Structured products sales up 20% for the year; March kicks off strongly with $623 million priced

By Emma Trincal

New York, March 8 – The market rally continued to feed robust sales of structured products last week, sellsiders said, even though concerns about a pullback are mounting.

Agents priced $623 million of structured products in the week ended Friday in 178 deals, according to preliminary data compiled by Prospect News.

Two-thirds of this however priced on Monday and Tuesday in the last two days of February, making it possible that the end of February would have overlapped in the early part of last week.

The previous week, which booked most of last month’s business, showed $1.8 billion.

Last week’s notional may end up being even higher as data are not complete at the end of each week due to delays between pricing, settlement and filing dates. Gaps may even be greater at the junction of two months. But since figures are always revised on the upside, current data suggested a positive trend.

Nice start for year

A more definite picture is the year-to-date volume through March 3, which reveals a 20% increase to $8.62 billion from $7.18 billion in the same period last year.

“It’s only been a couple of months, but still it’s really a good start already. Not every year begins so strongly. We’ll have to see how it sustains,” a structurer said.

“It looks like the rally has been helping.”

A look at the first two-months of each year since the beginning of the decade indicates that 2017 is starting at the fastest clip at the exception of the year 2011, which recorded a 25% increase during this period from the previous year.

The years with January and February volume combined showing double-digit growth ended up being strong, such as 2015, 2014 and 2011.

Those numbers however apply to a long bull market period without major pullbacks. Interestingly the corrections since in September 2011 and August 2015 did not prevent those years from hitting record issuance, with $9.11 billion in 2011 and $8.77 billion in 2015.

The structurer said those results were encouraging.

“People are expecting a pullback right now after a market that has been hitting new highs one day after the next,” he said.

“But if there’s a pullback, it’s not necessarily bad for our industry. It provides one more reason to use structured products...it’s a different way to put money in the market.”

The Dow Jones industrial average hit 12 consecutive highs before jumping to 21,000 last Wednesday. The market finished flat. While the bulls continued to be optimistic on the expectation of an administration that has promised to deliver tax and regulatory reforms, the prospect of higher rates resurfaced as a potential headwind when Federal Reserve chair Janet Yellen signaled on Friday that an interest rate hike was likely to happen at next week’s meeting.

Challenge and opportunity

“It’s hard to say what the impact of higher rates would be on stocks and on volume,” the structurer said.

“The industry shouldn’t open the Champaign just yet. It would be great if we could keep the momentum. One has to remain cautious.”

Higher rates would help the pricing of some structured products, he said. At the same time, it could trigger a downturn in the stock market by modifying the equity risk premium.

“There’s some concern about the run up,” a sellsider said.

Two types of investors have recently emerged in this uncertain environment, he added.

“Some people think that the market is just too high right now. They stay on the sidelines.

“Others are thinking about protection. As a result of that, you have a large group of people who may not have paid attention to structured products previously and who are now looking at it to see if it adds value.

“The market that we have right now provides some opportunities. It allows firms to capture clients looking for protection.”

Most of the deals were linked to equity indexes last week, making for 80% of the total. A notable amount of offerings based on exchange-traded funds priced, accounting for a 13.65% market share.

EAFE proxy

The top deal was JPMorgan Chase Financial Co. LLC’s $85.86 million of 18-month capped leveraged notes tied to a basket of international equity indexes. It was by far the largest deal but not a new one. The same structure with other issuers has been put together in previous offerings.

The underlying has featured the same index components with identical weightings in most previous versions. The basket consists of the Euro Stoxx 50 index with a 37% weight, the FTSE 100 index with a 23% weight, the Topix index with a 23% weight, the Swiss Market index with a 9% weight and the S&P/ASX 200 index with an 8% weight.

At maturity, investors in the JPMorgan Chase Financial offering receive twice the index gain up to a 52.3% cap. They are fully exposed to the downside.

“The cap is very high. That’s the reason you use international shares,” the structurer said.

“If you look at Europe, interest rates are low...even negative... and dividends are high. You get cheaper forwards on those bullish trades. That’s how you get better optics.”

The structure with its easily identified basket is a “proxy” for the EAFE index, the sellsider said.

The EAFE is the benchmark for developed markets and offers a large exposure to European countries.

“It’s not a perfect replication, but it’s good enough,” the sellsider said.

“People are probably buying it because, unlike the ETF, these notes remove your exposure to currency risk.”

Worst-of structures

The No. 2 deal, which was brought to market by Barclays Bank plc and distributed by UBS, was a worst-of. The $28.48 million of three-year trigger callable contingent yield notes was linked to the S&P 500 index, the Russell 2000 index and the Euro Stoxx 50 index.

The 10% contingent coupon was paid quarterly if the worst performer closed above a 65% American barrier. The 55% barrier at maturity was observed for the worst index on a point to point basis.

“Worst-of are popular because it’s a way to get higher yield by playing with the correlations. The less correlated the indexes are, the higher your yield,” the sellsider said.

Top agent, issuer

The top agent last week was JPMorgan with 12 deals totaling $134 million, or 21.5% of the market share. It was followed by Morgan Stanley and HSBC.

In terms of issuance, JPMorgan Chase Financial Co. LLC continued to be the No. 1 issuer, bringing to market $128 million in 10 deals, or 20.8% of the total.

“JPMorgan has some of the tightest spreads. It’s possible that another bank would have better pricing. But what’s most important is that JPMorgan has in-house distribution via the private bank.”

Among the 12 deals distributed by JPMorgan but not issued by one of the bank’s affiliates were two small offerings: one was issued by GS Finance Corp. for $4 million and the other was a Royal Bank of Canada $2 million deal.

“It’s only been a couple of months, but still it’s really a good start already. Not every year begins so strongly.” – A structurer, commenting on the 20% year-over-year gain in structured products issuance year to date

“The market that we have right now provides some opportunities. It allows firms to capture clients looking for protection.” – A sellsider

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