notes such as fixed-to floaters, capped floaters and step-ups are also not taken into account.

Killer rates

Interest rates trending toward zero are said to be the primary reason for the volume decline as low rates make deals more difficult to price.

Flows of money are driven to the relatively safe U.S. treasuries as uncertainty in the world, especially in Europe, fuel fears of another credit event, sources said.

"There are several factors behind the slowdown, from pricing conditions with the low interest rates to the current market uncertainty in the world," the sellsider said.

"But with the 10-year treasury breaking below 1.40%, the rate story continues to be the dominant one.

"Low rates make the economics of deals more difficult in terms of putting together structures in particular fully principal-protected products.

"I have buyers lamenting that there is not enough inventory," he said.

Other negatives

A structurer agreed that low interest rates are a big problem but said it is not the only one.

"We have no choice but using the equivalent of a zero coupon in order to structure any kind of deals," he said.

"The discount on your zero shrinks when interest rates are low. So the lower the interest rates, the more expensive the deal of course," he said.

The cost can be reduced when structuring the protection only partially, with a buffer, he said.

"When the client sells a put, we have more to spend so it helps," he added.

"But on short-dated structures I don't believe the low interest rates are the main issue."

He mentioned other factors.

"We're just at the beginning of the summer season. I would expect issuance to continue to be pretty slow until the end of August.

"And then you have Europe and the uncertainty around that.

"The market has to deal with Greece, Portugal, and Ireland. Now we're dealing with bigger countries, like Spain and Italy. Sovereign bond yields of Germany and France have also gone up a lot.

"It can definitely impact issuance because the uncertainty has triggered a flight to quality.

"People park their money in cash and highly rated Treasuries. Those seeking more yield go into high-yield bonds," he said.

Career changers

The lack of investors' demand has hit some sellsiders harshly. Bob Lee, who until recently was director of structured products for Charles Schwab and has 10 years experience in the business, told Prospect News what motivated him to exit the industry.

"I left the business recently. There was nothing relevant to sell," he said.

"Difficult pricing, perceptions of credit risk are driving people away.

"I haven't heard of many layoffs but I have industry colleagues that are exiting the business as well."

When asked when he began to notice a decrease in sales volume, he said that "things kind of began to dry up at the end of March, beginning of April."

Lee agreed with the sellsider on the primary driver.

"The main factor for me was the economics of the deals. Products weren't very attractive," he said.

But other factors combined made things worse, he noted.

"Now you got people avoiding any sort of bank debt due to what's going on in Europe. "Most of the issuers being European-based, most people don't want structured notes.

"The bank scandal around Libor didn't help anybody. The whale trade at JPMorgan didn't help anybody.

"There's no confidence from people already skeptical about our industry. The anti-bank sentiment is very strong," he said.

Another aggravating factor he said came from the regulatory environment.

"Regulators are only making things worse. The uncertainty about rule-making and the regulation that's upon us slows down everything. Everyday my hands got a little bit more tied because no one knows what the rules are around those products," he said.

Lee said he is now a business owner. "This turned out to be a good thing for me," he said. He has left the financial industry altogether.

The picture is not necessarily so dark for everyone. Some may sell less but said they remain busy.

"I have 50 deals closing right now. Business is good," a distributor said.

"We have good partners. It's also busy because there's a lot of operational activity. It doesn't mean the notional is big. It just means it's busy."

Top asset classes, structures

Equity index-linked notes issuance dropped strongly last week, down 74% to $74 million.

On the other hand, stock deals fell, too, but at a lower pace of 11%. They captured more market share (39.5%) than equity indexes (36.5%).

Reverse convertibles were the only structure that did well last week, up 30% from the prior week.

The name Apple Inc. helped stock-linked product sales. Out of $80 million sold in 60 stock deals, nearly 22% of this volume came from eight notes tied to the share price of Apple.

Options on Apple were particularly active last week, sources said, as the company was heading toward its widely anticipated earnings release on Tuesday. It turned out Apple's earnings and revenue missed analysts' forecasts, pushing down the share price by 4.5% since then as of Wednesday.

When looking at the asset class trends for the month and year-to-date basis, equity indexes continued to prevail - they're up 30% year to date while stocks have declined by 44%.

The top structure type both monthly and yearly volume continued to be leveraged notes with partial downside protection, up 17.5% year to date.

The second offering last week sold by JPMorgan and issued by Credit Suisse AG, Nassau Branch was a $19.12 million deal of 0% notes due Aug. 7, 2013 linked to a weighted basket of three buffered return enhanced components made of the Euro Stoxx 50 index with a 55% weight, the Topix index with a 23% weight and the FTSE 100 index with a 22% weight.

The third was a two-year Royal Bank of Canada $18.24 million 5.97% reverse convertible tied to General Electric Co. shares.

JPMorgan took the top slot selling 11 deals totaling $74 million or 36.48% of the total.

It was followed by UBS and Bank of America.

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