Structured products issuance volume light at $185 million amid tax deadline, earnings season

By Emma Trincal

New York, April 18 – The second week of April was slow for structured products sales as advisers and investors had their eyes on the tax deadline. Meanwhile equity volatility continued to be rampant ahead of the kick off of the earnings season on Friday.

Agents sold $185 million of structured products versus $613 million the week before, according to preliminary data compiled by Prospect News.

The number of deals fell to 77 from 177.

Figures get revised upward consistently as not all deals are filed with the Securities and Exchange Commission by press time. Another explanation for the difference was the pricing during the previous week of a $250 million trade by BofA Finance LLC.

“I think two things were going on,” said a distributor specializing in structured notes.

“Taxes got people really busy, doing busy things and a lot of paperwork. Advisers were not focused on investments. Advisers were caught up trying to meet the deadline.

“Also, the market continued to be quite volatile, which caused advisers to take a wait-and-see attitude.”

Volatility

Last week indeed was another succession of wild up and down moves. The bulls end up winning with the S&P 500 index finishing up 2% for the week.

A rally on Tuesday after China's president Xi eased worries of a trade war was preceded by a roller coaster on Monday as the Dow Jones industrial average rose 440 points before falling at the end of the session on geopolitical concerns. President Donald Trump threatened to attack Syria on Wednesday precipitating a sell-off followed by a rally the next day. Market gyrations continued on Friday after the earnings of JPMorgan, Citigroup and Wells Fargo Corp. somewhat disappointed.

It is not clear whether the earnings announcements of three major banks at the end of last week, followed by this week’s three more (Bank of America, Goldman Sachs and Morgan Stanley), played a major role in the weak action. Blackouts have been cited by sources as disruptive for sales.

This distributor said he was skeptical.

“You might as well read tea leaves,” he said.

“The fact is the market is volatile and people are looking for alternatives with more protection.”

The breakdown in structure categories last week showed a renewed interest for yield enhancement strategies, in particular with products such as autocallable contingent coupon and autocallable paying a call premium. Those two structures accounted for 32% and 20% of the total volume, respectively, according to the data.

“I don’t know if this is due to a pickup in volatility as much as a drift in asset allocation,” the distributor said.

“I can see that too. Those deals are the focus right now. People that used to look for yield in bonds or even in steepeners can’t get enough yield.”

The market share of 20% seen last week for autocallable structures exceeded the annual average of 5%.

While those products are not pure income plays – they pay a one-time call premium when the notes are redeemed early – they appear to be growing in popularity.

“The call will boost your coupon; that’s probably why you’re seeing more,” the distributor said.

His favorite sales remain the typical contingent coupon note with a coupon barrier lower than par and an autocall triggered at par.

“People want a fixed coupon even if it’s contingent. We’ve just done one on three stocks. Clients like it. You can get 12%, 13% or even 14% coupons. That’s nice. And you get a nice cushion,” he said.

Another trend seen last week: among all leveraged deals, the majority came with protection, according to the data.

Leveraged deal issuance made for 29% of the volume, according to the data, with three-quarters of it in leveraged notes with barriers or buffers while the rest offered full downside exposure.

“I’m seeing the same thing. Clients are definitely asking for protection,” said the distributor.

Risk off

The CBOE VIX index, which is used to indicate the volatility of S&P 500 index options, was at 21.77 at the beginning of last week but dropped to less than 15 on Friday. Still most market participants continue to struggle with volatility moving up and down itself, along with stock prices, leading investors to confusion about the direction of the market and demanding hedges at the price of more upside, a market participant said.

“It’s a good time to take some risk off the table,” this market participant said.

“It’s a good time to invest in structured products. The market is topping. Interest rates are still low. P/Es have come in. It’s not the time to be closing all the shutters and prepare for Armageddon. But it’s no longer the time to say: the sun is just coming out.”

In this choppy and range bound market, he predicts more absolute return products to give investors a chance to make money whether the market is up or down.

Issuance volume for the month through April 13 is down 42% to $800 million from $1.38 billion during the same time in March. This trend is common each year as volume is the strongest in the first quarter and begins to decline in the spring. Compared to a year ago, this month’s volume is down 20% from the same period in March of last year, which recorded $997 million in sales.

For the year to date, issuance volume is up 16.6% to $17.14 billion from $14.7 billion, according to the data.

Two factors have been driving growth. First the number of deals has continued to increase as it did last year, up 22.5% to 4,567 from 3,731. Secondly, more offerings in excess of $50 million have priced so far this year: 25 versus 15 last year.

Some of those larger trades are indeed very big deals in excess of $250 million. Three synthetic convertible deals in particular have boosted total volume this year by close to $1 billion. Those hybrid notes, which have been all linked to the share price of Voya Financial Inc. were issued successively by JPMorgan Chase Financial Co. LLC in January, Deutsche Bank AG, London Branch in March and BofA Finance LLC last month. The notional total of the three “Voya” trades is $900 million.

Top deals, agents

Two non-U.S. issuers brought to market the top deals last week.

Toronto-Dominion Bank sold $25.47 million buffered digital notes due May 13, 2020 linked to S&P 500 index.

If the final index level is greater than or equal to 85% of the initial index level, the payout at maturity will be par plus the digital return of 15.7%.

If the index falls by more than the 15% buffer, investors will lose 1.1765% for every 1% decline beyond 15%.

HSBC USA Inc.’s $18.93 million of two-year trigger autocallable notes linked to the S&P 500 index followed in size. The notes are callable automatically at par plus an annualized premium of 9% if the index closes at or above its initial level on any quarterly observation date after a no-call period of six months. There is a 75% barrier at maturity. The agent is UBS Financial Services Inc.

Last week’s top agent was UBS with 49 deals totaling $54 million or 29% of the total. It was followed by JPMorgan and TD Securities (USA), Inc.

JPMorgan Chase Financial Co. LLC was the top issuer with seven deals totaling $46 million, or 24.6% of the total.

This issuer is also No. 1 for the year with $2.49 billion issued in 611 deals, or 14.52% of the overall volume.

“I think two things were going on. Taxes got people really busy, doing busy things and a lot of paperwork. Advisers were not focused on investments. ... Also, the market continued to be quite volatile, which caused advisers to take a wait-and-see attitude.” – A distributor specializing in structured notes

“It’s a good time to take some risk off the table.” – A market participant

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