Structured products agents price $496 million for week ahead of U.S. mid-term elections; market up

By Emma Trincal

New York, Nov. 7 – Structured products issuance was robust last week with $496 million in 186 deals as stock prices rose in anticipation of the U.S. mid-term elections, according to data compiled by Prospect News.

Democrats gaining control of the House of Representatives ended up being the outcome most market participants had expected. Last week’s uncertainty was not bad for the markets: the S&P 500 index increased by 2.4%.

Diversion but confidence

Issuance volume could have even been better, a sellsider said.

“Even though most people expected the Democrats to win, people last week were still in the dark. It was a distraction,” he said.

“The market never likes uncertainty, good or bad. This morning there is no surprise. The results are in line with the expectations. People can move on.”

The stock market was higher on Wednesday morning after the results of the elections from the day before became known.

Big October

The latest updated figures showed that October was a strong month despite the sell-off. With $4.72 billion of issuance, it was the fifth best month of the year. January, which posted $6.4 billion, was the top one, followed by February, April and May. Interestingly, this year’s first two months have been volatile and saw deep but non-lasting pullbacks preceded or followed by rallies. October was different. The sell-off dragged on throughout the entire month.

“Investors are starting to get cautious, but people don’t think we’ve seen the peak yet. The U.S. is still the best house in a bad neighborhood,” a market participant said.

“I think we’re going to see a bit of a rough period here. But we are in November and once you get near Thanksgiving, December, you have what we call the Santa Claus rally and then the January effect.

“I think the lows have already been established.”

Sell-off

Last month hit equity markets hard. The S&P 500 index dropped close to 7% and had its worst month since September 2011.

Volatility as measured by the CBOE VIX index hit 25, its highest level since March but not as high as its 37 peak in January.

Some wondered how the structured products business continued to be so strong.

Double comfort

“When you have that type of sell-off, people keep cash on the sidelines with the intention to reinvest it. But they tend to be scared to go in,” the sellsider said.

“That’s when I think structured notes can help people get over their own short-term fear. If you get into a structured note that offers you some downside protection in addition to the market drop, it should make you feel more comfortable.

“For example, after a 10% correction, buying a note with a 20% buffer on top of it...hopefully that’s enough comfort for you to pull the trigger.”

Scotia’s top deal

The top deal last week offered full principal-protection and uncapped leverage over a three-year term based on an international equity index basket. Goldman Sachs & Co. was the dealer.

Bank of Nova Scotia priced $39.1 million on a basket consisting of the Euro Stoxx 50 index with a 36% weight, the Topix index with a 27% weight, the FTSE 100 index with a 20% weight, the Swiss Market index with a 9% weight and the S&P/ASX 200 index with an 8% weight. The upside participation rate is 121.5%.

“That tells you something about the basket...the volatility, the dividends, the interest rates,” said the sellsider.

“The standout feature is the term...how short it is considering that they had to price the full principal protection.

“The Euro Stoxx has a pretty high dividend yield that makes the forwards cheaper. The cheaper the options, the shorter you can make the notes.”

The use of European benchmarks as underliers has helped issuers offer shorter-dated products in general, he added.

“We do get requests for shorter notes all the time. I don’t think it’s always the right place to put your economics though.

“The market over time tends to go higher. Short-term, you can always hit a bear market and end up not having enough time for the recovery. So there’s a risk if you’re doing this,” he said.

Leverage, absolute return

Coming next was JPMorgan Chase Financial Co. LLC’s $25.95 million of 4.5-year leveraged barrier notes linked to the Euro Stoxx 50 index. The payout at maturity will be par plus 3.425 times the gain.

The structure provides a 70% barrier.

Morgan Stanley priced $17.68 million of 13-month absolute return notes tied to the S&P 500 index on the behalf of JPMorgan. It was the No. 3 deal.

The structure showed a bearish bias with an absolute return gain if the index declines above an 85% barrier while the one-to-one upside participation is capped at 9.65%.

Bet on Big Blue

Single-stock deals issuance was on hold last week: less than 9% of all volume used this underlying type versus an annual average share of 17%.

The top deal in this asset class was a pure autocallable reverse convertible paying a fixed monthly coupon coming from Royal Bank of Canada.

The Canadian issuer priced $12.64 million of one-year 7.8% airbag autocallable yield notes linked to International Business Machines Corp.

The deal priced on Oct. 29, two weeks after the company reported its third-quarter earnings. The timing offered investors a 17.5% discount in the stock price. UBS was the agent on the deal.

Relative value deal

One noteworthy deal – and the fifth one in size – was a relative value product introduced by Credit Suisse, which offered a bet on value investing versus growth.

Credit Suisse AG, London Branch priced $12.07 million of one-year jump securities linked to the relative performance of the S&P 500 Value index over the S&P 500 Growth index.

If the return of the value index finishes greater than the growth index, investors will receive a 12% return.

Otherwise, they will lose the percentage amount of underperformance of the value index relative to the growth index.

Morgan Stanley Wealth Management is handling distribution.

“This is an interesting note,” the sellsider said.

“It’s like a long/short play in a way.”

Equity long/short is a hedge fund strategy which consists of buying equities that are expected to go up in price while selling short equities that are expected to drop. The performance is the net result of the two combined strategies.

Growth has outperformed value in the U.S. for several years. But some expect a change, the sellsider said.

“People see a shift coming based on where we are in the business cycle,” he said.

October’s sell-off may be a first signal in that direction although it is related to a downturn. But between Sept. 28 and Nov. 6, the S&P 500 Value index has dropped 3.2% while the S&P 500 Growth index has lost 7.2%, according to S&P Dow Jones Indices.

Year is up

Structured products issuance volume year to date continued to be higher than last year with $49.32 billion versus $44.13 billion, an 11.76% increase. The number of deals rose by 17% to 13,787 from 11,769.

“I’m pretty optimistic,” the sellsider said.

“Notes continue to gain in popularity. There’s still a lot of room to grow. There are still many advisers who haven’t taken the time to understand this product and see how it fits in into their portfolio.

“But we’re heading in the right direction.”

The top agent last week was UBS with $106 million priced in 48 deals, or 21.46% of the total. It was followed by JPMorgan and Morgan Stanley.

JPMorgan Chase Financial Co. LLC, which brought to market 34 deals totaling $119 million, was the top issuer last week with a 24% share.

This issuer also tops its peers for the year to date with $7.35 billion in 1,908 deals, or 14.9% of the total.

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