Structured products issuance limited amid short holiday week, but some deal sizes ‘decent’

By Emma Trincal

New York, July 12 – The shortened Fourth of July holiday week ended with $245 million in structured products issuance in 62 offerings, a couple of which were of decent size, according to data compiled by Prospect News.

It was the first week of the monthly calendar, which is the slowest. Figures however could be revised if some of the filings get delayed due to the holidays.

Last week marked the start of the second half of 2017. This may explain the unusually large size of the top offerings, according to a sellsider.

“Typically it’s the end of the quarter, the end of the first half, and because of that people make their reallocations on their overall portfolio between bonds and equity,” he said.

“A lot of these shops will sell their clients on the advisory side. They use deals to rebalance the portfolios.

“This is why in the beginning of July you see these big size deals.”

These larger deals were brought to market by two agents – Morgan Stanley and UBS – using their own respective issuing subsidiaries.

ARN-like

Morgan Stanley Finance LLC priced $51.42 million of two-year capped leveraged notes linked to the S&P 500 index. The deal offers triple the index gain up to a 21.51% cap. Investors will lose 1% for each 1% decline.

The Morgan Stanley offering with its short maturity, aggressively priced upside and lack of downside protection resembled the “Accelerated Return Notes” or ARNs distributed by BofA Merrill Lynch with only one difference: the Merrill “brand” tends to be shorter than two year with maturities in the 13- to 14-month range.

“If there is a structure that gathered a certain attention it would make sense to other firms to replicate the idea,” a market participant said.

BofA Merrill Lynch has successfully distributed this type of product. Last year, a third of this distributor’s sales were delivered in the form of ARNs.

5X leverage

Coming second is UBS AG, London Branch’s $36.6 million of two-year capped leveraged notes linked to a basket of international equity indexes.

The basket has been used many times before by various issuers. It consists 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.

The notes offer five times any basket gain up to a 35.5% cap. As with the previously mentioned deal, the downside is not protected.

“Five times is highly levered. But two of the indexes, the Euro Stoxx 50 and the FTSE, pay high dividends. That certainly helps pricing,” the market participant said.

UBS deals

This deal size is unusual for UBS, an agent which sells deals averaging $2.25 million, according to data compiled by Prospect News. UBS is the top single-stock agent averaging $680,000 for stock deals. For equity indexes the average for this agent is $8.7 million.

In general index deals are much larger – $5.85 million in average – than single-stocks – $1.37 million – more because of their superior volume than their deal number.

Indexes

“Indexes draw a wider investor base. People look for diversified investments,” said the market participant.

“With single-stock you have to have an opinion on each. How each stock is going to fit into my portfolio?

“It’s much more complicated than just replicating the market, which gives you inherent diversification.”

Leverage

Despite the absence of Bank of America in this early part of the month, last week had decidedly some of the characteristics of the end of a month, less the volume.

First some larger trades were seen on top. Second index-linked notes overwhelmed the market, making for more than 80% of the total volume. Finally leverage with no downside protection was the top structure with 40% of the shares in only four deals.

A current choppy stock market may encourage investors to use more leverage, according to the market participant.

The market traded down earlier in the week then up and down to finally rally on Friday on a positive job report while financial stocks rallied. But at the end, it was a mixed market with the S&P 500 index finishing flat.

“People look for structured products for income. But they also look for enhance returns when the market doesn’t go anywhere,” said the market participant.

Year

The business has been booming so far this year with sales up 37.50% to $26.10 billion from $19 billion last year, according to the data. The growth is across asset classes, even rates which have seen volume double this year.

But in some corners of the market, growth is not felt.

For fixed income sellsiders in particular, the picture appears more sluggish as expectations for higher rates have lessened.

Rates

Case in point: no rate deal priced last week.

Issuance volume in this asset class may have increased. But at $272 million its notional size remains crippled, making for less than 1% of the market.

When counting rate products, Prospect News does not include plain-vanilla notes, which it calls structured coupons. Those are lightly structured, such as step-up notes, step-down notes, fixed-to-floating rate notes and capped floaters.

“It’s been dramatically slow I’d say for the last 10 weeks,” said a rate structurer.

“These lower and lower rates... People just aren’t excited.

“There was this expectation that rates were going to be up. Now the chatter is maybe they won’t.”

The top agent last week was UBS with 36 deals totaling $70 million, or 28.5% of the total volume. It was followed by Morgan Stanley and Goldman Sachs.

UBS AG, London was the top issuer with the same notional and deals.

“People look for structured products for income. But they also look for enhance returns when the market doesn’t go anywhere.” – A market participant

“There was this expectation that rates were going to be up. Now the chatter is maybe they won’t.” – A rate structurer

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