Structured products agents sell $317 million amid flat stock market, election, interest rate views

By Emma Trincal

New York, Oct. 26 – Amid uncertainty surrounding the Federal Reserve’s interest rate policy and the U.S. elections, the market in structured notes was rather light, reflecting a thinly traded, range bound equity market. The S&P 500 index rose 0.4% last week despite the third-quarter earnings season, which bared little impact on volatility.

Structured notes agents sold $317 million in the third week of the month ended Friday, or less than the previous week’s $410 million, according to preliminary data compiled by Prospect News.

Weekly trend

Current weekly volume figures may not be final as reporting onto the Securities and Exchange Commission website on some deals can be delayed. For instance a week ago, the estimated volume for the Columbus Day week was $257 million instead of $410 million. If this pattern holds numbers for this past week may also be revised higher.

From current available data, JPMorgan was the top agent by far last week, selling 33 offerings totaling $127 million, or slightly more than 40% of the total volume. It was followed by Barclays with $37 million in nine deals and HSBC’s $33 million in 10 deals. Bank of America was quasi absent last week based on this preliminary data with only one $4 million deal. This is not unusual as this agent prices nearly all of its volume in the final week of the month.

Single names

One striking trend was the important volume of single-stock deals, an asset class that has been out of favor of late.

Last week showed $68 million of notes linked to single stocks, or 21.40% of the market, which is a much higher penetration rate than the annual average of 11%, according to the data.

“One of the rationales behind single stocks is that when markets are fairly calm, as they have been recently, people don’t mind taking a little bit of risk. Perhaps that’s why they’re reaching out to stocks... because they feel the equity market is pretty benign,” said a sellsider.

“Volatility continues to be quite low. It’s difficult to put together something on the S&P and make it a yield play.

“Firms have been doing a lot of worst-of with indices. But you can only do so much of this. You’ve got different investors’ types. Some may be comfortable with worst-of on indices; some may not and may prefer to use a stock that they know.”

Yield chase

Two other related trends were seen in the past week.

First, autocallable reverse convertibles regained their lead after a few weeks marked by a dominant volume in leveraged products. The volume for autocallable reverse convertibles, which are contingent coupon notes with an autocallable feature, amounted to 45%, or $142 million, in 76 deals. The average is 25% for the year.

“Those yield-generating notes are among the most attractive products right now. Yield is what drives investors’ interest,” said the sellsider.

“You’re not seeing strong returns in the equity markets. The S&P is not even up 5% this year.

“That drives investors to seek returns in different ways. Having a coupon capping your upside is not such a big deal.

“The longer we are in this interest rates environment, the more impatient people are to get some yield.

“As a result, getting a 6%, 7% up to 10% from equity is catching people’s attention.”

Small deals

Second trend related to income products: UBS was back at the single-stock game pricing half of the autocallables reverse convertible deals, albeit in very small sizes. This agent, which has traditionally been the leader in single-stocks, priced last week $11.20 million of autocallable reverse convertible notes in 38 deals, averaging $300,000 per deal, according to the data.

The largest deals in this category however came from other agents, such as JPMorgan, Morgan Stanley and Barclays.

Deals in general were especially small with the top one hardly higher than $20 million. Only seven out of 127 offerings exceeded the $10 million mark.

The top autocallable reverse convertible deal was linked to a pharmaceutical name. It was the No. 3 deal in size.

JPMorgan Chase Financial Co. LLC priced $14.69 million of three-year contingent income autocallable securities linked to Bristol-Myers Squibb Co. The contingent coupon was 9.85% if the stock closed above an 80% barrier on a quarterly observation basis. On the same observation schedule, the notes were automatically called above the initial level. The barrier at maturity was also 80%. The notes were guaranteed by JPMorgan Chase & Co.

Interest rates

Last week finally saw the issuance of one interest-rate deal, the second one this month. In September, only seven such deals hit the market for a total of $42 million.

As a year-to-date comparison, only $264 million of interest-rate-linked notes have been priced so far this year, down 78% from last year’s $1.19 billion during the same time, the data showed.

Credit Suisse AG, Nassau Branch priced $20.4 million of 10-year fixed-to-floating notes linked to the 10-year U.S. dollar ICE swap rate.

The interest rate was 4% for the first three years. After that, it was set to equal the 10-year dollar ICE swap rate. Interest was payable quarterly. The payout at maturity was par. Incapital was the agent.

“It’s a bet on higher interest rates, and it’s almost a contrarian bet at this time,” said Paul Weisbruch, vice-president of options sales and trading at Street One Financial.

He said he was not surprised by the limited supply of rate deals.

“People anticipate a rate hike post-Elections. But nobody knows about next year. Is the Fed going to raise rates next year? Will they do it on a regular basis? People are skeptical about that,” he added.

“There is a huge question mark around the timing.

“People have been betting on interest rate hikes for a couple of years, and they’ve been wrong.

“So it’s not surprising that people are holding their bets at this point.”

Leverage

Leveraged notes with barriers or buffers largely outpaced leverage with no downside protection as 23.7% of the total versus 4.65%, respectively.

The top deal in this category was the second in size last week. It was brought to market by Royal Bank of Canada in $16.63 million of two-year leveraged buffered notes 2018 linked to the S&P 500 index. If the index finished positive, investors would receive par plus double the gain, subject to a 17.2% cap. The structure provided a 10% geared buffer on the downside with a 1.11 multiple.

Month, year

October so far looks promising with $1.39 billion issued through Oct. 21, a 10.25% increase from the same period last month, which saw the pricing of $1.26 billion.

The month is also on good footing when compared to $1.08 billion priced a year ago, as it is up about 30%.

Volume for the year however continues to lag with $29.53 billion versus $35.48 billion last year, a 16.80% decline.

“The longer we are in this interest rates environment, the more impatient people are to get some yield.” – A sellsider

“People have been betting on interest rate hikes for a couple of years, and they’ve been wrong.” – Paul Weisbruch, vice-president of options sales and trading at Street One Financial

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