Structured products issuance steady at $236 million for week; yearly numbers show 45% drop

By Emma Trincal

New York, March 20 – Agents sold $236 million in 116 structured product deals last week, nearly the same amount and count as the previous week, which recorded $235 million in 109 offerings, according to data compiled by Prospect News.

The bigger picture however is raising questions and concerns. Sales for the year are nearly half of last year’s volume through March 15, down 45.3% to $7.61 billion from $13.91 billion.

“I’m not surprised,” said Brady Beals, director of business development at Navian Capital, who attributed those results to the lack of volatility and conviction in the market.

The trailing data is also trending down.

Volume in the 12 months from March 14, 2018 to March 15 was at $50.54 billion, a 9.35% drop from $55.75 billion observed on the previous trailing 12 months.

For the month, the first half of March revealed a 54% decline to $535 million from $1.16 billion in February.

It gets worse compared to a year ago with a 70.4% drop from $1.81 billion.

Those results may surprise given the strong market gains since the Christmas Eve sell-off. Last week alone, the S&P 500 rose 2.9%. Even the Dow Jones industrial average, which was negatively impacted by the crash of a Boeing aircraft and the ensuing drop in the company’s share price, recorded a 1.57% gain on the week.

What to make of it? Sources attributed most of the lackluster action to a rally unfolding amid headwinds and uncertainty. The mix has worsened pricing conditions and put some of the demand for structured notes on hold, they said.

Uncertainty

“Our notional has been up substantially but it’s because we’ve tried to be creative with our payouts,” said Beals.

“Industry wise, volume is definitely down from last year.

“We have the opposite market of a year ago. Volatility is down; the market has rallied. We haven’t had any volatility since the Christmas Eve really. Last year at that time, terms were more attractive. Volatility was up a lot.

“There is also a lack of conviction right now. Even emerging markets are not so compelling now.

“We’ve done HSI/SPX trades based on the expectation that a deal with China would be beneficial. Outside of that, there isn’t much conviction.”

He was referring to the Chinese Hang Seng index and the S&P 500 index.

A distributor, who said he has not seen a decline in sales from his trading desk, acknowledged that the “buzz” in the industry is not encouraging.

“I’ve heard it from issuers. They’ve said that it’s very tough right now,” he said.

Less volatility

Volatility has dropped, making the yields on income products much less appealing, he noted.

This is in the context of a bull market that has followed the short bearish trend at the end of last year.

For the year and over less than three months, the S&P 500 index has climbed 12.5%.

“During last year’s correction a year ago, we saw a spike in volatility. It created a huge opportunity for structured product,” this distributor said.

“We had the best terms seen in years. It was a call for action. But now that the rally has created muted levels of vol, you can’t find those terms anymore.”

This distributor gave the Federal Reserve Bank credit for most of the rally since the beginning of the year.

“What the Fed has learned is not to spook the market. The market is up. Why would people want to get into notes that have worse terms than what they’re holding? People have maturing notes and they’re waiting. They want to see what happens. Is it just the trade deal with China? Is it the Fed? I don’t know what it is. But they’re waiting for something,” he said.

Funding spreads

Other adverse pricing conditions include lower interest rates.

“Rates are down a bit and it’s also been a factor, especially with principal-protected notes,” said Beals.

But funding spreads, especially for this structure type, are even a greater challenge.

“If you look at CDS, spreads are much tighter for JPMorgan, Morgan Stanley and most U.S. banks. Foreign banks also show narrower spreads,” he said.

“Funding is the risk-free rate plus the risk premium. That risk premium has been a lot tighter across the board, and that’s a problem.”

Memory and time

In order to remedy those pricing challenges, some shops have pushed some features, which may require a tradeoff on the part of investors.

For instance, Beals said his firm has been offering memory coupons on its autocallable contingent rate deals. Investors however had to accept less downside protection, which was made possible given the longer durations the firm offers to his clients.

Memory coupons allow investors who miss one or several payments to make up for it at a later date.

“We price longer-term notes, five- to seven-year paper. There is that perception that the longer you go out, the less risk you take. When clients don’t see the need to spend more on the downside protection for longer deals, we’ve been able to include memory coupon. The tradeoff is a little bit less protection,” he said.

Last week revealed an unusually high amount of deals tied to single stocks: 31.25% of the total versus an average of 10% of total sales for the year, according to the data.

Single names in demand

Sources were not surprised.

“The bread and butter deals, worst-of on broad indices such as the S&P and Russell or a little bit of Nasdaq, when that dries out, to get a coupon compelling enough you have to find volatility where it is,” said Beals.

In their quest for more premium, issuers have been tapping into global indexes or U.S. sectors, he said.

But single-stocks are another common way to extract more premium from selling volatility.

“To make up for the low vol., you have to take potentially more risk. It’s inevitable. You either introduce riskier terms on plain-vanilla structures or you go for individual stocks,” said Beals.

After the March 10 crash of a Boeing aircraft, a few deals tied to the stock were brought to market.

JPMorgan Chase Financial Co. LLC and UBS AG, London Branch issued a combined notional of $5.71 million of notes linked to Boeing Co. in seven deals. At the exception of one (a JPMorgan dual directional structure with a cap and 100% participation), all those products were income-oriented autocallable securities.

“We’re seeing a variety of names, not just what’s in the news. There are tech names, pharma names, financial names,” the distributor said.

“The simple structured products index-based notes whether for income or for growth might not be pricing as well. “There’s for sure an uptick in tactical, single names deals.”

Some of the single-stock underliers used last week were Bank of America Corp., Nvidia Corp., Netflix Inc. and CVS Health Corp.

Top deals

Morgan Stanley Finance LLC priced the second largest offering with $10.96 million of three-year contingent income autocallables linked to Bank of America.

The notes pay a 10.1% contingent coupon quarterly based on an 80% coupon barrier and are autocallable on any quarterly determination date above initial price. The principal barrier repayment at maturity is 80%.

Also tied to a single stock and issued by Morgan Stanley Finance, the No. 3 offering was $10.86 million of three-year contingent income autocallables on Nvidia.

The contingent coupon is 11.4% with a 55% coupon barrier and principal repayment barrier. Determination dates for the coupon payment and autocall are quarterly.

Canadian Imperial Bank of Commerce priced $22.89 million of 13-month capped leveraged notes due April 16, 2020 linked to the S&P 500 index.

The notes pay 1.5 times the gains up to a 17.92% cap. Investors will lose 1% for each 1% decline.

Top agent, issuer

Morgan Stanley with $59 million in 15 deals was the top agent last week, capturing nearly 25% of the market share. It was followed by UBS and JPMorgan.

JPMorgan Chase Financial Co. LLC, with $66 million in 20 deals, was the No. 1 issuer with 28% of the total.

This issuer also remained the top player for the year so far with 398 deals totaling $1.18 billion, or 15.45% of the total volume.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.