Structured products agents price $3.27 billion in March so far; investors seek safety, income

By Emma Trincal

New York, March 25 – One big surprise behind the speediest bear market in history induced by the coronavirus pandemic is the health of structured notes issuance in the United States, according to preliminary data compiled by Prospect News.

The $135 million notional sales last week, while weak, is certain to be updated upward as there is a gap between the time a note strikes and its visibility on the Securities and Exchange Commission website.

It may take several days for updated figures to show up in Prospect News’ database.

Blockbuster week

An example is the most recent update for the highly volatile week ended March 13.

Agents sold $1.47 billion worth of structured notes during that week – the second of the month – in 355 deals. These numbers in normal times would not be seen other than during the close of the monthly calendar.

This brings the month through March 20 to an astonishing $3.27 billion, a 17.1% increase from $2.79 billion in February.

When compared to a year before, March showed a volume up by 218% from $1.03 billion.

All this while the Dow Jones industrial average finished last week 35.2% below its all-time high from February.

Last week alone, the S&P 500 index shed 15% following an 11% drop the week before.

March surprise

“The strong volume surprises me for the month,” said a sellsider.

“For the first couple of months there’s been a lot of growth. But to see that growth continue during that time of uncertainty and this down market, it’s kind of amazing.

“A lot of the time, with sell-offs that big, people want to stay away to see a bottom.

“We continued to have a pretty massive sell-off last week.

“What we’re seeing on our own side is people stepping back and trying to see some signs of the bottom.”

Uncertain direction

Perhaps no one really has a sense of where the bottom is simply because the bear market takes breaks and swings back on the upside on a regular basis, leaving investors confused.

“Overall, despite this unprecedented crisis, investors remain confident about a rebound. But that’s still the big unknown,” the sellsider said.

“The good news is that we’re not seeing a lot of people coming out to us panic-selling.”

But again, that’s now, he said. What the future holds is anybody’s guess.

The uncertainty rather than panic felt by investors was a sentiment Howard Marks, co-founder of Oaktree Capital Management, analyzed in his latest memo on Thursday.

Last week and the previous one included down days in the S&P 500 index. He gave some examples: minus 7.6%, minus 9.5%, minus 12.0% and minus 5.2%.

“These are enormous losses,” he said.

“But every one of those declines was followed by similar gains,” he noted.

End not in sight yet

The famous portfolio manager concluded that investors have not “capitulated” yet.

“Given that almost all of the biggest down days in the last 80 years were followed by up days, so far, the strategy of ‘buy the dips’ has continued to be in favor,” he said.

While it’s good news, such sentiment “has nothing to do with fundamental improvement,” he said.

“What this tells me is that optimism still hasn’t been entirely eradicated and replaced by capitulation. Typically, the bottom is reached only when optimism is nowhere to be found.”

Timing the tickets

The rapid market swings can pose some challenges for structured notes issuance.

“The market moving in different directions makes pricing a bit more time-sensitive,” the sellsider said.

“It’s harder to hold deals for too long. Issuers say: ‘we can’t hold any terms right now, not even for next week.”

The rapid price action in the market makes the job of smaller independent advisers more complicated.

“If you have the volume, you can strike right away,” he said.

“But many advisers handle only smaller tickets. They need time to get more people. They operate more on calendar deals. That’s the way they can aggregate orders.”

Year up 117%

The year-to-date figures continued to be remarkably strong. Agents through March 20 priced $17.53 billion, a 116.75% jump from $8.09 billion last year, the data showed.

“This is the best time for structured products,” a structurer said.

“Pricing is very good.

“Structured products are unique. They give you protection with a level of definition that’s not possible with other investments.

“You’re an adviser. You get paid to do something. And your clients are panicking, asking you what to do. You’re pressured to offer solutions to your customers. Structured products offer some answers.”

Protection first

He attributed the high issuance volume to the hedging characteristics of structured notes.

“What people want is good protection. With this kind of market action, that’s going to be their priority,” he said.

Two types of structures dominated last week: digital notes and autocallables making for 40% and 55% of the total, respectively.

“People want higher yield,” the sellsider said.

“You had the 10-year Treasury, not a long time ago, below half of a percent.

“Interest rates pulled back dramatically, and we were already in a low-interest-rates environment.

“Demand for yield is quite strong.”

Leverage was curiously absent last week, based on the preliminary data.

“I think people really want to see yield. They want downside protection. I don’t think they care for leverage right now,” the structurer said.

“Volatility is high. Coupons look good.”

Autocallable notes combine the demand for yield and downside protection. In some instances, investors have given up autocallables for issuer calls.

“You can get a much higher coupon with a discretionary call than you would get with an autocall,” the sellsider said.

Top callable deals

An example was last week’s top deal: Barclays Bank plc priced $30.26 million of trigger callable contingent yield notes due June 23, 2022 linked to the worst performing of the Nasdaq-100 index, the Russell 2000 index and the S&P 500 index.

Each quarter, the notes will pay a contingent coupon at an annual rate of 29% if each index closes at or above its coupon barrier level, 60% of its initial level, on each day during the relevant quarterly observation period.

The notes will be callable at par of $10 plus any coupon on any quarterly observation date other than the final one.

Barclays Bank priced for $26.16 million another trigger contingent yield note due March 21, 2030, but this time the call was automatic and the underlying was tied to a single asset: the S&P 500 index.

The contingent coupon is 9.15% and coupon barrier 70%.

The barrier at maturity is 50% of the initial price.

In-the-money digitals

Another recent trend has been the emergence among digital products of “in-the-money” options. The term simply means that the trigger for the payout is situated below the initial price, allowing investors to receive the digital return even if the market is negative as long as the underlying stays above the trigger level.

Last week offered an example with GS Finance Corp. pricing $21.11 million of 0% digital notes due April 19, 2021 linked to the S&P 500 index.

If the final index level is greater than or equal to the threshold level, 75% of the initial index level, the payout at maturity will be par plus 15.35%.

Otherwise, investors will lose 1.33333% for every 1% that the index declines beyond 25%.

The top agent last week was UBS with $69 million in 31 deals, or 51.2% of the total.

It was followed by Goldman Sachs and JPMorgan.

Barclays Bank plc was the No. 1 issuer with $66 million in three offerings, a 48.5% share.

© 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.