Structured products issuance hits $335 million for week; focus on dual directionals, worst-ofs

By Emma Trincal

New York, May 8 – As May kicked in, structured products agents priced $335 million in 145 deals last week, a decent amount for this part of the month. The previous week, which wrapped up April, saw $1.85 billion sold in 443 deals, according to updated figures compiled by Prospect News.

The stock market was mixed and finished flat amid a flurry of economic and earnings news. It began with the S&P 500 index hitting an all-time high, finally breaking the September record, which preceded the December sell-off.

But the market reverted down after the Federal Reserve announced it would be neutral because of the low inflation and seeing no need to either hike or cut rates despite a solid economic picture. The market rallied on Friday with a stronger-than-expected job report for April and the announcement that the unemployment rate was at its lowest since 1969.

With these up-and-down swings, the market finished flat for the week.

Perplexity

Despite the brighter economic outlook, investor’s sentiment remains ambiguous. More than 10 years into a bull market, many question the resilience of the momentum, sources said. The S&P 500 index is up 15% for the year leading some to expect a correction. These concerns were reflected in the types of deals that priced last week.

Single-stock underliers made for less than 9% of the deals, in line with the year-to-date average of 11%, which is twice less than last year, according to the data.

Buffered or barrier leverage amounted to approximately 30% of the total, overwhelming the amount of unprotected structures.

Autocallable products remained the top style with a 45% share. Those structures do very well in a range bound market. They also provide downside protection via barriers.

Broader exposure

One of last week’s most striking trends pertaining to autocalls was the emphasis on equity indexes. Since those underliers are less volatile than single-stocks, a flow of worst-of on indexes hit the market. This group made for $100 million of the total and a third of the deals.

Perhaps the most significant sign of a lack of conviction on the part of investors last week was a burst of dual directional offerings, also known as absolute return. Those offer positive return on the downside up to a barrier level. Several of the top deals fell into that category, a majority of which were distributed by Morgan Stanley.

Rates lacking

Aside from equity, the other underlying asset classes nearly vanished. There were no interest-rates offerings last week per Prospect News definition, which excludes lightly structured notes such as Libor-based products.

One of the rate trends this source noticed recently was a decline in steepeners.

“The curve started to show signs of widening last month and I didn’t see new issues that were attractive compared to what we’ve seen before,” a sellsider said.

“This may just be temporary though as the spread is tightening again.”

Steepeners are notes paying a variable coupon based on the spread between two rates on the yield curve.

Year-to-date down

The year-to-date issuance volume continues to decline. Volume through May 3 dropped 36.3% to $14.33 billion compared to $22.49 billion last year, the data showed.

This decline came as both a surprise and relief for some.

“Oh God! I’m not alone! I wasn’t sure it was me or the industry, so it’s comforting to see these numbers even though it’s bad,” quipped the sellsider.

As previously recorded, this notional drop goes hand-in-hand with a declining number of deals. Those accounted to 4,643 this year, a 21% drop from 5,893 a year ago.

“I’m not even going to try to guess why the numbers are down,” this sellsider added.

“I know that issuers are doing whatever they can to put out attractive deals.

“BNP started a monthly calendar this year to enhance their business. SocGen came out with a lot of autocalls last month.”

The rally, this enemy

But the rally has not helped the autocall market in general. When stock prices go up, investors may be inclined to refuse the caps and be long the market. The low volatility also makes coupons and barriers unattractive, he explained.

“I know that some autocalls issued in January got called last month and I didn’t see the money going back into new deals,” he said.

This trend may be a sign of hesitancy among investors.

“I know a few accounts didn’t do anything with the proceeds. They’re waiting.”

The fall in volatility this year also makes pricing very challenging for those short-volatility structures, he noted.

The CBOE VIX index, which measures expected volatility on S&P 500 index options, nearly fell by half from 36 at the worst time of the sell-off on Christmas Eve to 19 presently. The S&P 500 index jumped 23% during this period.

