Structured products agents price $180 million in second week of February; issuance down

By Emma Trincal

New York, Feb. 20 – While bulls continued to be in charge on the equity market, issuance of structured notes was sluggish for the week ended Friday with $180 million in 94 deals, according to data compiled by Prospect News.

It was a sharp contrast with the previous week’s $396 million, which started off the month. Data however is preliminary and last week’s figures may be subject to upward revision.

The S&P 500 rose 2.5% for the week as investors regained confidence about the possibility of a trade deal between the United States and China. Among other cheerful news: another government shutdown was avoided. Tech stocks rallied the most, pushing the Nasdaq Composite up 2.4% for the week to its pre-Christmas Eve level.

The S&P 500 index has gained 19% since its bottom on Dec. 24.

But it was not all good news. Investors also had to digest the worst retail sales report since 2009 and the global economy continued to show signs of decelerating.

Month, year are down

Through Feb. 15, volume for the month has dropped nearly 10% to $740 million from $812 million during the same time in January, and this occurred despite a greater number of deals – 283 versus 233.

More concerning are figures for the year so far. Through Feb. 15, issuance volume plummeted 49% to $4.51 billion from $8.78 billion during the same period last year.

Meanwhile the number of deals fell by more than a third to 1,375 from 2,131.

Fewer block trades

As mentioned before, part of the explanation is the existence last year of a greater number of bigger deals versus this year.

Case in point: 13 deals in excess of $50 million priced last year through Feb. 15 versus five this year.

One example was JPMorgan Chase Financial Co. LLC’s $350 million cash-settled equity-linked notes offering linked to Voya Financial, Inc. More big block synthetic convertible trades, one of which at nearly twice that size, priced last year between mid-February and early April. But these trades do not show the real picture, according to a market participant.

“That big trade skewed the data. But there is more behind those numbers,” he said.

December shock still felt

The intensity of the December brief bear market has renewed fears among investors despite the stock market rebound and reduced volatility that ensued after the beginning of the year.

“A lot has to do with investors’ confidence...general market sentiment a year ago versus this year,” he said.

“We just went through a very difficult December and even though we now have a rally, we’re just recovering from the slump. People may not be convinced.

“A very strong January on the back of a very frightening December has dampened the enthusiasm.”

Last year’s timing for the bull market was also different.

“A year ago, the market was strong early on in the year. The big market scare came in February,” he noted.

Still February was a strong month for structured products a year ago. In fact, it was the second-best month of the year closely after January, according to the data. And the sell-off went on from Jan. 22 to the beginning of March.

“I think we’re still scared.

“There are many reports that cash is coming back as an asset class. Many investors are still out of the market, waiting on the sidelines,” the market participant said.

Clearer picture

Trailing 12-month period data eliminates some of the “noise” as the year is still young. There again the trend, while less alarming, is not quite positive.

Volume in the 12 months to Feb. 15 is down 4.1% to $52.57 billion from $54.95 billion in the same period a year earlier.

Pricing conditions

Some attribute the slowdown in sales to volatility, which went from spiking to falling over a short period of time. A recent compression in rates has not been favorable either.

“The market is suffering from the sharp rally and the lower rates,” a trader said.

“Especially in the rates space, we are faced with difficulties in making pricing work.

“The bond market rallied so hard, we’ve been in situations where we had to close some deals as they were pricing over par.”

Trends for week

Last week’s deals showed a tilt toward autocallable contingent coupon structures, which made for 34% of total volume in 60 deals. There was an uptick in the use of single-stocks as well as baskets of stocks, which combined represented nearly a quarter of total sales versus 52% for equity indexes, the data showed.

Leveraged deals with buffers and barriers accounted for 26% of total volume, which was higher than the share of leveraged products with full downside exposure, at 18%. This trend is consistent with the need for protection seen for the nearly past two months, which have followed the plummeting market.

Big merger

Morgan Stanley Finance LLC’s $16 million of 18-month leveraged notes linked to the SPDR S&P Regional Banking ETF was the top deal last week.

The payout at maturity will be par plus 5 times the ETF gain, subject to a cap of 25.25%.

Investors will lose 1% for each 1% decline.

“This seems like a timely deal. It comes on the he heels of the announcement of the largest bank merger in 10 years,” the market participant said.

Regional banks BB&T and SunTrust announced on Feb. 7 that they would merge to create the sixth-largest U.S. bank holding company. The notes priced a week later on Feb. 13.

“Big regional banks becoming super regional...for people interested in that sector it might be a catalyst,” he said.

European dividends

Citigroup Global Markets Holdings Inc. priced the second top offering with $13.36 million of three-year notes linked to a basket of international equity indexes.

The basket consists of the Euro Stoxx 50 index with a weight of 40%, the FTSE 100 index with a weight of 20%, the Nikkei Stock Average index with a weight of 20%, the Swiss Market index with a weight of 7.5%, the S&P/ASX 200 index with a weight of 7.5% and the Hang Seng index with a weight of 5%.

The payout at maturity will be par of $10 plus 2.7 times any basket gain.

If the basket falls but not below the 75% downside threshold, the payout will be par.

UBS Financial Services Inc. is the agent.

“This is an international equity play. It’s got a heavy weighting on Europe between the Euro Stoxx, the FTSE and the Swiss market,” the market participant said.

“This basket is very common. We see the same indices all the time. Only the weightings change.”

The structure had no cap and offered a 25% soft protection.

“You’re looking at some of the indices that pay strong dividend yields. Since you’re not participating in the total return, that would argue for generating leverage with higher or no cap,” he added.

The FTSE 100 index yields 4.53%, and the Euro Stoxx 50 index yields 3.9%. In comparison, the dividend yield for the S&P 500 index is 2%.

Sector play

UBS Financial Services Inc. priced the No. 3 deal on the behalf of HSBC USA Inc. with $12.75 million of 14-month of capped gears tied to the Energy Select Sector SPDR fund. Another sector play, the deal pays 3 times the ETF return at maturity, subject to a maximum gain of 29.14%. If the ETF return is negative, investors will be exposed to the ETF’s decline.

“A bullish play on energy, which we have seen can be a fairly volatile sector, and that’s how you get a high cap,” the market participant said.

The top agent last week was UBS with 45 deals totaling $55 million, or 30.43% of the total. It was followed by Morgan Stanley and JPMorgan.

Citigroup Global Markets Holdings Inc. was the No. 1 issuer with $31 million in eight deals, or 17% of the total issued volume.

Barclays Bank plc was the top issuer during the previous week.

For the year to date, JPMorgan Chase Financial Co. LLC is tops with $643 million in 208 deals, or 14.3% of the market.

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