Sellsiders cheer 37% year-to-date rise in structured products supply; $300 million prices for week

By Emma Trincal

New York, April 26 – Structured products agents priced $300 million in 104 deals through Friday last week, reflecting a relatively modest activity, but sellsiders are paying closer attention to the year-to-date trend, which is showing eye-catching growth.

Sales momentum

“This industry is booming,” a sellsider said.

Volume this year as of April 21 is up 37% to $15 billion from $10.94 billion last year, preliminary data compiled by Prospect News showed.

“We are more than that. Not a whole lot more but even more than that,” he said in reference to his firm’s sales activity.

“April is going to be a good month. After four months, I think we’ll be up 40%.”

Structured products issuance has gained a solid advance this year compared to last.

During the same time in 2016, volume was already down by about 23% compared to the previous year.

Getting a strong lead for the first third of the year is encouraging. But market participants remain cautious ahead of a summer, which is traditionally slow and amid concerns about the longevity of the bull market and the rising geopolitical tensions.

Last week

“The growth has been in equity. Nothing else has an impact really,” this sellsider said.

Sales of equity-linked products represent 90% of total volume, a proportion that is unchanged from last year.

Last week’s relatively modest volume was driven by several factors aside from the fact that it was the slow part of the monthly calendar. The April 18 tax deadline, the coming-out of the Easter weekend and the focus on political and geopolitical concerns were the main factors leading to a slowdown in equity.

“The tension with North Korea was not helpful for the markets. And then everybody was waiting for the French elections,” he said.

Investors were worried about the worst outcome: a run-off between the far-right and far-left candidates as both oppose the European Union. The result of the first round dispelled these fears.

Bull-dependent

Structured products have seen rising sales mainly because of the bull market, he said.

“But we’ve seen a shift. There’s been a pause...

“The first crack in the optimism is when the health care bill was pulled at the end of March and it ended on Sunday with the French elections,” he said.

“During that time, rates went down, equity markets started to sputter.

“Now we’re back to the old model since the November elections: we have a strong equity bid and bonds are starting to sell off.”

But this sellsider said it would be impossible to say what volume projections for the rest of the year would be.

“Everything was based on optimism. The optimists are winning. They are driving this rally. I hope they’re right, but I’m concerned because this market seems to be ignoring so many things,” he said.

“A lot of skepticism is emerging. How strong this rally really is? How determined this president really is?”

One of the risks for market participants was how strongly sales are the result of a resilient bull market.

“Once market sentiment turns pessimistic, you’ll see a slowdown in issuance. Investors will shy away from structured products in this scenario. We’ve been very dependent on the rally,” he said.

The S&P 500 finished the week down 0.30% on Friday.

Vision

A structurer said the market is much stronger this year because two important factors of uncertainty, which dampened volume last year, have been removed.

“It’s predominantly because we’re off the elections cycle and having a more clear perspective as it relates to economic policies,” he said.

“The role the central bank will play is also easier to anticipate.

“The money some market participants were having on the sidelines is finding its way to long positions permeating to structured notes as well as other investment vehicles.”

Top deals

Citigroup Global Markets Holdings Inc. priced the largest reported deal of the week with $27.73 million of one-year capped gears linked to the S&P 500 index. The product offered three times the index gain capped at 10.65%. There was full exposure to the downside. UBS Financial Services Inc. was the agent.

HSBC USA Inc. issued the second offering, which was distributed by BofA Merrill Lynch.

It priced $27.69 million of five-year enhanced market-linked step-up notes with a buffer linked to the S&P 500 index. If the final index level was greater than the step-up value, 128.45% of the initial index level, investors received the index return.

If the final index level was above 90% of the initial price but lower than the step-up value, they would get the 28.45% step-up payment.

The buffer was at 10%.

“If you have a bullish view and are willing to give up the 10% worth of dividends over the five year, that’s certainly a good trade,” the structurer said.

The S&P 500 index yields 2%.

For some investors the advantage of a step-up or digital note with a downside threshold is “safety,” he said.

“The return is lower because the probability is higher. Some investors prefer to increase the odds of getting paid.”

UBS

UBS Financial Services Inc. was the distributor of the third offering: Barclays Bank plc’s $25.6 million of one-year capped gears linked to the MSCI EAFE index. The upside leverage was three times up to a 13.3% cap. There was no downside protection.

The two UBS deals were similar to BofA Merrill Lynch’s signature products named “Accelerated Return Notes,” observed the sellsider. The structures present a short tenor, three-time leverage, a competitive cap and no downside protection.

“It’s almost the same thing and so what? Any of us in the business knows there is nothing new under the sun. Merrill is very successful with these products. It’s not surprising that others would do things that look a little bit the same,” the sellsider said.

The top bookrunner last week was JPMorgan with $82 million in 24 deals, or 27.36% of the total.

It was followed by Barclays and Bank of America.

The top issuer was JPMorgan Chase Financial Co. LLC. The issuing arm of JPMorgan brought to market about a quarter of the overall volume in 22 offerings totaling $74 million.

“The optimists are winning. They are driving this rally. I hope they’re right, but I’m concerned because this market seems to be ignoring so many things.” – A sellsider

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