Structured products issuance light at $135 million for week; clients eyeing earnings, inauguration

By Emma Trincal

New York, Jan. 18 – Structured products issuance volume was light last week ahead of the Martin Luther King Day holiday, with some sellsiders complaining that investors were not willing to make any significant move. Agents priced $135 million in 101 deals, a two-thirds decline from the $409 million sold during the previous week, according to data compiled by Prospect News.

The first two weeks of January are already lower in volume than the same period last month (minus 47%) and a year ago (minus 26%). However due to the holidays, some deals and perhaps large ones may not have been filed with the Securities and Exchange Commission website, which leaves open the possibility of upward revision of the data later on this month.

The market in general was in transition last week with a sharp sell-off on Thursday coming with a rise in volatility. The S&P 500 index traded range bound overall without climbing back to its 2,277 record high of Jan. 6.

Sellsiders indicated that many investors were reluctant to make decisions ahead of the fourth-quarter earnings, which kicked off on Friday. Additionally, the upcoming inauguration of the presidency of Donald Trump this Friday was another obstacle to making investment moves.

Waiting

“I’ve just felt that since the elections, give or take, people have been looking for excuses to postpone,” said a distributor of structured products.

“Part of it had to do with investors waiting for the [Federal Reserve] to raise rates; then you had the New Year. Now in the middle of the month, another holiday and finally people are now focused on the inauguration on Friday. Clients have told us very clearly that they won’t do anything until the inauguration.”

This market participant did not attribute the indecisiveness he observed to the current market condition at this point but rather to market sentiment and uncertainty.

“There is expected volatility in the market, and you have this wait-and-see attitude, which is the worst for us.”

Sales soldiers

In other corners of the distribution channel, growth for the year was already perceptible.

“We’re actually seeing a pretty strong volume,” a market participant said.

Sales for this firm have jumped 50% in the past two months of last year compared to the year before, he said. But he does not have January figures yet.

The growth was due to a strategic plan implemented at his firm.

“Although we’ve not hired, we’ve deployed a new marketing team, an educational team for our salesforce to help them get out there.

“There are a lot of people who for whatever reasons are not getting themselves up to speed on the product, have avoided it one way or the other.

“We see a big difference when you break down the stereotypes. A lot of firms now realize that it’s not so much about investors’ demand or the market. It’s about getting the salesforce out in the field.”

Top deals

Deals were small in size last week with the first one at less than $20 million, according to figures available at press time. The top four offerings were all income-generating products.

Credit Suisse AG, London Branch’s $19.26 million of three-year autocallable market-linked step-up notes linked to the S&P 500 index was the No. 1 deal. It was distributed by BofA Merrill Lynch.

The notes were called at par plus a call premium of 8.7% per year if the index closed at or above its initial level on any annual call observation date.

If the index finished above the step-up level, 121% of the initial level, the payout at maturity would be par plus the index gain.

If the index finished at or below the step-up level but at or above the initial level, the payout would be par plus the step-up return of 21%.

Investors were fully exposed to any index decline.

Yield-generating products thrive in a rising volatility environment, the market participant noted.

Last week saw the CBOE VIX index jump to its high for the year at 12.50 during Thursday’s sell-off.

“Whenever the market is volatile, you can monetize volatility to provide income,” he said.

Worst-of structures

The second deal was brought to market by GS Finance Corp., which sold $13.84 million of 4.5-year callable contingent coupon notes linked to the worst performing of the S&P 500 index, the Russell 2000 index and the MSCI EAFE index.

The notes were linked to the worst performing index for both the coupon payment and principal repayment.

The annual contingent coupon of 8.75% was payable quarterly above a 60% coupon barrier. The notes were callable on any payment date after six months. The barrier at maturity was 60%.

Coming next was JPMorgan Chase Financial Co. LLC pricing $10.76 million of 18-month digital notes linked to the S&P 500 index.

The 11% digital was paid above a downside threshold of 90%, allowing investors to receive the coupon if the index was down by no more than 10%. Beyond that, investors lost 1.1111% for each 1% decline in the index.

Agents, such as JPMorgan first but also Goldman Sachs, UBS and Credit Suisse, priced a few worst-of notes.

The market participant said he was not surprised.

“Those deals work well when the market fluctuates. The S&P 500 just came off its highs, which creates a little bit of volatility allowing these deals to price,” he said.

“It’s the same with the autocalls and the step ups. We were just going to put together a potential Trump play but we’ve postponed.”

So-called “Trump plays,” a term coined in the wake of the presidential elections, are notes reflecting a sector bet designed to capitalize on popular themes. For instance, the market has identified industrial, financial and energy stocks as some of the potential winners in the new Administration. As a result, some firms have priced since November growth notes in order to take advantage of the bullish views on these sectors.

Premium only

The fourth deal, another worst-of, offered the particularity of being a pure autocallable product, a rare structure dwarfed by the overwhelmingly high number of contingent coupon notes and digitals, according to the data.

It was issued by JPMorgan Chase Financial Co. LLC for $9.39 million. The three-year notes were based on the lesser performing of the S&P 500 index and the Russell 2000. The notes were automatically called for a 12.5% call premium if each index closed at or above its initial price on any of the three annual review dates.

The payout at maturity was par unless either index finished below an 80% barrier, in which case investors were fully exposed to the decline of the lesser performing index.

“You get the benefit of it only if it’s called out,” the market participant said.

“Those deals are not getting done much today. They used to be pretty common, but they’re no longer popular.

“The only time you could see this is if a lead order and they’re showing it to other people who jump up if they care.”

The top agent last week was UBS, which priced 78 offerings totaling $41 million, or 30% of the market. It was followed by JPMorgan and Goldman Sachs.

“I’ve just felt that since the elections, give or take, people have been looking for excuses to postpone.” – A distributor of structured products

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