Structured products issuance opens December strongly with $539 million; absolute return notes eyed

By Emma Trincal

New York, Dec. 7 – Agents sold $539 million of structured products in the week ended Dec. 2, a solid volume considering that the period followed the closing of the month, according to data compiled by Prospect News.

In the week prior to last week, agents priced $1.1 billion just ahead of Thanksgiving, with Bank of America driving the push. Last week included three more days for November, but by then, Bank of America was absent and most of the sales for last month had already been done, according to the data. For most market participants, November was over last week.

“It was the start of December,” a sellsider said.

“Because November was not entirely over, in any normal time I would have said, we’re still at the end of the month. But with Thanksgiving we tend to look at it as the end of November. You have two dead days. For all intents and purposes we look at the week after Thanksgiving as the beginning of December.”

Good start

If this is so, then December started on a strong note compared to the average weekly volume this year of $435 million, excluding month ends.

“More than half a billion... That’s great,” the sellsider said.

“December is usually a good month, just in general. People are trying to meet year-end goals, and it’s the time to do that. In December, there is a little additional impetus to take action.”

Rally

In the equity market, the three-week post-Elections rally began to weaken.

The S&P 500 index ended down 1% despite a strong U.S. jobs report showing a drop in the unemployment rate to 4.6%.

The report increased the expectation of a Federal Reserve rate increase in December. Some analysts expressed concerns about the decline in the employment participation rate, which may have pushed some investors to take profits. Still, the S&P 500 index since the Elections a month ago has jumped 3.75%.

“I don’t know what the rally did. It probably has carried over to the structured product market to some degree,” the sellsider said.

Equity

“We’re seeing the rotation from fixed-income to equities, and this trend has developed a lot more since the Election of Trump with his promises to cut taxes and to spend on infrastructure. Just look at a stock like Caterpillar,” the sellsider said.

The share price of Caterpillar Inc. has surged 15% over the past month.

The emphasis on equity-linked notes was visible last week as notes tied to this asset class made for 97% of the total volume versus a 91% average for the year, according to the data.

For the year to date, volume is down 15.80% to $34.66 billion from $41.16 billion last year through Dec. 2, according to the data.

Three Morgan Stanley

Morgan Stanley distributed the top three deals, all of which were absolute return, also known as dual directional products. Those structures tend to be used in choppy markets when a trend is difficult to predict.

“It’s interesting. I wouldn’t buy dual directional notes right now because volatility is very low. You need volatility to be fairly high to make those structures work. I guess you had those deals because some people anticipate a correction,” a structurer said.

Morgan Stanley Finance LLC’s $37.21 million of five-year dual directional notes linked to the S&P 500 index was the top deal.

If the index finished flat or up, the payout at maturity was par plus the greater of the index return and 29.5%.

If the index fell but finished above the 70% trigger, the payout would be the absolute value of the index return.

If the index finished below the trigger level, investors would be exposed to the full index decline.

The agent was Morgan Stanley & Co. LLC.

Morgan Stanley Finance LLC is the issuing subsidiary of Morgan Stanley, which guaranteed the notes.

GS Finance Corp.’s $28.37 million of three-year leveraged dual directional notes linked to the S&P 500 index was the second largest deal. It offered two times leverage on the upside up to a 26.2% cap. There was an 80% barrier on the downside. If the index was negative but did not breach the barrier, investors received the absolute value of the index. If the decline was more than 20%, investors lost one-to-one from the initial price. The notes were distributed by Morgan Stanley Wealth Management.

Morgan Stanley Finance LLC priced $23.78 million of five-year absolute return notes linked to the S&P 500 index.

It was the same structure as the first deal, except that the minimum return was set at 28.5% instead of 29.5%.

UBS Financial Services Inc. was the dealer, and Morgan Stanley & Co. LLC the agent.

Yield search

Income products, in particular contingent coupon often tied to several underliers (worst of) remained very popular. Autocallable contingent coupon with one or several reference assets accounted for 37% of last week’s volume, a much bigger market share than leveraged notes, which made for 25% of the total, versus 40% for the year.

“People are still looking for income with rates as low as they are. In Europe it’s even worse because rates are negative so when a bond expires you really have to find the yield from equity,” the structurer explained.

“You can always buy high-dividend stocks, but there are risks with these stocks. We’re seeing a sector rotation out of consumer staples, which tend to pay high dividends, into other sectors.

“On the bond side, I can construct a bond portfolio with 50 to 60 investment-grade bonds yielding 2% on a two- to five-year maturity.

“It really makes sense for investors to look at equity-linked products if they want to get income. They can use indices, conservative barriers and get compelling yields. That’s why demand for those products will continue to be strong.”

Worst of

The top product in this structure type and the fourth largest one for the year was brought to market by UBS AG, London Branch. The issuer priced $22.14 million of three-year autocallable contingent yield notes linked to the S&P 500 index and the Russell 2000 index. The contingent coupon paid and observed quarterly was 7.68% per year if each index closed at or above a 70% coupon barrier. The notes were automatically called on a quarterly observation date if each index closed above its initial price.

There was a 70% barrier at maturity observable point to point.

UBS Financial Services Inc. and UBS Investment Bank were the agents.

The top agent last week was JPMorgan with $121 million in 20 deals, or 22.47% of the market. It was followed by Morgan Stanley and UBS.

On the issuer side, JPMorgan Chase Financial Co., the issuing arm of JPMorgan, was No. 1 with $108 million in 15 deals, or 20% of the total.

It was followed by Morgan Stanley Finance LLC and UBS AG, London Branch.

“December is usually a good month, just in general. People are trying to meet year-end goals, and it’s the time to do that. In December, there is a little additional impetus to take action.” – A sellsider

“It really makes sense for investors to look at equity-linked products if they want to get income. They can use indices, conservative barriers and get compelling yields. That’s why demand for those products will continue to be strong.” – A structurer

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