“Because we ran up so much, when people look at 15% or 20% barriers or buffers, it’s not enough to get them interested,” the sellsider said.

“A lot of investors are staying away from what’s being offered. The market has gone up too much. They see a pullback coming in.”

Doing away with hedges

Alternative investments in general have a hard time getting traction in buoyant rallies, said Ferenc Sanderson, principal at Elizabeth Park Capital Management, a hedge fund.

He brought the example of long/short investing, which consists of buying long equity positions for their upside potential while selling stocks expected to decline.

“In bull markets, institutional investors are not so keen to add so much exposure to the S&P. They’ve already hit their target,” he said.

“Long/short demand has come down significantly. Why pay for the hedge? The average in long/short performance this year is only 5%. They’re not keeping up with the market.”

As a result, many hedge fund managers are switching from long/short to long only exposure. Sanderson said that the same factor may be at play with structured products as those provide hedges against downside exposure, which some may find too costly in terms of missed opportunities, famously coined as “fear of missing out.”

“It’s when the market is up so much that investors should think of buying protection. Unfortunately, that’s not how the majority of people think,” Sanderson said.

The sellsider agreed. Skittish investors tend to sit on the sidelines while the more bullish kind invest directly in the equity market, he said.

Slow April

April’s tally was not good either: agents priced $3.51 billion versus $5.12 billion a year ago, a drop of nearly one-third, according to the data.

“April was a very strange month. It always is. It’s the month when advisers put business aside because they have to focus on taxes and client service,” the sellsider said.

Leverage deal tops

Barclays Bank plc priced the top deal of the week with $21.55 million of six-year leveraged notes linked to the S&P 500 index. The payout structure features 150% of any index gain with a 65% barrier on the downside.

Barclays was the agent with Morgan Stanley Wealth Management acting as a dealer.

Dual directional notes handled by Morgan Stanley were a key theme for last week. It was on display in three of the top five deals.

Dual directional bonanza

For instance, the second-largest offering, which was issued by Citigroup Global Markets Holdings Inc., was a $15.11 million issue of five-year trigger jump securities tied to the S&P 500 index. If the index is up, investors will get at least 33.5% in return or the index gain, whichever is higher.

If the index is negative but above an 80% barrier level, the payout will be the absolute return.

Morgan Stanley priced another absolute return offering – and the third-largest of the week – on the behalf of Credit Suisse AG, London Branch in a $12.72 million issue linked to the Dow Jones industrial average. This time a 10% buffer (with a 10% range of absolute return above its threshold) and an 18-month tenor commended a different upside payout of par plus the index return capped at 10.35%.

JPMorgan Chase Financial Co. LLC issued and sold the other absolute return issue, ranked No. 5 in size for $11.34 million on the S&P 500 index. The payout for this 15-month deal is par plus the index return subject to a maximum return of 10%. On the downside, the absolute return kicks in above a barrier level set at 90% of the initial price.

Worst-of on three indexes

Back to the basic worst-of income products, JPMorgan issued and distributed the fourth deal in $11.81 million of autocallable contingent coupon notes. The notes maturing on July 31, 2020 are linked to the least performing of the S&P 500 index, the Russell 2000 index and the Euro Stoxx 50 index. The contingent coupon rate is 9% per year payable quarterly and based on a 70% coupon trigger, which also serves as the principal repayment barrier.

Last week’s top agent was Morgan Stanley with $148 million in 31 deals, or 44.3% of the total. It was followed by JPMorgan and Wells Fargo.

The No. 1 issuer was JPMorgan Chase Financial, which brought to market 23 offerings totaling $70 million, a 21% share. The previous week’s leading issuer was Bank of Nova Scotia.

JPMorgan is No. 1 for the year with $1.94 billion in 696 deals, or 13.6% of the total notional issued.

“A lot of investors are staying away from what’s being offered. The market has gone up too much. They see a pullback coming in.” – A sellsider

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