Agents price $445 million of structured products for week; plethora of autocalls lift volume

By Emma Trincal

New York, March 15 – Structured products issuance volume was relatively robust last week, for what constitutes the full initial week of the month. Agents sold $445 million in 145 deals, according to data compiled by Prospect News.

Income deals, especially worst-of and autocallable structures, largely prevailed over return enhancement products.

Sales volume was encouraging, sellsiders said, as the market seems to be at a turning point.

The market finished slightly lower last week ahead of the following week’s FOMC meeting. After weeks of gains and new record highs, investors were more cautious amid concern that a widely expected rate hike may trigger a sell-off.

Rollovers

Volume for the year to date is up 26% to $9.41 billion from $7.46 billion through March 10, according to the data.

Agents have also priced nearly twice more deals this year as those a year ago, or 2,417 compared to 1,371 during the same period last year.

Part of that uptrend in volume has to do with the surge in the number and the volume of autocallable deals, a sellsider said.

Those products have more than tripled in volume from last year to $3.70 billion from $1.16 billion. The number of offerings has also more than tripled to 1,365 from 434. Finally their market share has increased as well: from 16% of the volume last year to 39% so far this year.

“We’ve been really, really busy since the summer of last year,” this sellsider said.

“Lots of that is the callable stuff.

“Obviously, people get their money back and they’ve got to spend it somewhere.

“If you’re launching new things, it ends up being a little bit of a virtuous cycle.”

For last week, autocallable reverse convertibles made for 63% of the volume, an exceptionally high market share.

Meanwhile, leveraged volume was more subdued than usual last week. It represented only 12% of the issuance compared to 30% for the year to date.

Caution

“With market up, interest rates still low, people are still looking for more defensive structures. Autocallables fit the bill because they have most of the time deeper barriers than your leveraged deal,” this sellsider said.

Autocallables are also considered more “conservative” because once the notes are called, investors are no longer exposed to any risk, he added.

One sign that investors played it safe last week was the extremely low percentage of leveraged notes with full downside exposure. Those accounted for less than 1% of the total, a record low compared to the 15% share for the year-to-date volume.

Last year, leveraged products with full downside risk (no barrier and no buffer) amounted to 19% of the total sold.

“There is a bit of caution on the part of investors, and who would blame them? Markets are at record highs and you have this political uncertainty in the U.S. and in the U.K, and today in the Netherlands, and France in six weeks. The British prime minister is going to trigger Brexit. We have big news coming up for the global economy,” the sellsider said.

General elections were held in the Netherlands on Wednesday. The populist candidate in this country has vowed to leave the European Union, causing investors to be nervous. France’s Marine Le Pen is also a front-runner and a populist candidate who wants to depart the Union.

“There is a sort of dichotomy. The market has been very high. Yet there is a lot of uncertainty. You’ve got that push and pull. No wonder investors stick to more conservative products,” the sellsider added.

“I’m not surprised that people would stay away from leverage, especially if there’s no protection on the downside.”

Worst-of more popular

Worst-of income products – in which the exposure is only to the worst-of underlier – overwhelmed in number and volume the rest of the market last week.

Agents priced 34 worst-of offerings totaling $272 million, or 61% of the total, the data showed.

Although those products add correlation as a risk factor (less correlated assets increase the odds of one of the underliers to breach the barrier) they also tend to offer lower barriers. As such, some view those products as relatively safe, depending on the final barrier level.

Also, they tend to come with an autocallable feature.

“It’s very interesting to see so many worst-of and income deals in general,” a market participant said.

“Often when people think of structured products, they think leverage.

“But there is more interest in income structures today. These things are becoming more mainstream.”

The products were a good match for investors who have a range-bound view on the market.

“The market is doing relatively well. Expectations are fairly benign. People don’t expect big drops. So it makes sense.”

Worst-of deals used to be seen as “exotic,” he added.

But the perception has changed.

“If someone has never used them before, yes, there are a couple of moving parts. They’re harder to understand.

“But if you use them a couple of time, it becomes easier.”

Since the majority of those worst-of have an automatic call component, investors are increasingly reinvesting into the same types of products.

“Investors are using them more and more. The more you use it, the more you become familiar with it,” he said.

Top deals

The top three deals were all worst-of with an autocallable or callable feature.

Only three deals out of the 10 largest ones were linked to a single asset, according to the data.

The No. 1 offering was a long-dated $38.26 million trigger autocallable contingent yield note due March 15, 2027 brought to market by HSBC USA Inc. UBS was the distributor.

Observations were based on the worst-of the Russell 2000 index and the Euro Stoxx 50 index.

An 8.95% annual coupon was paid if both indexes closed above a 70% coupon barrier on a quarterly basis.

After one year, the notes were automatically called if the two underliers closed above their initial level also quarterly.

The final barrier at maturity was 50% of the initial price of the worst-performing index.

Callable

UBS AG, London Branch priced the second largest deal using the same structure under the same name except for the term “autocallable,” as the notes were callable at the discretion of the issuer on a quarterly basis.

The $26.2 million of trigger callable contingent yield notes was linked to the least performing of the MSCI EAFE index, the Russell 2000 index and the S&P 500 index.

The 8.35% contingent coupon was based on a 60% barrier and was observed quarterly.

If the notes were not called at maturity, investors would keep their principal if all three underliers closed above the 60% barrier.

The third deal was sold by UBS on the behalf of Deutsche Bank AG, London Branch. The issuer priced $22.35 million of three-year trigger callable contingent yield notes linked to the S&P 500 index, the Russell 2000 index and the Euro Stoxx 50 index. A “daily coupon observation” feature made the structure riskier by enabling the 65% coupon barrier to be breached on any day. In return, it allowed a higher premium with an annual coupon rate of 10%. The call was discretionary. The point-to-point barrier at maturity was 55% of the initial price for the worst-performing index.

The top agent last week was Barclays with 13 deals totaling $96 million, or 21.62% of the total.

It was followed by HSBC and UBS.

Barclays was also the top issuer with $103 million.

“There is a sort of dichotomy. The market has been very high. Yet there is a lot of uncertainty. You’ve got that push and pull. No wonder investors stick to more conservative products.” – A sellsider

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