Structured products issuance hits $386 million for week, closing better-than-expected month

By Emma Trincal

New York, Sept. 7 – As August ended last week, participants in the structured products market reflected on what’s usually considered a dreaded month, and the general impression was – not that bad after all, according to sources reflecting on their firm’s performance and commenting on data compiled by Prospect News.

Agents priced $386 million of structured products in the week ended Sept. 2 in 101 deals, according to Prospect News data.

A look at previous weeks this year showed it was relatively strong given that summer weeks tend to be slow and that the week fell ahead of the long Labor Day holiday weekend. Most importantly, last week was not the big closing week of the month when Bank of America prices its block trades – which took place the prior week when $1.67 billion hit the market.

Surprisingly good

But apparently agents finished some of last month’s business from Monday through Wednesday: nine out of 10 deals, or 99% of last week’s volume, priced during those three final days of August.

August itself was a surprise. The equity market did not go through the global market correction of the previous year and the S&P 500 hit new highs. Yet trading volume in the stock market was light, economic signals were mixed and the market for the most part trended sideways. Despite those obstacles, distributors and sellsiders appeared satisfied.

“We had a very good August...fairly outstanding all across the board,” said a structured notes distributor.

“It was actually a decent month. It’s hard to tell why,” a sellsider said, adding that the market had not shown a clear direction, which normally is not conducive to business.

“For us, the month was positive. We expect to have a good end of the year,” this sellsider noted.

August turned out to be the fourth best month of the year, in notional sales, the data showed. Agents sold $3.02 billion during this month, just below March’s volume at $3.15 billion. January was the best month at $4.68 billion. July was the second-best month with $3.31 billion but as a result of an anomaly: Bank of America priced both its June and July volume in July as it postponed its June’s trades to avoid the anticipated volatility around Brexit.

May, April, February and June followed August in decreasing order of volume sold. February, which is traditionally the second strongest month, saw its volume hampered by the market correction, which occurred in the first half of that month.

The year-to-date volume remains negative, but the gap has narrowed compared to previous weeks. Agents so far this year have priced $24.40 billion, a 22.38% decline from the previous year as of Sept. 2.

Autocallable revcons

Deals were small in size last week with the biggest offering sized at less than $35 million.

Autocallable reverse convertibles predominated with 45% of the volume in 63 deals totaling $174 million, according to the data. Leveraged notes on the other hand made for only 24% of the total issued volume. Those market shares are the reverse of the year-to-date average: 22% for autocallable reverse convertibles and 43% for leverage.

“Maybe we’re at the top. The S&P has hit a historical high. The expectations are quite muted,” the distributor said to explain why some investors may prefer limiting the upside for an attractive annualized return.

Naturally, the search for yield remains the dominant trend, he noted.

Top, small deal

The top deal however was a typical leveraged buffered note linked to a basket of international equity indexes. This particular basket has been used many times before with the same underlying indexes and with identical weightings.

The deal was JPMorgan Chase Financial Co. LLC’s $34.82 million of two-year capped buffered enhanced participation notes linked to a basket consisting of the Euro Stoxx 50 index with a 37% weight, the FTSE 100 index with a 23% weight, the Topix index with a 23% weight, the Swiss Market index with a 9% weight and the S&P/ASX 200 index with an 8% weight.

Investors were offered three-times leverage on the upside up to a 22.25% cap. The downside featured a 10% geared buffer with a multiple of 1.111.

Absolute return

The following two deals were dual directional structures.

Credit Suisse AG, London Branch priced $30.9 million of three-year dual directional trigger leveraged notes linked to the S&P 500 index. The payout at maturity was par plus 200% of any index gain, subject to a maximum return of 28.2%.

Above a trigger level of 80% of the initial price, any index decline offered a positive return equal to par plus the absolute value of the index return. The downside exposure if the barrier was breached was one-to-one from the initial price.

Morgan Stanley Finance LLC priced the third deal with $21.25 million of three-year dual directional notes linked to the Euro Stoxx 50 index. The upside participation rate was 200% and the cap, 47%. The final barrier with absolute return was 80% of the initial price.

“The experts are generally quite muted when they make market return predictions,” said the distributor.

“Anytime I speak with an adviser and ask what’s your market return expectation, I get something around a 5%, 6%, at best 7%, annualized return.”

“Assuming a three-year dual directional with a minus 15 to plus 20 range; if the market goes up 5% a year only, you’re going to outperform with the leverage. You can also outperform on the downside. People like those deals because you can make money in most scenarios.”

Worst-of notes

Finally the No. 4 deal was a contingent coupon autocallable with a worst-of payout. The pair of underliers chosen for this deal was not very common, sources noted.

The notes – UBS AG, London Branch’s $17.41 million of 10-year trigger autocallables with contingent yield linked to the lesser performing of the MSCI Emerging Markets index and the S&P 500 index – offered a coupon barrier level at 70% of the initial price of the worst-performing index based on quarterly observations with an 8.36% contingent yield per annum. At maturity, the barrier was 50% of the initial price.

JPMorgan was the top agent last week with 66 deals totaling $139 million, or 35.90% of the volume. It was followed by Credit Suisse and Morgan Stanley.

“We had a very good August...fairly outstanding all across the board.” – A structured notes distributor

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