Agents sell $204 million of structured products for week; year’s tally could be best in decade

By Emma Trincal

New York, Nov. 14 – Agents priced $204 million in 76 deals in the week ended Friday, according to preliminary data compiled by Prospect News.

Separately, the year 2018, although not ended yet, appears to be on track to be one of the best if not the best year for notional sales since 2004, the data showed.

As November began, issuance volume grew thinner but the mood brightened as the uncertainty around the U.S. midterm elections was finally over.

“The market hates uncertainty, and we had a nice post-election rally,” a sellsider said.

The CBOE VIX index at around 20 on Tuesday dropped to a little over 16 the next day.

U.S. equities rose significantly for the week with the S&P 500 gaining 2.1% even though Friday saw another sell-off.

By the end of the week, the S&P 500 index had already regained 5.3% since its Oct. 29 low in a little over a week.

Elections

“As far as the elections go, we had one of the better types of scenarios because you have control and balance, which is why the market did well,” the sellsider said.

“No one can really undo what Trump did. But he won’t be able to push a new agenda. People seem satisfied with the idea that the election results are going to bring us to a standstill for the next two years.

“That’s why the market has been flattish despite volatility spikes.”

There have been indeed plenty of volatility moves up and down, especially since Apple reported earnings on Nov. 1, triggering a sell-off in the technology space.

“The news at Apple is what’s driving the market. If Apple sales are down that’s OK. But their suppliers are feeling the pinch, and that’s where tech is suffering.”

Autocalls, stocks

Autocallable contingent coupon deals were the top structure last week with 33% of the total issuance volume in 41 deals. Leveraged notes with buffers or barriers made for 22.6% of the total while the share of unprotected leveraged structures was only 10%, slightly below the 13% annual average, according to the data.

Single stocks accounted for 18.5% of total volume while equity indexes represented a 64% share.

“We’ve seen more demand for deals on single stocks,” the sellsider said.

“Volatility has helped a lot since those deals are for the most part short-vol., mainly autocalls,” he said.

For this sellsider, the earnings calendar is not necessarily what drives the pricing of single-stock deals.

“I don’t think buyers of structured notes play the earnings the way options traders do,” he said.

“It’s just that you get a bit more volatility around earnings and since those single-stock deals are sellers of volatility you hope to get a better price around that time where the uncertainty is maximum.

“You hope you sold volatility at a high and get the best possible deal.”

Investor sentiment

Investors have plenty to worry about.

President Donald Trump and president Xi of China will meet to negotiate a trade agreement during the G20 Leaders' Summit at the end of the month; crude oil prices have entered bear market territory last week; global growth is slowing. Yet investors appear confident with the elections uncertainty lifted and the hope of a year-end rally at a time of the year usually favorable, especially this year after the October correction.

“I couldn’t say that last week was a good week. It started OK and ended down. But investors seem pretty resilient. We don’t hear any concerns or panic from our clients,” said Andrew Valentine Pool, main trader at Regatta Research & Money Management.

Best year ever?

In terms of volume, new issues are pretty good for the year. With $50 billion priced through Nov. 9 of this year, 2018 looks like it could be the best of the past 15 years, according to data compiled by Prospect News.

The full year of 2017 saw $52 billion, followed by $50.52 in the full year of 2008 based on data compiled since 2004.

“With two months left we’re likely to beat the record this year,” the sellsider said, referring of the two final weeks of November and December when the bulk of the volume prices.

Bitter sweet Apple

Speaking of catching volatility when it’s high to provide better terms, Morgan Stanley Finance LLC priced on Nov. 9 a deal on Apple Inc. stock for $13.89 million. The top deal for last week, it was a three-year contingent income autocallable structure with a 9.65% quarterly contingent coupon, autocallable above initial price on any quarterly observation and both a coupon barrier and principal barrier of 75%.

The underlying’s initial price was $204.47, or more than 12% below the stock’s 52-week high of Oct. 3, observed Regatta’s Pool.

“I think the buyer got in on a very good timing,” he said.

“In the beginning of September the RSI was at around 70. Now it’s less than 40. From a strictly technical standpoint it offers much better value when you look at a chart.

The relative strength index or “RSI” is a technical indicator used to assess the strength or weakness of a price based on the stock’s historical data. When the RSI is above 70, the stock is usually considered overpriced while it is seen as oversold below 30.

Step-up

The second deal last week was BofA Finance LLC’s $13.22 million of market-linked step-up notes due March 26, 2021 linked to the S&P 500 index.

If the index is positive, investors will receive at least the step-up value, 126.5% of the initial index level or the index gain if the return is higher. The notes feature a 5% buffer.

“It’s good to have that minimum return without a cap. The market is range bound, you outperform with the 26% step. If it’s higher than that, you still participate one-to-one,” he said.

“I don’t like the 5% buffer as much though.

“In my opinion, 5% buffers are similar to teaser trailers in movie theaters.”

Digital notes

BofA Merrill Lynch priced the third deal on the behalf of Toronto-Dominion Bank with $12.57 million of 15-month digital notes linked to the S&P Banks Select Industry index.

If the final index level is greater than or equal to the initial index level, the payout at maturity will be par plus the digital return of 12.35%.

If the index falls but not below 85% of its initial level, the payout will be par.

Otherwise, investors will lose 1.1765% for every 1% decline beyond 15%.

“People who bought this deal got in at a price already 15% lower than the 52-week high in March,” said Pool.

“Once you’re in, there’s still room for another 15% decline where you get paid. I think the entry is fair.”

Top agent, issuer

The top agent last week was JPMorgan with 14 deals totaling $46 million, or 22.8% of the total. It was followed by UBS and Morgan Stanley.

JPMorgan Chase Financial Co. LLC was the top issuer for the week with 11 deal totaling $40 million. It was followed by Morgan Stanley Finance LLC.

JPMorgan Chase Financial Co. is also the No. 1 issuer for the year to date with $7.48 billion in 1,948 deals, or nearly 15% of the total.

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