Agents close softer week with $183 million sold; interest in autocallable bonds remains strong

By Emma Trincal

New York, April 15 – Volume was light during the week ended Friday with $183 million sold in 68 deals, according to data compiled by Prospect News. It was a full week, but it followed the Good Friday holiday, which saw the release of a disappointing jobs report.

Other factors may have slowed down the action, sources noted, pointing to the tax-filing deadline. Finally, it was the first week of the month, which is typically slow.

“The retail issuance market last week suffered from the convergence of holidays and spring break. When kids are out, things tend to slow down,” a sellsider said.

“Hopefully we will see volume pick up back in the month.”

Single stocks were unusually popular, making for 35% of the total volume. Autocallable reverse convertibles, which pay a contingent coupon and feature an autocallable provision, were the favorite structure type with more than 44% of the issuance, according to the data.

Autocallable, leverage

“We see more volume on autocallable activity. Volatility has been higher and has come down again. Autocallables are used as a way to diversify a bit beyond the market and to increase the coupon,” a structurer said.

“When you introduce the autocall, you can make those products more attractive. You don’t know what the duration of the notes is going to be. That’s more risk. You’re being compensated for it.”

Investors had a greater appetite for leveraged products with buffers or barriers (25% of the volume) than leveraged products with full downside exposure (9%), according to the data.

As a sure sign of softness, only four deals exceeded $10 million in size last week versus 23 the week before. Agents did not sell any deal over the $20 million mark, compared with nine during the previous week.

The top offering was brought to market by HSBC USA Inc., which priced $15.28 million of 0% barrier Accelerated Market Participation Securities due April 10, 2018 linked to the Euro Stoxx 50 index. The upside offers a 160% participation rate with a 50% cap. On the downside, investors benefit from a 75% barrier.

Overall, the use of downside protection versus no protection varies from one week to another and shows no significant pattern, sources said.

“The market has been rallying and volatility is down. But you can still do all sorts of products,” the structurer said. “The beauty of structured products is that you can buy volatility when it’s low and sell volatility when it’s high.

“Right now it’s about average. Volatility depends on different factors. It depends on the maturity. It depends on the underlying.

“I don’t see much demand for downside protection right now. The momentum is still bullish.”

Yield enhancement

Issuers may combine the autocall with others features as a way to further boost the coupon. The use of a worst-of payout is an example, illustrated by the No. 2 deal of the week, JPMorgan Chase & Co.’s $14.99 million of review notes due Oct. 14, 2016 linked to the lesser performing of the Russell 2000 index and the iShares MSCI EAFE exchange-traded fund.

The notes will be called at par plus an annualized premium of 10.7% if each index closes at or above its initial level on any semiannual observation date.

If the notes are not called and each underlying component falls by no more than 20%, the payout at maturity will be par. Otherwise, investors will lose 1.25% for each 1% decline of the lesser-performing component beyond the 20% buffer.

“The coupons you’re getting on those notes are much better than bond yields,” the sellsider said.

“Bond yields have come down in the last couple of weeks, especially after the weak job report released on Good Friday.”

In last week’s No. 3 deal, JPMorgan priced $12.16 million of three-year contingent income autocallable securities linked to Apple Inc. stock with a quarterly contingent payment of 2.525%, or 10.1% per year.

Best of both worlds

For the structurer, issuers are getting more and more creative to not only boost coupons but also offer something else. He pointed to a growing number of reverse convertible autocallable notes that combine a fixed coupon with participation in the underlying gains.

An example is the autocallable market-linked step-up note distributed by BofA Merrill Lynch.

In those structures, the notes on a given observation date are automatically called at a specific strike, usually at the initial price. If the notes are not called but at maturity the underlying closes above a higher strike, called the step level, investors enjoy full upside participation in the index return.

“We’re seeing notes that give you a fixed coupon like in any reverse convertible plus a buffer or barrier on the downside and at maturity you can still participate in the upside,” he said.

“Those products are difficult to structure. Worst-of [structures] are often used.

“You need the volatility component; you have to pay for the coupon; you have to pay for the barrier. And you have to finance the participation. Usually you need a high-dividend underlying along with high volatility.”

Issuance is growing this year compared to last year. Investors have priced $13.31 billion, an 11.4% increase from $11.95 billion last year, according to the data as of April 10.

JPMorgan was the top agent last week with $79 million in 15 deals, or 43.35% of the total volume. It was followed by HSBC and Goldman Sachs.

“The retail issuance market last week suffered from the convergence of holidays and spring break.” – A sellsider

“The beauty of structured products is that you can buy volatility when it’s low and sell volatility when it’s high.” – A structurer

© 2015 Prospect News.
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