Structured products issuance nearly dormant in holiday week; rocky market finishes in correction

By Emma Trincal

New York, Nov. 28 – Structured products agents priced a modest notional of $117 million in 54 deals during the three-day week ahead of the Thanksgiving Day holiday, according to preliminary data compiled by Prospect News.

About half of this volume came from small-size deals in the $5 million-or-less range and only five offerings exceeded this amount.

No deals priced after Wednesday as the bond market was closed. The stock market reopened on Friday but closed early and bruised.

The shortened trading week saw the market wipe out gains for the year. The S&P 500 index dropped 3.8% for the week. It finished at correction level due to an extensive sell-off in tech and energy stocks along with continued concerns around trade talks, global growth and rising interest rates.

No rolls

“Thanksgiving week tends to be a dead week, but the sell-off may have made things worse. It’s hard to isolate one factor from the other. But sentiment if it turns negative can have an impact. Deals don’t get called, clients lose money and they don’t roll the proceeds,” a market participant said.

Leverage

This reasoning seems to explain the distribution of sales across structure types last week. Typically leveraged notes represent about a third of the total issued volume with autocallables averaging nearly the same share at around 31%, according to the year-to-date data.

Last week, autocallables made for only 22% of the total versus 55% for leveraged notes.

This disparity is often striking at month end when Bank of America prices its big index-linked leveraged trades.

But Bank of America was nearly out of the market last week. It is expected to be pricing its calendar month this week instead.

Rising volatility

A comparison with last year’s short Thanksgiving week also pointed to the role of last week’s market rout as a major factor behind the slow action. A year ago, more than $1 billion priced during the three days prior to the long holiday weekend. Just as it is the case this year, it was not even the close of the calendar month, which happened the following week.

“When you have a brutal market like last week, if you’re an adviser who needs to do something, you’re not going to put your clients in products whose barriers just got knocked out,” said the market participant.

“Clients don’t get called. They may not get paid and they probably lose money. You need to come out with something more appealing.”

Leveraged structures with caps and buffers sell volatility, he explained.

“When volatility picks up you get better terms. You’re selling a call option to price those caps. “The greater the volatility, the higher the cap.”

Protection

Also notable was the fact that all leveraged products last week offered some kind of downside protection either via a buffer or a barrier. There was no leverage with full downside exposure, according to the preliminary data. Usually leverage with and without protection are sold in even proportions, the data showed.

“All things being equal, more volatility will also give you a chunkier buffer. Those plain-vanilla leveraged buffered notes regain popularity in this environment,” he said.

A distributor agreed.

“The biggest performing structures year over year are those leveraged notes. Our adviser’s job is to increase alpha while mitigating risk,” he said.

“If clients hold the S&P in their portfolio with full downside risk, why not mitigate the risk with a buffer and get the upside leverage?”

Single-stocks were not in demand last week, showing up in less than 10% of the overall volume while equity indexes took the lead with two-thirds of the total. The yearly average share for single-stocks is 17%.

Such a result was not a surprise given that most single-stock deals are income-oriented, not leveraged notes.

A few other structures were seen such as absolute return deals, a couple of callable range accrual notes on rates with worst-of equity components from JPMorgan and some digital buffered notes.

But those deals were very small in size.

Champagne anyone?

The good news remained this year-to-date volume, which is up 8.95% to $50.82 billion from $46.65 billion through Nov. 23. While the volume is slowing down this month compared to a year ago, the advance the market has this year may help 2018 match and even exceed last year’s notional.

Last year’s $52 billion notional was a record year, according to data compiled by Prospect News going back to 2004.

Agents need to sell another $1.2 billion to surpass last year’s record.

“November and December haven’t even closed yet. Merrill alone will do that,” the market participant said.

Two JPMorgan deals

JPMorgan Chase Financial Co. LLC priced the top deal with $31.03 million of two-year leveraged buffered notes on the S&P 500 index. The payout will be par plus 1.5 times the gain capped at 23.1%. The downside features a 10% geared buffer with a 1.11 gearing.

Coming next, JPMorgan also priced another leveraged deal with a geared buffer but this one had no cap.

The $11.09 million of 18-month notes linked to the Euro Stoxx 50 index will pay at maturity par plus 1.78 times the gain. If the index falls by up to 15%, the payout will be par. Otherwise, investors will lose 1.1765% for each 1% decline beyond the buffer.

Daily observation worst-of

Finally, on the income side, Morgan Stanley Finance LLC issued the third deal with $6.77 million of 3.5-year callable contingent yield notes with daily coupon observation linked to the least performing of the S&P 500 index, the Russell 2000 index and the Euro Stoxx 50 index. It was distributed by UBS Financial Services.

The contingent coupon is at 9.35% per year with a 65% contingent barrier observed daily. The notes are callable above initial price after six months.

The principal repayment barrier at maturity is 60% observed point to point.

JPMorgan was the top agent last week with six deals totaling $54 million, or 45.85% of the total. It was followed by Citigroup and UBS.

JPMorgan Chase Financial Co. LLC was the No. 1 issuer. The bank’s financial subsidiary is also the top issuer for the year to date with $7.64 billion issued in 1,992 offerings, a 15% market share.

© 2015 Prospect News.
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