Structured products market as month debuts shows resilience ahead of holiday, Greek headlines

By Emma Trincal

New York, July 8 – Agents sold $356 million in 88 deals in the four-day week prior to the Fourth of July weekend, a number in line with the average for the first week of the month, according to data compiled by Prospect News.

Barclays was the top agent with $123 million sold in 13 deals, or 35% of the total. JPMorgan captured 19.6% of the volume with $70 million in 16 deals followed by Morgan Stanley with 11 deals totaling $66 million.

The average volume for the first week of the monthly cycle has been $375 million, according to the data. It contrasts with a $1.85 billion average for the closing week of the month, which is when the top dealer, BofA Merrill Lynch, prints its notes and many other firms see a rush of deals price.

Resiliency

Given last week’s headlines about Greece leaving the negotiation table with its creditors ahead of Sunday’s referendum, Chinese stocks plummeting and lower oil prices, the structured note market and the U.S. stock market showed an unexpected resilience, sources said.

“Considering that it was a holiday week, that the month just started and that most people were gone, volume was actually pretty strong,” a market participant said.

“The market was pretty nonchalant about international headlines last week. I think U.S. investors remain more focused on the Fed and the U.S. economy. The news is not bad on the economic front, and fears of higher rates are subsiding because people know that the Fed is going to be extremely cautious when it raises rates. People know rates will go up but at a very moderate pace.”

While international events have “never been at the forefront” of U.S. investors’ attention, he said that things could change this week.

“If Greece or China didn’t really play out last week, I think this week is going to be different. We’re going to see more volatility ahead of the Sunday deadline in the euro zone along with the sell-off in China,” he said.

Bullish bets

In the meantime, investors’ bullishness remained unabated as the top-selling structure suggested: leveraged notes with full downside exposure were the No. 1 product to be priced, accounting for 41% of the total volume.

Barclays Bank plc brought to market the largest deal with $40.28 million of two-year capped leveraged index-linked notes tied to the S&P 500 index. The structure offered 3 times leverage subject to a 22.83% cap. Investors were fully exposed to any losses. Barclays was the agent.

“It’s a bullish equity deal. The size confirms that people are still pretty confident in the U.S. market,” the market participant said.

“The S&P is an expensive market but one that most banks are still making bullish calls on. A lot of cash is sitting on the sidelines. Asia, Europe are in the headlines. The U.S. market is the path of least resistance.

“What people see right now is that the U.S. economy is turning around. Data is pretty strong. It looks like the first quarter was a soft patch. I’m not surprised that people would bid on long equity structures with leverage and no protection.”

Leverage benefits

A sellsider explained that leveraged bets even with no protection are often misperceived.

“Just because your downside is one-to-one does not mean you have more risk,” this sellsider said.

“With an ETF, you don’t have any downside protection either. You can’t get the currency hedge that structured notes have to offer. Structured notes are quanto. You take away the currency risk.

“And when it comes to downside risk, even without a buffer or a barrier, the leverage itself is a protection. “Instead of putting down $300 for a $300 notional you only put down $100. Unlike an ETF, there is no leverage on the downside. That’s risk mitigation.”

Fewer stocks

Single-stock deals were in decline last week, accounting for only 8.5% of the volume against a year-to-date average of 18.5%, the data showed.

The top stock deal, issued by Wells Fargo & Co. and tied to Kinder Morgan, Inc., had a size of only $11.72 million. This was an add on to a $55 million deal originally priced on June 17. The notes are optionally exchangeable for Kinder Morgan Stock.

After that, the biggest stock deal of the week was $5.1 million of phoenix autocallable securities linked to Chicago Bridge & Iron Co. NV that was issued by Barclays Bank plc.

“Regulators have been focusing a lot on income products tied to single stocks. The derivatives aspect of those bonds is a concern if investors don’t realize that they’re betting on stock prices and are exposed to the volatility of a single name,” the market participant said.

Deals

Deal sizes were very small last week. Not one deal in a $50 million or more size priced while the previous week, which closed the month of June, saw seven of them hit the market.

Last week’s second deal, also issued by Barclays but this time distributed by Morgan Stanley Wealth Management, was $17.31 million in size. The 15-month 0% Performance Leveraged Upside Securities were linked to the Euro Stoxx 50 index and offered three-times upside leverage up to a 17.4% cap. The downside was fully at risk.

Morgan Stanley’s $14.67 million of 0% enhanced trigger jump securities due Sept. 4, 2018 linked to the S&P 500 index, was the No. 3 deal.

The structure was similar to Bank of America’s market-linked step up notes.

If the final index level was greater than or equal to the downside threshold value, 85% of the initial index level, the payout at maturity would be par plus the greater of the index return and a fixed percentage of 12%.

If the final index level was less than the downside threshold value, investors would be fully exposed to the index’s decline from the initial level.

One difference with Bank of America’s step ups was that the downside threshold was situated below rather than at the initial price. As a result the trigger structure offers not only protection but also some upside when the index finished negative.

© 2015 Prospect News.
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