Structured products issuance hits $328 million amid volatile week; equity index products in focus

By Emma Trincal

New York, Sept. 28 – Agents priced $328 million of structured products in 96 deals during the past week, which was more than half the volume seen during the previous week, according to data compiled by Prospect News. The issuance came as volatility picked up at the end of last week after a brief rally sparked by the Federal Reserve’s decision not to raise interest rates in September.

It was the third week of the month. The bulk of September issuance is expected to price this week.

“There was some volatility last week around the Fed. Were they going to raise the rates or not? Apparently some people had taken bets that they would and we saw some immediate overreaction,” a sellsider said.

“It’s all about whether the Fed is going to move or not and that has an impact on the structured product space too.

“The market is so toppish; clients are trying to figure out what’s going on between the Fed, the elections coming up. People are on the sidelines,” the sellsider said.

Structured notes linked to equity indexes usually dominate the final week of the month when Bank of America brings its large block trades, which rarely reference single stocks, according to the data.

Last week, however, equity indexes made for 68% of the total volume versus 78% for the year-to-date average.

Autocallable reverse convertibles dominated significantly with nearly half of the volume, or 47.6% versus 31% for leveraged return notes.

Nearly all leveraged product sales consisted in notes with a buffer or barrier. Only one such product priced at $1 million featured no downside protection, which is significantly low compared to the year-to-date average of 21.50% for these full-risk products.

The sellsider said he had observed the trend, which suggests that investors have turned more cautious.

“We’re seeing more and more caps in the form of a capped leveraged notes or digitals. People are less bullish. They’re willing to receive less on the upside if they can get some decent barrier or buffer on the downside,” he said.

Volume for September so far is encouraging, the data showed. Sales amounted to $1.37 billion this month through Sept. 23, a third more than in August, which recorded $1.03 billion.

Compared to September a year ago, which saw $1.16 billion issued, September so far has posted a solid increase in notional of more than 18%.

Summer volume from July 1 through Sept. 23 was up more than 4% from a year ago to $7.86 billion, according to the data.

“We had the Brexit, which gave us a huge boost in short-term volatility and was used by clients to increase exposure,” a structurer said.

“People have bought equities directly or structured products. The volatility gave them good entry points and it allowed us to generate higher coupons on notes.

“Volatility is still in the median-low range but it’s not super low either because we have the U.S. elections.”

Volume for the year is $25.93 billion versus $32.51 billion a year ago.

However, the gap from last year has narrowed from a 25% decline in the beginning of July to 20% right now.

“I’m not too pessimistic for the end of the year. The coming elections should boost volatility, and I do expect market moves to have a positive impact on volume,” the structurer said.

Identical twins

The two top deals last week were quasi identical except for the issuer and a slight difference in the cap.

The first one was Barclays Bank plc’s $39.52 million of two-year capped leveraged buffered notes linked to a basket of unequally weighted indexes. The basket consisted of the Euro Stoxx 50 index with a 37% initial weight, the FTSE 100 index with a 23% initial weight, the Topix index with a 23% initial weight, the Swiss Market index with a 9% initial weight and the S&P/ASX 200 index with an 8% initial weight. The leverage factor was three with a 27.90% cap. There was a 10% geared buffer with a 1.111 multiple for the downside. Barclays was listed as the agent but not necessarily the only distributor.

JPMorgan Chase Financial Co. LLC’s $34.8 million of two-year capped buffered enhanced participation notes were linked to the same basket with the same weightings. The Sept. 26, 2018 maturity date was common to both the Barclays and the JPMorgan Chase Financial offerings. The three times leverage on the upside and 10% geared buffer on the downside were exactly the same. The only difference in the structure was the cap set at 25.20%.

J.P. Morgan Securities LLC was the agent.

“Maybe it’s the same client who wants to diversify the issuer to reduce credit risk. Or it could be someone else. You never know. In this market somebody has an idea, somebody else may have picked it up,” the structurer said.

This particular basket is far from being new. Sixty-nine deals so far this year have used it with the same weightings for a total notional of $450 million.

“The basket is probably customized for the client or clients,” said the structurer, adding that using a basket did not necessarily help pricing.

“If it’s a basket, not a worst-of, you actually have imperfect correlation in there, which is going to lower volatility. And problem is you need high volatility for structures like this because you need to get enough premium on your short calls.”

He was referring to the cap of the notes, which is structured by selling call options for a premium. The view of a call seller is that the underlying will not rise more than the strike level at expiration. The cap level of the notes is the equivalent of the strike for that short position.

The third deal fell into the increasingly popular category of worst-of paying a contingent coupon. This one, GS Finance Corp.’s $21 million deal, had a 2.5-year maturity. It was callable at the discretion of the issuer after six months. The contingent coupon rate was 10.5% per annum with a 65% coupon barrier observed quarterly and based on the worst performing of the S&P 500 index, the Russell 2000 index and the Euro Stoxx 50 index. The final threshold was a 55% European barrier. Goldman Sachs Group, Inc. guaranteed the notes. Goldman Sachs was the underwriter.

JPMorgan was the top agent last week with 18 offerings totaling $123 million, or 37.35% of the total. It was followed by Barclays and Goldman Sachs.

“The market is so toppish; clients are trying to figure out what’s going on between the Fed, the elections coming up. People are on the sidelines.” – A sellsider

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