Agents price $281 million of structured products in week; worst-of, digital deals lead the way

By Emma Trincal

New York, Oct. 25 – While the U.S. equity market continued to score new highs, showing no sign of a pullback, action in the structured products market was more modest.

Agents priced $281 million in the week ended Friday versus $590 million the week before, according to preliminary data compiled by Prospect News. The number of deals – 122 for this mid-month week – was also relatively lower versus 180 deals a week before, the data showed.

The figures however are subject to upward revisions as more deals get filed on the Securities and Exchange Commission website, which will modify Prospect News’ data.

Good month, year

So far, October beats last month.

From Oct. 1 through Oct. 20, volume is up 14% to $1.49 billion from $1.31 billion in September, according to the preliminary data. Compared to a year ago when $1.25 billion priced, the volume has grown by more than 19%.

The year to date continues to show a solid advance with $30.9 billion sold through Oct. 20, a 35% rise from $29.53 billion during the same time last year.

On a rolling period basis the trend remains largely positive.

Total sales for the 12-month trailing period to Oct. 20 is $49.07 billion, a 28.35% increase from $38.24 billion for the previous trailing period.

The number of deals during that time has exploded to 13,052 deals from 8,700, a 50% increase.

Exposure and income

“The themes have been pretty consistent this year. The market is on this positive momentum, and while investors are perhaps more nervous, they want the ability to participate but with some downside protection,” a market participant said.

“Second, interest rates remain historically low, therefore people continue to look for income.”

The thin issuance volume seen last week, at least from the preliminary data, contrasted with a rally, which had benchmarks pushing into new record highs. The regained confidence in the resiliency of the old bull market in the absence of any significant correction since November has investors flocking directly to equity markets, especially funds. But the concern over a pullback is an incentive for investors to buy notes with buffers or barriers, sellsiders said.

Leverage with protection

Leveraged notes accounted for 36% of last week’s volume. The volume of leveraged products with barriers or buffers was twice as high as leverage with principal at risk within this group.

“I think it’s clear that people don’t want to miss the bull run. They want to participate, but they’re also asking for protection because they’re scared about the downside,” the market participant said.

“That explains the appeal of leveraged buffered or barrier return enhanced products.”

Correlations

Structures overall were diversified last week with no particular trend emerging except for the continued success of worst-of deals.

Worst-of deals, at least the largest ones, are most of the time contingent coupon notes. This structure type accounted for 43% of the total volume last week.

Recent market trends are making worst-of pricing increasingly appealing from a correlation basis, an industry source said.

“As correlation is breaking down and the VIX keeps on breaking up you get a more favorable environment for worst-of,” this source said.

The most common combination of indexes for worst-of deals was the S&P 500, the Russell 2000 and the MSCI EAFE. The Euro Stoxx 50 was still commonly used in place of the EAFE.

Worst-of on single-stocks are the exception, not the rule, and deal sizes are much smaller.

JPMorgan priced a $1.21 million deal on Apple Inc., Alphabet Inc. and Microsoft Corp. with an 8% contingent coupon over a two-year term.

Digital notes have also gained momentum. Last week was no exception.

“Demand for digitals is a little bit more difficult to break down. But it looks like it’s the same income theme. People are dissatisfied with where the rates are,” the source said.

Bond sell-off

The recent bond sell-off has also been a positive driver for structuring notes not only in rates but in equity as well, this source said.

Over the past couple of months, the 10-year Treasury rate has picked up nearly 40 basis points, yielding on Wednesday 2.43%.

“It does help structuring equity products. The present value discount gives you more upside since you can purchase more optionality,” he said.

On the rate side, the recent sell-off has brought a new set of buyers into the market who are willing to go longer terms, he added.

Only one rate-linked note offering priced last week, but it was one of a decent size.

Wells Fargo & Co. sold $10 million of fixed-to-floating notes linked to the 10-Year Constant Maturity Swap Rate. The notes paid a fixed coupon of 4.05% on the first year.

Top offerings

The top deal was modest in size, reflecting the slow pace seen last week, based on currently available data.

JPMorgan Chase Financial Co. LLC priced $20.4 million of three-year capped leveraged notes linked to a basket of indexes.

The basket, which has been the basis of many deals, some of which among the largest structured notes ever issued, 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 success of this basket, whose weighting sometimes varies from deal to deal, has been attributed to its ability to offer a “customized” proxy of the MSCI EAFE index, according to sellsiders.

The upside leverage is three times subject to a cap of 123.35%. Investors will be exposed to any basket decline.

The second largest offering was a digital note.

Canadian Imperial Bank of Commerce priced $13.52 million of 18-month notes linked to the S&P 500 index.

If the index return is greater than or equal to negative 10%, the digital return will be 8.5%. Otherwise, investors will lose 1.1111% for every 1% that the index declines beyond 10%.

“Eight and a half percent seems pretty sexy in this environment. If the market is down 10% you feel pretty smart,” the market participant said.

The top agent last week was UBS, which priced 74 deals totaling $87 million, or 31% of the total volume, according to the preliminary data. JPMorgan and Goldman Sachs followed it.

JPMorgan Chase Financial Co. LLC was the No. 1 issuer with $56 million brought to market in 14 offerings.

“I think it’s clear that people don’t want to miss the bull run. They want to participate, but they’re also asking for protection because they’re scared about the downside.” – A market participant

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