Volume slowing down this year amid new rules on capital, interest rate divergence, sources say

By Emma Trincal

New York, Dec. 2 – Industry participants are increasingly concerned about the weakening of U.S. structured notes issuance volume over the past few months.

Agents sold $644 million in 79 deals in the shortened Thanksgiving week, according to preliminary data compiled by Prospect News. Two-thirds of the deals priced on Tuesday.

While it was a holiday week, it was also the end of the month, and as such, volume could have been higher, sources said.

Weekly volume when a month closes during its final week has ranged this year between $1.5 billion and more than $3 billion, the data showed.

Last week’s data however is still subject to increase as not all offerings were filed with the Securities and Exchange Commission by press time. A couple of larger offerings could significantly change the picture.

Brakes on

Over longer periods though, the trend shows a slowdown since June.

“We were doing pretty well in the first half of the year. But we’ve seen a continued decline in sales starting this summer,” said a sellsider.

“Whatever lead we had six months ago is now lost.”

For the first half of 2015, volume rose 17% to $24.97 billion from $21.33 billion, according to data compiled by Prospect News.

During the first three quarters, volume was up by less than 6% to $34.41 billion from $32.51 billion.

Assuming the November figures are complete, the full month of November with $2.09 billion represents a 38.5% decline from October.

Volume for the year is now flat, up 1.45% from last year with $39.87 billion from $39.49 billion.

TLAC worries

“I’ve been talking to several issuers, and they’re all worried about TLAC. That may have something to do with that,” said the sellsider, talking about the slower action.

At the end of October, the Federal Reserve disclosed new capital requirement rules for total loss absorbing capacity (TLAC) in an effort to limit the risk of too-big-to-fail. According to the rules, structured notes are not considered “TLAC,” which, some fear may reduce banks’ incentive to issue them.

“Rates are ridiculously low, and in this industry banks don’t need structured notes to get funding to begin with. They have enough cash. People are concerned about the new rules making things worse. Banks are afraid they may not be able to issue as much structured notes as before. It’s not a matter of whether TLAC will have a negative impact. It’s a matter of how detrimental it’s going to be,” the sellsider added.

Another possible explanation is the evolution of easing policies worldwide.

An industry source pointed to the new “divergence” in interest rates between the Fed’s soon to come rate hikes and the continued monetary stimulus signaled by the European Central Bank.

Interest rates

“Part of the reason you see volume partially tapering off, especially with rates-linked notes issuance, is because of this negative interest rate thing going on in Europe,” an industry source said.

“Many countries in Europe ýhave adopted negative interest rates policies,” a currency strategist said.

“The ECB has negative deposit rates. Swiss, Sweden and Denmark have negative rates.”

As Federal Reserve chair Janet Yellen is expected to hike interest rates this month, all eyes are on the ECB meeting on Thursday where more easing is expected, including another interest-rate cut.

“People are sitting on their hands. At the same time, it’s an incentive for investors to look into European equity-based products,” said the industry source. He pointed to the success of some underliers, such as the Euro Stoxx 50 index.

It’s not the market

The stock market last week showed no clear direction. The week started well following a very strong rally but ended flat after the downing of a Russian fighter jet by Turkey and a sell-off in the Shanghai equity market. The S&P 500 index is flat for the year, up less than 1% at midday on Wednesday.

“I don’t think it has much to do with investors. I don’t think it’s really related to the markets,” the sellsider said.

“You had a correction in August. People got scared. But the market has rallied since then. Even if there is still a lot of uncertainty, there’s always uncertainty. Uncertainty is how things get priced. It’s the market. And it’s usually a good thing for structured products that offer something else than just beta.”

“Unless you have a huge bear market, there’s always demand for structured products.”

Fewer stocks

Single-stock note volume declined last week compared to the previous week by nearly a half to $24 million in only 18 deals. For the year, single-stocks as an underlying saw their volume drop 37% to $34.66 billion, according to the data. Indexes rose sharply this year, making for two-thirds of the market. Meanwhile autocallable reverse convertibles and autocallables have not registered an increase.

“People are increasingly using indices and ETFs for reverse convertible autocallables,” the sellsider said.

“Stocks as an underlying may be declining. People believe more in picking markets. It doesn’t necessarily mean that the structures are disappearing.

“Autocalls are still very popular because people want the income. Just because people are moving away from single stocks doesn’t mean the fundamentals have changed. People want income.”

BofA tops

Bank of America, pricing three-quarters of the market shares last week, helped support volume for the month. Month after month, this agent has also helped the year’s volume stay flat rather than decline.

As an agent, BofA Merrill Lynch sold $463 million in only 15 deals.

“It makes you wonder: what would our industry look like without those guys?” the sellsider said.

“The good news is they’re not going anywhere when they command three-quarters of this market. Still the distribution has been for a long time and continues to be dominated by one giant. It’s a little bit unbalanced.”

He pointed to some of the factors behind the success of this agent.

“Bank of America is very good at approving new products and educating their salesforce about new products.

“In this industry you have to bring new stuff on the table because the market changes, investors’ needs change.

“For instance, principal-protected trades are things of the past.”

BofA Merrill Lynch priced the top 11 deals. Each one of the first four offerings exceeded $50 million in size.

Top deals

The first was Bank of America Corp.’s $86.66 million of 0% Accelerated Return Notes due Jan. 27, 2017 linked to the Euro Stoxx 50 index. The notes offered three-times leverage on the upside up to a 17.35% maximum payment. Investors were fully exposed to the index decline at maturity.

HSBC USA Inc. issued the second largest deal: $74.38 million of 0% autocallable market-linked step-up notes due Nov. 30, 2018 linked to the S&P 500 index with a step-up value of 125% of the initial index level. If the final index level was greater than 125%, investors gained the index return. When the final price was between the initial price and the step level, investors received the 25% step payment. The downside was not protected.

The first buffered deal was the No. 3 issue. Bank of America’s $53.28 million two-year Capped Leveraged Index Return Notes linked to the S&P 500 index offered a leverage multiple of two, a 14.62% cap and a 10% buffer.

The No. 4 deal was AB Svensk Exportkredit’s $51.64 million of 14-month Accelerated Return Notes linked to the Russell 2000 index. Investors at maturity received par plus 300% of any index gain, capped at 14.46%, and were exposed to any losses.

UBS was the second agent last week with $38 million in 19 deals, or 6.15% of the total, closely followed by Goldman Sachs, which priced nine offerings totaling $35 million, or 5.75% of the market, according to the preliminary data.

“We were doing pretty well in the first half of the year. But we’ve seen a continued decline in sales starting this summer.” – A sellsider, commenting on general structured products issuance

“I’ve been talking to several issuers, and they’re all worried about TLAC.” – A sellsider, commenting on new Federal Reserve rules for total loss-absorbing capacity of banks

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.