Structured products issuance volume $458 million for week amid hurricanes; Europe in focus

By Emma Trincal

New York, Sept. 27 – Structured products issuance volume was healthy for the third week of the month given the devastating hurricane season. Issuance hit $458 million in 131 deals.

Morgan Stanley topped the dealer’s list after pricing 13 deals totaling $148 million, or nearly a third of the market, according to data compiled by Prospect News.

Part of Morgan Stanley’s lead came from a nearly $40 million trade based on the Euro Stoxx Banks index, which was issued by JPMorgan’s issuing subsidiary JPMorgan Chase Financial Co. LLC.

Europe was the main investment theme of the week with a number of deals directly linked to the main European equity benchmark or to narrower sectors or countries within the geographic area.

Month, year

For the month through Sept. 22 however, issuance volume slowed down to $1.56 billion, an 8% decline from the same time in August.

“No question those hurricanes – Hurricane Harvey, Hurricane Irma and then Maria – had some negative impact on volume in September,” a sellsider said.

“With Irma, you probably have Florida out for at least two weeks. You don’t invest the week before because you have to prepare for the hurricane and you don’t invest the week after when you have to fix what was broken. There are many broker-dealers in Florida too. Overall you’re talking about big centers of wealth: Florida, Tampa and Houston.”

Issuance volume for the year remains strong with $35.92 billion sold through Sept. 22, a 39% increase from $25.90 billion last year.

Volume in the 12 months to Sept 22 is up 30% to $48.75 billion from $37.5 billion in the same period a year earlier, according to the data.

Euro focus

Europe continued to be popular in the overall market and among structured notes investors. Some of the largest deals featured underliers which were directly or partially related to European equity.

“Europe has recently had a nice jump,” the sellsider said.

“It’s a catch up game. The U.S. is kind of toppish. Where else are you going to invest your money? In Japan? In China?

“People are using the Euro Stoxx 50 to get upside large-cap participation to a market that still offers more value than the U.S.”

On Sunday, German chancellor Angela Merkel won a fourth term in Germany's election, a widely anticipated event.

“There was no volatility due to the German elections. It was not an issue like Brexit was an issue last year,” he added.

“If people priced a lot of deals based on European themes, I don’t think it was anything tactical going on. Merkel was not challenged. Everyone went about their business.”

Volatility as measured by the CBOE VIX index remained low last week, trading range bound around 10. Its high in early August was 16 for this year.

Creating premium

“Volatility is still not moving. Yet things are pretty good,” an industry source said.

What keeps pricing attractive and volume strong is investors ‘bullishness but also the rising tide of correlation trades. Those provide issuers with other sources of premium than pure short-volatility plays, he explained.

“The market is quite expensive and volatility is low, so we see quite a lot of autocallables stuff, especially the worst-of,” he said.

Top deal

JPMorgan Chase Financial Co. LLC priced $39.11 million of 15-month trigger Performance Leveraged Upside Securities linked to the Euro Stoxx Banks index. Distributed by Morgan Stanley Wealth Management, it was the largest offering of the week, according to preliminary data available.

The upside participation rate was 200% up to a 19.4% cap. There was a 75% barrier at maturity observed point to point.

JPMorgan also priced another trigger PLUS linked to Euro Stoxx Banks for $15.77 million, showing nearly identical terms except for the barrier and cap levels.

The second big deal, a pure European equity play, was Morgan Stanley Finance LLC’s $32.26 million of two-year leveraged buffered notes linked to the Euro Stoxx 50 index. The leverage factor on the upside was 1.5 up to a 23.25% maximum return. The downside featured a 20% geared buffer with a 1.25 multiple.

UBS AG, London Branch priced a $21.33 million deal of five-year worst-of callable contingent yield notes linked to the MSCI EAFE index, the Russell 2000 index and the S&P 500 index. For some investors, the MSCI EAFE as a broader international benchmark can be used as an alternative to the European equity index given the heavy weighting of this asset class in the index components.

Three countries

Some market participants noted a new European markets product put together by JPMorgan last week with a deal linked to three European countries: France, Italy and Spain.

It was Deutsche Bank AG, London Branch’s $15 million of three-year annual review notes linked to the worst performing of the CAC 40 index, the FTSE MIB index and the IBEX 35 index. The notes will be automatically called at par plus a call premium of 10.32% per year if each index closes at or above its initial level on either annual review date. There was a 70% barrier at maturity and a maximum call premium of 30.96% on the last call date.

“I saw that deal come across, and it’s an interesting one, although I’m not sure I see a theme here,” the sellsider said.

“When you want to do say U.S. mid-cap in anticipation of a tax reform, that’s a theme. But these are just three European economies. It’s probably more a specific client’s request focused on ‘let’s break apart Europe’ or it’s just three countries they could come up with to get the pricing that they need. I’m not exactly sure.”

Rates

Interest rates deals made for more than 10% of total notional last week, which is higher than the year-to-date average of less than 2%. It was in part due to Barclays Bank plc’s $15 million of capped callable CMS steepener notes due Oct. 20, 2037. The underlying was the spread between the 30-year CMS rate and the two-year CMS rate.

UBS was the second agent last week after Morgan Stanley. It was followed by Goldman Sachs.

JPMorgan Chase Financial Co. LLC was the No. 1 issuer with $93 million in 16 deals, or more than 20% of the total.

“No question those hurricanes – Hurricane Harvey, Hurricane Irma and then Maria – had some negative impact on volume in September.” – A sellsider

“Volatility is still not moving. Yet things are pretty good.” – An industry source

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