Structured products issuance $202 million for week amid earnings season, choppy stock markets

By Emma Trincal

New York, July 24 – Structured products agents priced $202 million in 104 deals in the second full week of the month as earnings season kicked off, according to preliminary data compiled by Prospect News.

Revised figures for the previous week showed a $480 million tally in 140 offerings.

Deal sizes were modest. No unusual trend was visible except for the continued use of worst-of deals as well as a slight pickup in single-stocks. Both techniques are routinely employed as a mean to generate more yield.

Month, year

For the month through July 19, volume is at $1.19 billion, down 15% from June’s $1.4 billion. July is slightly higher than a year ago though with a 3.2% increase from $1.15 billion.

But in this early part of the second half of the year, all eyes remained on the totals for the year to date, which are 24% lower than last year at $24.78 billion versus $32.65 billion, respectively. While a recovery cannot be ruled out over the nearly two quarters left before the year ends, it is challenging to make up for a gap of nearly $8 billion.

The slowdown in issuance volume remains a preoccupation among sellsiders.

“Volume is down. All investment volumes are down,” a structured notes distributor said.

“It’s a steady market. But volume is just suffering because of this uncertainty.”

The Brexit in Europe, the trade negotiations between the U.S. and China and the future direction of Central Banks’ monetary policies are all factors keeping investors on the sidelines.

Equity, volatility

The U.S. market could not have been more equity-centric last week. In all, 95% of the volume originated from this asset class versus 89% for the year-to-date average. As always, equity indexes were overwhelmingly dominant with nearly three-quarter of total notional.

The equity market rally is often blamed for the lackluster volume. Trading above 3,000, the S&P 500 index is already up 20% for the year. The bull run has pushed the VIX index, which measures volatility, to 12, well below its historical daily closing average of 20.

“Low volatility is not helping volume in general,” the sellsider said.

Three versus two

Investors continued to prefer betting on broadly diversified indexes.

This has always been the case in the structured products space.

“Any large-cap indices, whether it be the S&P, the Euro Stoxx, the FTSE, the Nikkei, reduces the chance of losing money versus single stocks,” the distributor said.

One trend last week was the extension from two to three in the number of underlying indexes observed in several worst-of offerings although not on all of them.

“That makes sense,” the sellsider added.

“When vol. is low you need to put more underliers, play with correlation in order to punch a little bit more coupon.”

The most common “trio” used as for worst-of deals were the S&P 500 and the Russell 2000 to which were alternatively added either the Nasdaq-100, the Euro Stoxx 50 or the Dow Jones industrial average.

As always, those worst-of deals for the most part were income-oriented notes.

“If you’re using the S&P, the Russell and the Euro Stoxx it’s much better than Brazil’s Bovespa paired with Russia,” said the distributor.

“My point is: you’re better off with three highly correlated indices than two completely different ones.

“It’s not about the number of underlying indices. It’s about how they’re correlated to one another.”

The amount of autocallable contingent coupon notes was a record high last week with 52% of the total in sharp contrast with the yearly average of one-third. In addition, snowballs (autocallables that pay a call premium upon early redemption only) accounted for 12% of the volume, nearly twice as much as the year-to-date average.

“If you believe the market will not fall below a certain put level, it’s a pretty logical trade,” the distributor said.

He was referring to autocallable contingent coupon notes as well as an increasingly popular digital trade in which the trigger is set below the initial price.

Earnings season

Despite the unshakable popularity of indexes, single-stocks remained widely used with 15% of total volume.

“Earnings season kicked off last week. That’s always a good opportunity to catch some volatility on some stocks,” said the sellsider.

The majority of the underlying stocks were part of baskets either through worst-of deals and less often through weighted-average baskets.

As a sign that earnings bets were at play, UBS AG, London Branch sold 10 deals tied to Netflix, Inc., whose shares dropped more than 10% on Thursday after reporting disappointing results the day before. The bulk of those small Netflix deals priced at the post-earnings discounted price on Thursday and Friday.

Caution on stocks

Investors were cautious ahead of second-quarter earnings. Risk-aversion was reflected in a choppy market.

The S&P 500 index posted a 1.2% decline, but part of it may also be due to profit-taking after the benchmarks had just hit all-time highs.

The distributor said that single-stock underlying should be reserved to sophisticated investors only.

“Those deals shouldn’t be offered to private banks. Nobody has the modeling tools to analyze correlations on single stocks,” he said.

The more widely used equity-index-linked notes structures were amply justified in his view.

“With indices, it’s much easier to model the correlations and the probabilities of return. It’s fine to do stocks if you’re a hedge fund or an institutional investor. Then you have the capabilities to run simulations. It’s very difficult for retail or high-net-worth investors.”

Finally, equity indexes are far less risky.

“An index like the S&P 500 with 500 names or the FTSE 100 can’t really go down to zero. But it’s possible with a stock,” he said.

Rates

No interest-rates-linked notes offerings were brought to market last week, according to Prospect News’ definition, which excludes lightly structured deals tied to generic underlying such as Libor.

“People are on the sidelines with rates. Everyone is waiting for the Fed’s decision next week. Before that, we’re not going to see a lot of action,” the sellsider said.

Earlier last week, the futures markets indicated a quarter point cut for the Federal Open Market Committee meetings of July 30-31. But a controversial speech on Thursday by New York Fed president John Williams recommending to “act quickly to lower rates at the first sign of economic distress,” prompted Fed Funds futures traders to rectify their bets, raising the rate cut to half a point.

Right now, the balance is back to a less dovish anticipation again. The market is pricing an 80% chance for a 25 basis points cut and a 20% chance for a 50 bps cut.

Top deals

Citigroup Global Markets Holdings Inc. priced $13.33 million of three-year step-down trigger autocallable notes linked to the lesser performing of the S&P 500 index and the MSCI Emerging Markets index.

The notes will be automatically called at a call premium of 7.8% per year if the less-performing index closes at or above its initial level on an annual observation date. In the absence of a call, the payout at maturity will be full exposure to the lesser-performing index decline from its initial level.

UBS Financial Services Inc. is the agent.

The second-largest deal came from GS Finance Corp. in $11.01 million of callable contingent yield notes due April 21, 2023 linked to the least performing of the S&P 500 index, the Russell 2000 index and the Euro Stoxx 50 index.

The notes on each quarter will pay a contingent coupon at the rate of 9.15% per year if each index’s closing level remains at or above its coupon barrier, 70% of its initial level, on each day during that quarter.

The notes are callable at the issuer’s discretion on any quarterly coupon payment date.

The principal repayment barrier at maturity is at 60%.

UBS Financial Services Inc. is also acting as selling agent.

Last week’s top agent was UBS with 46 deals totaling $80 million, or 39.5% of the total. It was followed by JPMorgan and Morgan Stanley.

The No. 1 issuer is Citigroup Global Markets Holdings with $30 million in six offerings, a 15.1% share.

For the year, Barclays Bank plc is the top issuer with $3.91 billion in 964 deals, or 15.8% of the total notional.

“Volume is down. All investment volumes are down. It’s a steady market. But volume is just suffering because of this uncertainty.” – A structured notes distributor

“Earnings season kicked off last week. That’s always a good opportunity to catch some volatility on some stocks.” – A sellsider

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