SPA Conference: A tough pricing environment makes simplicity dear, panelists say

By Emma Trincal

New York, March 6 - Issuers are struggling to create deals that make economic sense in the current lower interest rate, low volatility environment, panelists said at the last two panels at the Structured Products Association distribution conference in New York on Wednesday. The presentations covered asset classes and speakers' forecasts.

Participants noted that some asset classes have fared better than others in the present market conditions.

"2012 was the year of the callable step-up note," said Glenn Lotenberg, a distributor at Incapital.

"On the fixed-income side, we should see floaters becoming more popular over the next six to nine months.

"The trigger note is still likely to be very popular over the next six months, especially if rates stay range-boud and the equity markets stay bullish.

"Investors will still be looking for yield [and] that is challenging because credit spreads have come in substantially. "Wealth managers are looking for new products and new ideas," he said.

On the other hand, Bernd Henseler, vice-president of S&P Dow Jones Indices, point out: "Given the current low rate environment, principal-protected notes are difficult to create. So you have to adjust the payout profile to enable the issuance of attractive notes."

Cheap complexity

Keith Styrcula, chairman of the Structured Products Association and moderator of the panels, said that low interest rates, low volatility and low yields represent a challenging pricing environment.

"People talk a lot about the need to bring out simplicity in products. But simplicity is expensive in this environment," he said.

"So while there is a desire for simplicity, we also need complexity to get some yield. It's a difficult balance to strike.

"One way to do that is to offer simple structures but with more complex underlying assets, for instance algorithmic indexes," he said.

Several panelists said that algorithmic indexes were popular last year

Raul Perez, a structurer at BNP Paribas said that with the stock market at all-time highs, the question of "whether we are in a bubble or not" has become more relevant than ever.

"Investors are concerned about what the market will be like in three years. Market timing is kind of picking up," he said.

Perez said his firm has recently successfully sold "lookback" products, which give investors a chance to get extra leverage if the underlying asset drops below a certain threshold during an initial period of typically three months.

While equity still prevails, other asset classes have been hit particularly hard last year, especially commodities, he said.

"Commodities had a horrible year but it's still a product we feel will come back if inflation goes up. I can't see clients requesting CPI-linked notes in the next six months, but maybe next year even though inflation is still low."

Perez said volatility should pick up in the second quarter this year.

"It's my personal opinion but I don't see any reason why stocks should stay at all-time-highs the way they are. I'm not that optimistic about the stock market," he said.

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