Rally, low rates help push structured products issuance volume up to $369 million

By Emma Trincal

New York, Aug. 17 – Structured products investors showed more optimism about the market last week with $369 million sold in 135 deals, a reasonable issuance volume level for the first half of the month, according to data compiled by Prospect News. The volume marked a 75% increase from the previous week’s $211 million.

Record closes

Market conditions and low fear levels as measured by the VIX index were reflected in the U.S. equity market as well. On Thursday, all three major indices –the S&P 500 index, the Dow Jones industrial average and the Nasdaq – hit record highs, the first time since December 1999. Sources said that the market’s low expectation for a Federal Reserve hike in the coming months was the main driver behind the last week’s optimism.

“Investors are aware that valuations are high. But at the same time, with rates as low as they are, there are not many other places to be other than equity right now,” a sellsider said.

Fed expectations

This scenario has already shifted this week since New York Federal Reserve president William Dudley said Tuesday that a September rate hike was “possible,” this sellsider noted.

“The Fed just gave an indication that rates could go up next month. The market now thinks there could be an event, a rate increase in September. People are laying low for this rate increase in September. They’re trying to position themselves around that,” he said.

He was speaking ahead of the Fed minutes release on Wednesday.

July anomaly

The month-to-date volume as of Aug. 12 is lower than July. A total of $580 million priced this month versus $1.02 billion during the same period last month, the data showed.

That it not to say August is weak: to the contrary. Volume this month is up 16.5% versus the same period a year ago, when $498 million were priced.

“This is a relatively good August so far and we’re pretty optimistic,” the sellsider said.

Last month explains the divergence in trends between the two sets of monthly data.

In July, Bank of America came to the market twice. The first chunk, which priced early in the month, was June’s supply as the agent had decided to postpone to the following month its June activity due to Brexit. The second round corresponded to Bank of America’s natural business activity for July, which priced in the final week of the month.

Those two waves led to an inflated July volume for a summer month. Sales hit $3.31 billion, which was greater than June’s $2.33 billion but only slightly over the monthly average volume of $3 billion for the year.

The year-to-date volume shows a less rosy picture, down 35% to $26.79 billion from $41.12 billion as of Aug. 12. Those figures will be more meaningful at the end of the month, once the final volume for August is known.

Structures, assets

Leverage was under-used last week, making for only 25% of the total in 20 deals versus an average market share of 45% for the year. Not surprisingly autocallable reverse convertibles led the way as income-generators with 51% of the volume in 90 deals.

Equity indexes (52% of the volume) but also equity exchange-traded funds (11%) were the prevalent asset classes.

Yield hunt

The search for higher coupons remains the main trend in the market, the sellsider said. Investors have become more comfortable with riskier terms such as worst-of payouts, contingent coupons and barriers in place of buffers or even barriers observed through the life of the notes or any day during an observation period.

“Sometimes they take risk above and beyond what they should be taking,” a market participant said.

“People are reaching out for yield because where else can they find it? It’s probably the wrong move but if you need income you need income. The HYG is already at all time-highs. Yields are not anytime near where they were in the first half of the year.”

The “HYG” ticker symbol designates the iShares iBoxx $ High Yield Corporate Bond ETF, a widely used proxy for the high-yield corporate bond market.

Top deals

The top two deals were small in size, with the largest one below $22 million, according to the data.

The sellsider said the products were designed to fit investors’ expectations.

“There are interesting structures in the market right now consistent with the fact that people are concerned with the market levels in general,” he said.

Market-linked step up

Bank of Nova Scotia priced $21.88 million of three-year autocallable market-linked step-up notes linked to the S&P 500 index. It was the No. 1 offering in size. The agent was BofA Merrill Lynch.

If the final index level was greater than the step-up value, 125% of the initial index level, investors would get par plus the index return. If the level was positive but below the step-up value, investors would receive par plus the step payment of 25%. On the downside, they were fully exposed to any loss.

The notes were called automatically at par plus 8.32% per year if the index closed at or above initial index level on any annual call date.

“If you think things are high today, if you expect market returns to be limited, it’s a way to leverage that by bumping up your return to 25%. Twenty five percent over three years isn’t bad if the market doesn’t go anywhere. It’s a way to get a pretty decent return,” the sellsider said.

Worst-of

Barclays Bank plc priced the second largest deal with $20.42 million of two-and-a-half year trigger callable contingent yield notes linked to the worst performing of the Euro Stoxx 50 index, the S&P 500 index and the Russell 2000 index.

Each quarter, the notes paid a contingent coupon at an annual rate of 10.6% if each index’s closing level remained at or above its coupon barrier level, 65% of its initial level, on each day during that quarter.

The notes were callable at par of $10 on any quarterly observation date other than the final one.

If the notes were not called and each index finished at or above its 65% downside threshold level, the payout at maturity would be par. Otherwise, investors would lose 1% for every 1% that the least-performing index’s final level was below its initial level.

UBS Financial Services Inc. and Barclays were the agents.

“Those worst-of kinds of deals are pretty popular. It comes down to the search for yield,” the sellsider noted.

“People are looking for ways to get double-digit coupons.

“You can’t find it in the fixed-income market. You can’t find it in high yield. It’s just hard to find.

“The market is saying that it has to turn to equity for that. Equity derivatives are a way to get higher yields. Investors understand that.”

JPMorgan was the top agent last week with $77 million sold in 19 deals, or 20.75% of the total. It was followed by Barclays and UBS.

“Those worst-of kinds of deals are pretty popular. It comes down to the search for yield.” – A sellsider

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