Structured products volume not robust at $364 million as agents, investors face volatility

By Emma Trincal

New York, Sept. 9 – Agents priced $364 million in 88 structured products deals last week, a relatively weak volume even for the beginning of a month but one that could have been worse given the extreme volatility seen over the past three weeks, including last week, sources said, commenting on data compiled by Prospect News.

Other month starts saw greater activity, such as the beginning of May for instance, with $520 million; March with $440 million or even August with $410 million.

A total of 88 deals were brought to market in the week ended Friday, the largest one by Wells Fargo. Wells Fargo Securities, LLC was the top agent for the week, selling more than a fifth of the total volume in only three offerings.

It was another volatile week with stocks going up and down on a daily basis, sources said.

Since the later part of August, markets worldwide have experienced a pickup in volatility heightened by concerns about the timing of the Federal Reserve’s policy, weaker growth in China coupled with a bear market in the Shanghai stock market as well as plunging oil prices.

The market continued on roller-coaster mode last week.

September began with a strong sell-off on Tuesday, quickly followed by a rebound the next day. The equity markets finished the week in decline after the release of the job market report failed to clarify the timing of a potential rate hike.

Indecision

“It’s the uncertainty in the market that’s holding off investors,” a sellsider said.

“The desks also have to deal with the uncertainty. Volatility makes it more challenging to hold the price. Most of those deals work within a range. If the market all of a sudden starts moving a lot, it’s hard to fix the range for the deals to come.

“Some deals get pulled. Issuers in some case have to refile. It doesn’t happen very often but it’s still a factor.

“When issuers can’t hold the price, generally it reduces the amount of activity.

“I would say that investors’ sentiment though is the main driver behind the slow pace.”

For the year to date, volume is still rising, with sales up 8.20% to $31.43 billion from $29.05 billion as of Sept. 4, according to the data.

Top Wells Fargo deal

Wells Fargo’s top deal was noteworthy for its size but also its structure, sources noted.

On Monday, Wells Fargo & Co. priced $55.5 million of four-year enhanced return securities with 1-to-1 upside and downside exposure and threshold leveraged upside participation linked to the iShares MSCI Emerging Markets exchange-traded fund. The feature, which caught the market’s attention, was the introduction of a leverage condition above a certain price level. Investors would receive par plus 1.5 times the index gain if the final level was above 111.9% of the initial level. Any returns positive or negative below that threshold commended a one-to-one exposure to the fund’s performance.

CMS rate-linked deals

Wells Fargo Securities, LLC also priced the unique rate deal of the week. It was the No. 3 offering in size.

Wells Fargo & Co.’s $19.42 million of 12-year fixed-to-floating-rate notes linked to the 10-year Constant Maturity Swap rate offered a fixed interest rate of 4% for the first three years. After that, the interest rate was 0.92 times the 10-year CMS rate.

“This is a bearish strategy,” said a rate structurer.

“Everybody is anticipating higher interest rates. For investors with a bond portfolio the question is: what are you doing in preparation for this?

“These fixed to floaters let you gain from higher interest rates. After the fixed rate period, you’ll get 92% of the 10-year rate. They give you 4% fixed for the first three years, which is still decent. This is a good instrument to have in a potentially rising interest rates environment.

“I personally don’t think rates will go up that much. The Fed has been doing all kinds of things since 2008. The market doesn’t react to stimulus anymore. Most of the Fed rate hike talk is noise. However this note offers a decent hedge.”

Notes linked to CMS rates or CMS spreads have declined in volume this year to $1.10 billion from $1.31 billion, a 16% drop from last year, according to Prospect News data.

Also, fewer deals have been brought to market – 13 this year versus 22 in 2014.

“We don’t see a lot of this stuff anymore because all those CMS deals require good funding rates. Banks don’t have the need to come out with higher funding rates right now because the issuers, the banks don’t need money. Everyone is flush with cash,” this structurer said.

Leverage

Investors continued to buy leveraged notes, which represented 70% of the total notional. Leveraged notes with full downside exposure were the most popular, accounting for 43% of the total. The rest –30% of the volume – consisted in leveraged products with either barriers or buffers.

The strong bid for unprotected notes while the market is on correction mode was not all that surprising to the sellsider.

“The sell-off has been happening for two weeks only. Most products have been designed and discussed for longer than that. The recent correction hasn’t had too much of an impact on the design of products, which is probably the reason why you see so much leveraged notes with no protection.

“The notes might have priced recently. But people selling the products monthly have been pitching those products in the past few months,” he said.

The top leverage deal and No. 2 for the week was Royal Bank of Canada’s $29.49 million of 15-month PLUS linked to the Euro Stoxx 50 index. “The payout at maturity was par plus 300% of any index gain, subject to an 18% cap and no downside protection. Morgan Stanley Wealth Management distributed the notes.

Downside leverage

A few deals used geared buffers in order to offer downside protection in place of a straight buffer or a barrier.

Goldman Sachs in particular applied the device in seven offerings totaling nearly $40 million.

The notional for structures offering geared buffers – $54.15 million – may not seem like a lot, but it represented more than half of the $98 million volume of leveraged notes that offer some form of partial protection, according to the data.

The largest deal in this category was Morgan Stanley’s $15.05 million of 0% buffered digital notes due Sept. 7, 2017 linked to the MSCI EAFE index. There was a 10% buffer, but investors were to lose 1.1111% for each 1% decline beyond 10%.

The sellsider said that geared buffers are more popular than barriers as they offer a guaranteed protection even if ultimately investors may still lose their entire principal due to the leverage.

From an issuer’s standpoint, they are easier to price than a real buffer, he said.

“It’s the middle-ground,” he said.

“The cheapest protection is the barrier. Then you have the geared buffer. The standard buffer is definitely the most expensive solution.”

JPMorgan was the second agent after Wells Fargo, with 21 deals totaling $66 million, or 18.25% of the total. It was followed by Goldman Sachs and Morgan Stanley.

© 2015 Prospect News.
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