Structured products issuance up 31% for year; week dominated by two big trades amid market sell-off

By Emma Trincal

New York, March 21 – Despite a declining equity market, structured products fared relatively well last week. Agents sold $446 million in 141 deals in the second week of the month ended Friday, according to preliminary data compiled by Prospect News. Figures are likely to be revised upward.

For the year, volume is up 31%.

Last week’s stock market saw four consecutive sessions of price declines. The Dow Jones industrial average lost 389 points. The main U.S. benchmarks (S&P 500 index, Dow Jones and the Nasdaq Composite) each dropped 1% or more.

Another big convertible

However, as it happened during the previous week, a large synthetic reverse convertible may have skewed the data. Issued by JPMorgan Chase Financial Co. LLC, the $83.23 million offering was a hybrid structure half structured note, half convertible bond. The investment was linked to Apple Inc.

The notes will be callable after three years at the greater of par and the alternative settlement amount, which is par times the final stock price on that valuation date over the threshold price, which is 120% of the initial strike price.

At maturity, the payout will be will be the greater of par and the alternative settlement amount.

Two big deals

In all, 57% of last week’s volume came from two offerings only: this deal and another one.

Goldman Sachs was the dealer for the second block trade: $71.25 million of four-year leveraged buffered notes sold on behalf of Bank of Nova Scotia. The four-year notes are tied to the EAFE-like basket consisting of unequally weighted international indexes – the Euro Stoxx 50, the FTSE 100, the Topix, the Swiss Market index and the S&P/ASX 200 index. The notes offer a 205% uncapped participation on the upside and a 20% geared buffer on the downside.

Some market observers have compared the basket to the MSCI EAFE index, which tracks the performance of developed countries excluding the U.S. and Canada and reflects a large allocation to the euro zone markets, the U.K. and Japan.

Goldman and the EAFE basket

“Goldman is likely behind the scenes. The same deal has been done with different issuers, different indexes and different weightings. But it’s a combination of those five indexes,” a market participant said.

In February 2016, Goldman Sachs Group, Inc. priced $1.07 billion of a version of the same offering tied to a basket comprising only three out of the five indexes: the Euro Stoxx 50 index, the FTSE 100 and the Topix. The deal was rumored to have been sold to the JPMorgan wealth management platform.

The underlying basket under its various forms is one of the top ones in the basket-linked notes category.

Since 2010 there have been 496 offerings of this deal with a variety of combinations of the index components and weightings. In total, it represents $7.3 billion, according to data compiled by Prospect News.

A great diversity of issuers have participated in these deals, including Morgan Stanley Finance LLC, GS Finance Corp., HSBC USA, Inc., Barclays Bank plc, Citigroup Global Markets Holdings Inc. and Credit Suisse AG, London Branch and BofA Finance.

“My belief is that Goldman uses this deal so frequently, they need other issuers. They seem to always be the underwriter. I don’t know if they’re selling it to their asset management platform or to others like JPMorgan’s private wealth.”

This market participant does not believe the deal targets a single investor.

“Or it would have to be an investment fund, some sort of collective entity,” he said.

Top agents

With 13 other deals, Goldman was the top agent, pricing $156 million, or more than a third of last week’s total volume.

JPMorgan with its block trade and 15 others captured $101 million, or nearly 23%, of total volume. The firm was the No. 2 agent.

Healthy year

Year-to-date issuance volume brings a more accurate picture of the business as weekly figures are subject to revisions.

Agents so far have sold $13.13 billion through March 16, an increase in excess of 31% from the same period last year, according to the data.

The number of offerings grew by more than 30% to 3,358 from 2,580 a year ago, a continuation of a trend of smaller deals made possible by technology developments within various distribution channels.

Total volume for the trailing 12 months is $53.32 billion, a 30% increase from the previous trailing period.

Scaling down

While the year so far is strong, some sellsiders are expressing concerns over the return of volatility.

Those concerns may be more apparent among firms with large calendar offerings.

“Firms that have a top-down approach and see their clients freaked out by those market gyrations may want to scale down or they may do what the CEO tells them to do. But not every firm can afford to move into bonds,” the market participant said.

New opportunities

On the other hand, firms that cater to registered investment advisers are seeing healthy growth.

“We see a lot of bespoke action from RIAs,” the market participant said.

“We have a pretty good deal flow of one-off, a majority of which are issues tied to ETFs or indices.”

The impact of rising volatility as measured by the CBOE VIX index depends on the type of clients that advisers cater to, he said.

Better coupons

“Our clients love the VIX at 25-26. It’s been at 11 for so long. Now they have the ability to get a 12% coupon for a one-year on a basket of sectors or large indices with 60% to 55% barriers.

“For a lot of them there is no chance of a 40% drawdown in one year. That’s why they find the opportunity of those worst-of autocalls very attractive. Between a 12% coupon and an 8% when the VIX was at 11, it’s a big difference.

“They’re more sophisticated. They’re paid on the asset growth. That’s why we see a lot of bespoke deals.”

In general the impact of higher volatility should not alter too much the conditions of equity-linked structured notes issuance, he said. If anything, it should be a driving force for growth.

“If volatility in the markets makes people nervous that’s also the time when you want a volatility-managed approach. You want to buy the S&P and buy a buffer at the same time,” he said.

“For autocalls the opportunity of getting much higher coupons is just too hard to pass on.

“Overall I don’t believe the market volatility will dampen the business.”

Rates

Interest-rates linked notes did not come up last week. But the growth of this asset class has been exponential this year. Agents have priced $407 million in 50 deals through March 16, which is nearly 18 times the amount seen during the same time last year with $23 million in eight deals.

Naturally the bid is due to the rise in interest rates.

“Volatility in the equity market is good for the banks. Even better for them is the increase in interest rates,” said an analyst.

“Higher rates will force a whole bunch of financial institutions to readjust their balance sheet to reduce their exposure to interest rate risk; otherwise they would lose money.

“That should increase the volume of interest-rate linked notes. That’s how you do your hedging.”

“If volatility in the markets makes people nervous that’s also the time when you want a volatility-managed approach. You want to buy the S&P and buy a buffer at the same time.” – A market participant

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