Week’s structured products issuance $684 million, led by Bank of Montreal $310 million block trade

By Emma Trincal

New York, Jan. 25 – Agents priced $684 million of structured products in the four-day week ended Friday, a robust volume for the third week of January preceding the final week of the month, which is taking place now, according to data compiled by Prospect News.

Figures however were skewed by a big block trade from Bank of Montreal sized at $310.24 million linked to Raymond James Analysts’ stock picking for this year. Without this deal, the week would have amounted to $374 million, which is average for weekly volume, the data showed.

So far

Still it was a second consecutive strong week with $535 million priced the week before.

“We’re up to a pretty good start. The market just hit 20,000 today. It’s rational exuberance playing out,” said Keith Styrcula, chairman of the Structured Products Association.

He was referring to the Dow Jones industrial average hitting 20,000 for the first time ever on Wednesday, this week.

Last week however, shortened by the Martin Luther King holiday, was not bullish. The market was on hold awaiting Friday’s inauguration of president Donald Trump. The S&P 500 index ended the week flat, shedding 0.1%.

But a market participant also expressed optimism.

“Strong equity markets are pretty good for the structured products space. Rising interest rates are pretty good for the principal-protection area.

“Eight or 10 years ago, fewer people knew about structured notes but ironically the environment was better to create appealing structure. If we get this combination of a strong market and higher rates, it will be very good for the structured products space,” the market participant said.

Best picks

Bank of Montreal’s $310.24 million of one-year notes linked to a basket of 17 equally weighted stocks selected as Raymond James Analysts’ Best Picks for 2017 was of course the top deal of the week and the year.

If the offering had been ranked based on last year’s top trades, it would have scored the second slot.

In December of each year, the equity research department at Raymond James selects its best picks for the following calendar year. Raymond James’ goal in selecting its best picks is to identify stocks that will be able to sustain operational growth and price appreciation over a 12-month period.

Bank of Montreal prices each December followed by January its “Best Picks” issue for the year. Last week’s offering was the second one for the 2017 best picks.

In December, Bank of Montreal sold $250 million in notes linked to the Best Picks for 2017. It was the third largest deal of 2016. The No. 1 was Goldman Sachs Group, Inc.’s leveraged notes tied to a basket of equity indexes, including the Euro Stoxx 50, the FTSE 100 and the Topix. The second one was Credit Suisse AG, London Branch’s $270.6 million digital notes linked to the S&P 500 index in March.

“It adds up,” a sellsider said about Bank of Montreal’s basket notes issued in December and last week.

“They always split it in two pieces. Now it’s more than half a billion. I guess [Laurence] probably took a vacation,” he said.

He was referring to Laurence Kaplan, who runs the structured products at BMO Capital Markets.

“Raymond James also did an excellent job. It’s kind of a roll trade.”

Raymond James is the distributor of the notes.

No copycats

The market participant said the size of Bank of Montreal’s deal should serve as an example for the industry.

“I’ve always been surprised that more firms wouldn’t do that kind of things,” he said.

“Raymond James has a number of peers in their space. They may not have a large structured products footprint but they have a large research footprint.

“If a firm publishes their 10 best picks, why not use it to issue notes?

“I’m not sure there is a conflict of interest there, but even if there were, Wall Street is famous for overcoming conflicts. They could do the same thing and use one firm for the research and another one for the issuance,” he said.

The size of each Bank of Montreal’s deal linked to Raymond James’ research proves how strong demand for these types of products can be, he said.

“They get pretty big prints out of it. You’d think others would try to copycat it. But not really...and it works for them.”

BNP Paribas has used the stock-picking theme in issuing and distributing notes linked to the Morningstar Ultimate Stock-Pickers Target Volatility 7 index. The French bank’s affiliate Bank of the West has priced market-linked certificates of deposits on the same index. But the underlying, a stock screen based on the selection of the best stock-pickers, is different from Raymond James’ basket of stocks selected by the analysts of the firm. The notional of those trades is also much smaller.

Other top deals

Last week was dominated by Canadian firms as the second largest deal came from Royal Bank of Canada.

This issuer brought to market the No. 2 deal with $48.28 million of 18-month leveraged notes linked to the S&P 500 index. Investors at maturity received par plus 300% of the index gains up to an 18.45% cap. They had full exposure to the decline.

JPMorgan Chase Financial Co. LLC’s $41.12 million of 18-month leveraged notes linked to a basket of indexes was the third largest deal.

The basket and the weightings were not new. The components were 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.

The upside participation rate was 300% subject to a 29.4% cap. Investors had one-to-one exposure to the decline.

Last year’s top deal, which was distributed by JPMorgan, was similarly structured and comes to maturity this month. Some sources were wondering if the $41.12 million offering was part of a rollover.

“It’s pretty small for a roll,” the sellsider said. “It may not be related to their discretionary account like the giant one coming up is. That would be my guess.”

Short and sweet

Leveraged notes were at the forefront of the big sales, after the large delta one product from Bank of Montreal.

Leverage and income products had fairly similar market shares at 42% and 39%, respectively, based on last week’s volume without Bank of Montreal’s deal.

The market participant noticed that the second and third top deals had similar structures, characterized by a short maturity of 18 months, three-times leverage, a competitive cap and no downside protection, noting that it is a structure often seen in products sold by Merrill Lynch brokers.

“I don’t know if this represents a move to offer products similar to what Merrill does. But this looks very much like Merrill’s Accelerated Return Notes. Those deals are pretty simple. A lot of firms can replicate that. Maybe that’s a ‘me-too’ type of deal. It looks like RBC is doing a deal for RBC but that they’ve done it the same way as Merrill,” he said.

The top agents last week were BMO Capital Markets Corp. and Raymond James. Following next were JPMorgan and Credit Suisse.

“We’re up to a pretty good start. The market just hit 20,000 today. It’s rational exuberance playing out.” – Keith Styrcula, chairman of the Structured Products Association

“If we get this combination of a strong market and higher rates, it will be very good for the structured products space.” – A market participant

© 2015 Prospect News.
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