Volume for year grows 13% to $18.47 billion, but market participants brace for summer slowdown

By Emma Trincal

New York, June 11 – Structured products volume remains positive this year. Sales for 2014 as of Friday have increased by 13% to $18.47 billion from $16.37 billion during the same period of last year, according to data compiled by Prospect News.

Yet sources remain somewhat cautious about the second half of the year coming up.

“Last year wasn’t an amazing year for structured products, so it’s probably easy to beat the numbers,” a sellsider said.

Summer

June kicked off last week with the smallest weekly volume for the year. It was also the least active of the first weeks of any given month so far this year.

Agents sold $171 million in the week ended Friday in 71 offerings, according to the data.

In comparison, the first week of February and the first week of January amounted to $630 million and $580 million, respectively.

While weekly figures may not be significant, the weakness of June’s start indicates slower volume coming up, according to sources.

“The market is not as active because we’re already in the slow season. You see it from the volume, from people wearing white pants. It’s summertime,” the sellsider said.

“We’ve reached out to clients. They’re already on vacation. The kids are off to camps. It has an impact on business.

“We’ll see more of the summer effect at the end of the month, but I think last week was a good indicator of what’s to come.”

Wait and see

For the most part, the strong equity rally may be to blame for the slower pace of issuance, sources said.

“The stock market is at all-time highs, and trading volume is low,” the sellsider said.

“While there is a positive sentiment in the market, there is also a great deal of caution.

“Investors have no immediate need to make a decision. They’re waiting on the sidelines before jumping in.

“As an investor, is it the time to invest in the S&P 500 at 1,943, or do you want to wait for a 5% correction? I’m pretty sure that if we had a 5% sell-off, everybody would jump in. People are looking for a reason to get into the market. Right now it doesn’t look like it’s the right time to be locked in.”

But the picture is mixed as investors remain bullish.

“People on the other hand don’t want to miss another bump up, so they are taking more specific bets,” he said.

“It’s either a wait-and-see situation or some targeted bets. People are waiting for the right level, at which point they’ll execute.”

Secondary market

A market participant said that investors, including in the retail space, have started to sell in an attempt to take some profits off the table.

“The secondary market has become more active. Products over the past two or three years have performed well, and we’re seeing investors selling back their positions to the issuer. It’s not a good thing for issuance volume. You’d rather see more rollovers,” this market participant said.

Some investors are getting concerned about the prospect of rising rates within 12 to 18 months, he noted. Despite the buoyant mood in equities, many investors are expecting a correction.

“Sell-offs are pretty common in the summer, and it’s on people’s minds. I think this has propelled people to sell on the secondary market,” he said.

“Clients in private banks like JPMorgan have someone dedicated to managing their allocations. They may be encouraged to set aside a little bit more cash. Issuers provide a price. If the investor wants to take on some profits, there are not many places to go. They have to go back to the issuer, and I’m sure a lot of people do that, especially if the bank makes it easy to do so.”

The largest deal last week was linked to an equity basket and sold by JPMorgan. It was HSBC USA Inc.’s $20 million of 0% market plus notes due June 10, 2019 linked to a basket that includes the S&P 500 index with a 50% weight, the Euro Stoxx 50 index with a 25% weight, the Russell 2000 index with a 12.5% weight and the iShares MSCI Emerging Markets exchange-traded fund with a 12.5% weight.

The payout at maturity will be par plus the greater of the basket return and 24% unless the final basket level has decreased from the initial basket level by more than 20%, in which case investors will lose 1% for every 1% that the final basket level is less than the initial basket level.

Worst of

Agents priced several deals with multi-asset underliers. One of the structures used most often was worst-of, even though deals in this product type remained small in size.

Eight offerings from various agents used worst-of payouts linked to the S&P 500 index coupled with the Russell 2000 index. Morgan Stanley, Credit Suisse, JPMorgan and Barclays were among the distributors of those particular deals, which totaled $18.5 million.

“Russell and S&P has been the most popular pairing for worst-of,” the sellsider said.

“It’s because a lot of clients want to stay U.S.-focused. The Dow doesn’t do as well with that type of structure if you pair it with the S&P. There is just too much correlation.

“But the S&P and Russell, technically speaking, even though they’re both moving in the same direction, they still give you a little bit more risk since you’re playing small-cap versus large-cap. In theory, small caps do well at the beginning of a recovery while large caps outperform in the midst of the bullish cycle. Therefore there is slightly less correlation and potential for a higher premium.”

The sellsider said that he also saw a few worst-of deals using the Euro Stoxx 50 with either the Russell 2000 or the S&P 500.

“Europe is popular. The European market had its crisis in 2011, two years after us. They’re a little bit behind. Investors see potential for appreciation,” he said.

Worst-of structures make sense too because they allow issuers to enhance the upside given the added risk associated with non-correlated assets, the market participant explained.

“Some pairs are riskier than others,” he said.

“Pairing the S&P and the Russell is going to capture a little bit more upside than just one index, but the Euro Stoxx and S&P would make more sense.

“Everybody is playing correlation now. With low vol, you have to find other ways to generate returns.”

Leverage remained popular last week. It made for 21% of the volume, and leveraged notes offering a buffer or a barrier showed the greatest volume at 14% of the total.

“With low volatility you’re going to see more leverage, obviously,” the market participant said. He was referring to the cheaper cost of buying call options when volatility is low.

Single stocks

The second largest deal last week was linked to a single stock and used a very popular structure. JPMorgan was also the agent.

Barclays Bank plc priced $11.88 million of phoenix autocallable notes due June 24, 2015 linked to Bristol-Myers Squibb Co. shares. The notes pay a contingent quarterly coupon at an annual rate of 11.4% if Bristol-Myers Squibb stock closes at or above the trigger level, 85% of the initial price, on the observation date for that quarter.

The notes will be called at par plus the contingent coupon if the shares close at or above the initial price on any observation date.

If the notes are not called and Bristol-Myers Squibb shares finish at or above the trigger level, the payout at maturity will be par plus the contingent coupon. Otherwise, investors will be exposed to any losses.

Single stocks represented 27% of last week’s volume in 40 deals. The size of those deals was small on average with the Barclays $11.88 million deal topping the list. The smallest stock deal was UBS AG, London Branch’s $450,000 of trigger phoenix autocallable optimization securities due Dec. 14, 2015 linked to Abercrombie & Fitch Co.

“They put out several names, and they see what clients like,” the sellsider said.

“That’s how you could end up with tiny deals of less than $100,000. That’s the nature of the game when dealing with stocks. There is no golden ticker. Investors’ appetite will depend on the firm’s recommendation, what the sector is like and if the name feels toppish or not.”

The top agent last week was Goldman Sachs with $32 million in eight deals, or 18.82% of the total. It was followed by JPMorgan and UBS.

“Investors have no immediate need to make a decision.” – A sellsider

“Everybody is playing correlation now.” – A market participant

© 2015 Prospect News.
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