October structured products issuance at $1 billion so far, nearly twice as high as in September

By Emma Trincal

New York, Oct. 18 – October structured products issuance so far is very robust with sales up nearly 90% through Oct. 17 to $1.01 billion from $536 million during the same time in September, according to preliminary data compiled by Prospect News.

A total of 294 deals printed versus 198 last month.

This figure will increase as not all deals were filed with the Securities and Exchange Commission by press time.

However the end of the month will show the real picture as an additional $3 billion needs to come in to break even with September’s $4 billion in issuance volume.

This is not a high watermark to achieve considering an average monthly notional volume of $3.9 billion so far this year.

October

“October is usually good,” a market participant said.

“September can be a slow month. It’s based on the demographics of structured notes buyers who are wealthy individuals. The busiest time will be middle or end of September to November.

“Then as we all know the business shuts down and it picks up again from January to April.”

It’s the cycle but also market conditions that determine appetite for trades, he noted.

“We’re starting to see some clarity. Retail sales are up, consumer sentiment too. Corporate earnings are looking good, especially bank earnings. The perspective of a tax reform continues to drive investors’ confidence,” he said.

The S&P 500 index is up 14.5% year to date. The benchmark rose 1.7% so far this month.

Second week

For the week, which was the second of the month, agents priced 123 deals totaling $398 million, a 35% decline from $614 million issued the week before in 171 offerings.

While this figure will be revised upward, the decline was still notable.

The market participant familiar with private banking distribution offered an explanation.

“It was a good week. It wasn’t a great week. Mid-month can be sometimes a little bit slow,” he said.

“In the beginning of the month, you do custom deals. At the end, the calendar closes...you get the calendar offerings, which means that there is this kind of dead period in the middle.”

Mid-month pause

Most sales of structured notes are conducted through private banks, he added, saying that the salesforce tends to meet customers at the end of each month.

“After these discussions the client doesn’t want to wait. We usually pull our orders early on when the month kicks in. But as you approach the end of the month, you’d rather wait and do a calendar rather than a custom note. That makes the second and third week usually a little bit less busy.”

No bargains

Meanwhile markets continued to push further into record highs last week.

The Dow Jones industrial average finished higher for the fifth consecutive week on Friday closing at 22,872.61.

This rally as well as the resilience of the bull market, the second longest in history, makes some distributors and buyers cautious.

“We’re surprised we’ve had so few decent pullbacks year to date,” said Andrew Valentine Pool, main trader at Regatta Research & Money Management.

“In our firm we decided last month to limit our purchases of structured notes when money comes due. We’ve cut our replacements by 20%.”

This trader finds valuations too high at this stage.

“We like to get in at the middle of the channel. The S&P in August was on a pullback so we bought. But September and this month are on the top of the channel; therefore, we’re cutting back. We’re not interested in buying at those levels. We’re more technical.”

“We think the markets have gotten ahead of themselves and it’s puzzling for us. No matter what happens anywhere, whether it is a series of major hurricanes in the U.S. or threats of a nuclear war, it just keeps going.

“This concerns us. Complacency is a little bit scary.”

Strong year

Year-to-date issuance volume is up 35.5% through Oct. 13 with $39.4 billion in 10,488 deals compared to $29.1 billion in 6,830 deals in the year-ago period. Similar rates of growth in this market have not been seen for nearly a decade, although it is too soon to tell until 2017 is over.

Volume in the 12 months to Oct. 13 is up 28% to $49 billion from $38.3 billion in the same period a year earlier.

“It can be a couple of things,” the market participant said.

“Interest rates are rising so pricing is improving. Low volatility is certainly not helping pricing but nobody seems to care about volatility, which is interesting.

“We’re also in a major bull market. This is the most unloved rally in history, which is why it’s not over.

“There is a ton of cash on the sidelines waiting for a pullback. But so far there hasn’t been a correction, and the money needs to go somewhere.”

Top deals

Deals were modest in size, according to preliminary data.

UBS AG, London Branch’s $32.93 million of two-year capped leveraged buffered notes linked to the S&P 500 index came in first. The structure offers par plus 150% of any index gain, up to a cap of 16%.

Investors will receive par if the index falls by up to 10% and will lose 1.1111% for each 1% decline beyond 10%.

UBS distributed the second deal on the behalf of Credit Suisse AG, London Branch with the pricing of $23.63 million of 3.5-year trigger callable contingent yield notes with daily coupon observation linked to the least performing of the Euro Stoxx 50 index, the Russell 2000 index and the S&P 500 index.

Preference was given to income-generating products such as autocallables and worst-of contingent coupon deals, which accounted for more than 44% of the total volume, the data showed.

Leverage on the other hand was less with 18% of the notional sold.

The top agent last week was UBS with $193 million sold in 84 deals, or 48.5% of the total. It was followed by Bank of America and Morgan Stanley.

UBS AG, London Branch was the No. 1 issuer. It brought to market 73 deals totaling $97 million.

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