Structured products volume $687 million for week, led by Morgan Stanley’s sizable issuance

By Emma Trincal

New York, Sept. 6 – Agents priced $687 million of structured products in the week ended Sept. 1 ahead of the three-day Labor Day holiday weekend, wrapping up a month that showed declining sales from July, according to preliminary data compiled by Prospect News subject to upward revisions. The year however remains strongly up.

Bank of America had already priced its monthly notional during the week before, bringing to market $627 million alone, according to updated figures.

Morgan Stanley tops

Last week was a big week for Morgan Stanley. The top agent priced $159 million in 15 offerings, or nearly a quarter of the market. This agent’s average market share for the year is 9%, according to the data.

“That’s a big jump,” a market participant said.

“Whether it’s due to a big one-off, I don’t know.”

Morgan Stanley priced the top three offerings. Those combined made for 10% of the market’s volume. The largest one was over $36 million in size. The second one priced at $32 million.

“These make for two pretty big prints. When you get BofA out of the way, it makes sense that one dealer could catch that much of the market,” the market participant said.

The succession of two big weeks – the prior week ($1.089 billion in total) ending Aug. 25 with Bank of America closing its monthly calendar – is relatively unusual. It may have to do with the Labor Day weekend, an industry source said.

“It’s probably a matter of staffing or vacation. The holiday happened to split the end of the month,” he said.

August

The month of August is slightly lower in volume than July, a trend that surprises no one as it is a well-known seasonal pattern.

Agents sold $3.31 billion last month versus $4 billion in August, a 17% decline.

But those figures are not definite yet and may be revised upward any time as new deals for the period get filed with the Securities and Exchange Commission after press time.

So far August is stronger than last year’s $3.19 billion but not by a lot.

Strong annual growth

The yearly trend remains positive although the advance from last year’s numbers is slowly receding.

“From what I understand we’re still up and the trend is still up. But it’s not a total gangbuster like earlier in the year. Looks like it could just be the summer,” the industry source said.

Volume at $33.90 billion this year is up 37.8% through Sept. 1 versus $24.60 billion last year. This growth is accompanied by a strong pick up in the number of deals, which rose 56% to 8,976 from 5,672.

“It’s a healthy increase, but you always have to look at what you’re comparing it to,” the market participant said, pointing to the disappointing year in 2016.

12-month trailing

A look at the 12-month trailing period helps eliminate some of the “noise.”

Volume in the 12 months to Sept. 1 is up 29% to $48.02 billion from $37.30 billion in the same period a year earlier.

These figures are encouraging, sources said.

“The market continues to be strong. A strong equity market hovering around record high levels has been the primary driver of growth,” said Keith Styrcula, chairman of the Structured Products Association.

“Structured notes have a compelling story. With markets at all-time high getting downside protection is very attractive for a financial adviser as they’re able to relate to their clients.”

From a historical standpoint, the first eight months of 2017 are already surpassing the entire volume of certain past years such as $35.2 billion in 2012; $28.5 billion in 2009; and $23.25 billion in 2006. The best year since 2006 was 2008 with $50.5 billion.

“We’re getting closer to the high water mark and the year is not over yet. That’s a very positive trend,” the market participant said.

Indexes, stocks

Last week was dominated by equity index deals, which represented 83% of the sales. Equity indexes are the prevailing underlying on a constant basis. But their proportion tends to peak when a larger dealer dominates the market in any given week. On the other hand, single-stock deals only accounted for 2.5% of the total volume last week or $17 million in 39 trades.

Figures suggest that when a top agent brings to market large block trades, those are often equity index notes, which rapidly raise the market share of this asset class.

The inverse is true of single-stock deals, which are brought in the market in a larger number of small deals.

All stock-linked note offerings were distributed by UBS at the exception of the “top” deal, Royal Bank of Canada’s $3.08 million autocallable note linked to Microsoft Corp. UBS priced 38 trades ranging from $99,000 to $1.7 million, or approximately $400,000 in average.

“This speaks to another trend which is really gaining momentum in our market,” the market participant said.

“I’m referring to the online point-and-click distribution directly to financial advisers, which gives you the possibility to lower the minimum size substantially. UBS was one of the early adopters of the online reverse inquiry pricing deal,” he said.

Resilient stock market

There was no particular structuring trend seen last week if not the continued use of worst-of with indexes.

Sometimes issuers used three underliers rather than two to increase the coupon. The underlying indexes were the usual suspects: the S&P 500, the Euro Stoxx 50 and the Russell 2000. Some issues presented longer maturities to capture more premium.

The U.S. equity market finished the week slightly higher despite many obstacles, including the impact of hurricane Harvey, a missile launch by North Korea into Japanese airspace and a slightly disappointing jobs report for August on Friday. The resiliency remains a major topic of conversation among market participants with some stressing the danger of a pullback while others remain confident about the future of the current bull run.

Top deal

The top deal distributed by Morgan Stanley Wealth Management was HSBC USA Inc.’s $36.4 million of five-year dual directional trigger jump securities linked to the S&P 500 index.

If the index finishes at or above its initial level, the payout at maturity will be par of $10 plus the greater of the index return and 16.2%.

If the index falls but finishes at or above the trigger level, 70% of the initial index level, the payout will be par plus the absolute value of the index return. Below the 70% trigger level, investors will be fully exposed to the index decline.

“I can see how all that might have some appeal. You have the barrier, the absolute return and you have the unlimited upside,” the market participant said.

Morgan Stanley Finance

Morgan Stanley Finance LLC, Morgan Stanley’s issuing finance subsidiary, priced $31.99 million of 10-year autocallable contingent coupon worst-of linked to the Russell 2000 index and the Euro Stoxx 50 index. It was the second deal in size.

The contingent quarterly coupon is 7.22% per year based on a 70% coupon barrier observed for the worst-performing index. After one year, the notes are automatically called if each index closes at or above its initial level on any quarterly observation date.

The barrier at maturity is 50%.

“Ten years is relatively long-term. Maybe they had to go that far in order to make it more attractive optically,” he said.

The next deal was a three-year note from the same issuer, which priced at $19.91 million. Also a worst-of, it includes in addition to the Russell 2000 and the Euro Stoxx, the S&P 500 index. The note will pay an annual contingent coupon of 8.5% each quarter based on a 75% coupon barrier. The barrier is “American” with observation on any trading day. After three months, the issuer may call the notes on any interest payment date. The 65% barrier at maturity is observed from the initial level.

“The American barrier adds another risk born by the purchaser. It’s also a 65% principal barrier versus 50%,” the market participant said, commenting on the differences in terms between this offering and the $31.99 million deal both priced by the same issuer.

The issuer was able to offer a higher coupon and significantly shorten the duration not only through the American barrier but by adding a third underlying index and the discretionary call option, he noted.

After Morgan Stanley the top agent last week was Goldman Sachs.

Morgan Stanley Finance LLC was the No. 1 issuer with $119 million in 13 offerings. Morgan Stanley itself only issued one deal for $4 million, according to the data.

“The market continues to be strong. A strong equity market hovering around record high levels has been the primary driver of growth.” – Keith Styrcula, chairman of the Structured Products Association

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