Structured products issuance sees record slow week at $134 million; calendar, holidays eyed

By Emma Trincal

New York, Sept. 14 – Apparently agents last week shied away from pricing structured products deals as the month kicked off with a holiday-shortened week and volume always slows when a new month begins, sources said.

Agents sold only $134 million in 75 deals, a record low weekly volume since the first week of July 2012, which showed $120 million in volume, according to data compiled by Prospect News.

One only has to go back to 2008 and 2007 to see lower notional sales amounts with $110 million in the final days of 2007 and $70 million at the end of 2008.

Sell-off

Last week, the U.S. equity market continued to trade range bound for the first three days before selling off on Friday due to heightened fears of a Federal Reserve rate hike this month. The S&P 500 index was down 2.5% for the week.

“I don’t think the slow volume last week had anything to do with the market,” a structurer said.

“Structured products buyers tend to not be very responsive to the market,” he added.

“The real issue is that the market is not directional, at least not up until Friday.

“People are not really chasing performance in any kind of asset class as the U.S. market is close to its highs.”

Vol. resurfacing

Since Friday, volatility, which was at multiyear lows in the summer, has jumped up. But the spike was not likely to have impacted last week’s action as it took place at the end of the week, he said.

“I think the shorter week was the primary reason even though there’s a bit of nervousness in the market,” he said.

With a market driven mostly by offers than bids, agents may have simply decided not to price much last week, suggested a market participant.

“A lot of the calendar priced in the last week of August. Issuers in the wake of Labor Day probably decided that it was not worth launching any new product since everyone, including marketers, is out of town,” he said.

As volatility has begun to rise this week and since last Friday, some believe that structured note investors may begin to pay closer attention to market price moves.

“We’re expecting much more volatility looking forward, and it’s definitely going to have an impact on pricing, which could be good, or volume depending on market sentiment,” a source said.

Year to date

Volume so far this year through Sept. 9 amounted to $24.69 billion, a 22% decline from last year’s $31.69 billion during the same period, according to the data.

“If sales are down, it either means that people are not investing at all in any market or that they look for alternatives,” the market participant said.

“Perhaps they prefer ETFs with a simple one-to-one exposure. ETFs offer no optionality, but if people are confident in the market, they may think they don’t need the leverage on the upside or the buffer.

“Perhaps they really need much higher yields, and while they can find it with structured notes, they may be more comfortable with dividend stocks.”

Small tops

The size of last week’s top deals clearly showed how thin volume was. The No. 1 deal priced for less than $10 million, an exceptionally low size in most past weeks, according to the data.

This first deal was Wells Fargo & Co.’s $9.85 million of 18-month leveraged buffered notes linked to the iShares MSCI EAFE exchange-traded fund. The leverage multiple on the upside was 1.5 with a 14.4% cap. There was a 20% geared buffer on the downside.

One ICE

The second one was a rate deal. Rate-linked products have not been seen much in the past few months. This deal alone was the only rate deal to price last week, but its roughly $10 million size was relatively decent compared to deals priced earlier this month and in August with sizes of less than $4 million.

Only 18 rate deals have priced since July for a total of only $72 million, the data showed. Since last month, only JPMorgan and Deutsche Bank have issued such deals. Deutsche Bank AG, London Branch priced the largest one in August with a $15.9 million deal linked to the 10-year U.S. dollar ICE swap rate.

Last week’s No. 2 offering also came from Deutsche Bank with $9.72 million of one-year digital return notes. It also was linked to the 10-year U.S. dollar ICE swap.

The initial reference rate was 1.512%. If the final reference rate was greater than or equal to the buffer level, 60% of the initial reference rate, the payout at maturity would be par plus 8%. Otherwise, investors would lose 1.6667% for every 1% that the reference rate’s decline exceeded 40%.

“We haven’t had many rate deals because spreads have been tightening. The 10 year minus two is tight, which doesn’t give a lot of structuring capability,” the market participant said.

“Terms have to make sense to appeal to investors, and right now low rates are not helping.

“Things may change soon in rates if the Fed start to hike.”

Netflix

Finally, JPMorgan Chase Financial Co. LLC issued the third offering with $8.48 million six-month contingent income autocallable securities linked to Netflix Inc. The notes were guaranteed by JPMorgan Chase & Co.

The coupon barrier was 75% observed on a monthly basis with a contingent coupon of 12.7% per year.

The notes were called automatically if Netflix shares closed at or above their initial price on any monthly observation date. The final barrier at maturity was 70%. Morgan Stanley Smith Barney LLC distributed the notes.

The top agent last week was JPMorgan, which priced 10 deals totaling $38 million, or 28.25% of the total. It was followed by Goldman Sachs and Barclays.

“I don’t think the slow volume last week had anything to do with the market. Structured products buyers tend to not be very responsive to the market.” – A structurer

“We’re expecting much more volatility looking forward, and it’s definitely going to have an impact on pricing, which could be good, or volume depending on market sentiment.” – A market source

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