Structured products volume nears $1 billion as month, Q3 end; two $50 million trades eyed

By Emma Trincal

New York, Oct. 3 – Agents priced $964 million of structured products in 308 deals in the week ended Friday, marking the close of both the month and the quarter, according to preliminary data compiled by Prospect News.

The S&P 500 index ended flat for the week amid European concerns over Italian debt and continued uneasiness around trade. The news of the Securities and Exchange Commission bringing criminal charges against Tesla chief executive Elon Musk was a market-moving event. On the other hand, the Federal Reserve hiking rates for the third time this year had less of an impact although it continued to push the U.S. dollar higher.

BofA Merrill Lynch priced its monthly calendar last week with $334 million in only 20 deals, or 35% of the total issuance volume.

It was followed by UBS pricing 122 offerings totaling $232 million, a 24% market share.

“It’s unusual to see UBS so high in the ranking for the end of the month,” a source noted.

Given BofA Merrill Lynch’s impact, products reflected this agent’s style. Leverage, accounting for nearly a quarter of the total volume, dominated. The prevalent asset class was equity indexes, as they accounted for 69% of the total.

However, single-stocks and baskets of stocks combined were not negligible, making for more than 20% of the total.

Year to date

Volume for the year is up 9.9% to $42.92 billion from $39.06 billion during the same time last year through Sept. 28.

Stocks have done very well over the third quarter: the S&P 500 gained 7.75% over the period. This encouraged structured notes buyers to take on some risk but also to look for more protection as evidenced by the increased demand for leveraged notes with barriers and buffers. Those made for 26% of volume last week versus 16% for leverage with no downside protection, according to the data.

“Volume is up this year mainly because of the frothy markets,” said Matt Rosenberg, sales trader at Halo Investing.

“We've seen such a bull run – investors are seeking protection.”

Confidence, risk premium

With the market up and volatility low, investors have gained confidence, but desks have to remain inventive to put together attractive terms, the structurer said.

“Volatility is surprisingly low, so terms are not the most exciting. But maybe investors have more realistic expectations,” he said.

“Some on the other hand are more adventurous and are taking more risk. When people are optimistic about the market they tend to do that. Anytime you take more risk, you get more premium and banks are able to offer compelling structures in those conditions.

Another factor that has helped volume this year was the rise in interest rates.

“Higher rates help. It doesn’t help with all structures but it helps. So perhaps it has counteracted some of the negative pricing effects that come with the low volatility.”

Month

Data was not final yet so it was unclear at press time whether September outpaced volume compared to August and to a year ago. Preliminary data showed a slight decline in both instances.

Issuance volume figures are subject to change as the data get updated and are likely to be revised upward.

“As far as a slowdown in September, I find this stat surprising and think will make up for itself in October,” Rosenberg said.

“It seems to me that September was a better month. In August everybody’s gone on vacation and I mean everyone, including bank desks, not just advisers.”

BofA’s convertible

The two top deals, both priced at $50 million, were tied to one asset class, namely popular tech stocks.

One was BofA Finance LLC’s $50 million of five-year 0% equity-linked notes tied to Alphabet Inc. with an initial conversion premium of 29.85%.

The payout at maturity will be the greater of par and par times the final stock price divided by the threshold price, 129.85% of the initial price.

BofA Merrill Lynch is the underwriter.

“This is a traditional convertible deal. I don’t think it’s a retail deal. It looks like an institutional deal for sure,” a structurer said.

He explained why.

“It’s very rare in the retail space to see any kind of principal-protected note tied to a stock. Retail clients when they buy stock deals will buy reverse convertibles, autocallables, Phoenix, worst-of, anything that can give them a higher coupon. This one is a zero coupon.

“Also the tax treatment here is not retail-friendly. You are subject to income tax even though you’re not receiving any income. Institutions, like pensions, do not care about that.”

Tech still hot

The second one was another $50 million trade, this time issued by Wells Fargo & Co.

The structure offers a contingent coupon worst-of tied to three technology stocks – Amazon.com, Inc., Apple Inc. and Microsoft Corp. – with a call feature. The contingent coupon is 20.7% based on a 70% coupon barrier and paid quarterly. After six months the notes are callable on a quarterly basis at the discretion of the issuer. The repayment barrier at maturity is also 70%.

Wells Fargo Securities LLC is the agent, according to the prospectus.

This issuer has been raising large-size deals before under the BofA Merrill Lynch distribution network. The industry source said Wells Fargo was capable of distributing this kind of trade on its own.

“I don’t think it was Merrill if they weren’t listed in the docs.”

“Similar to Merrill, Wells Fargo has a huge captive advisor-base in Wells Fargo advisers – so it’s not so surprising. Maybe it’s a sign of a better adoption of structured notes within their network. They’ve also brought in Raul Perez for third-party distribution this summer, so that could help boost issuance.”

CIBC’s Euro Stoxx

Canadian Imperial Bank of Commerce’s $30.65 million of 14-month Accelerated Return Notes linked to the Euro Stoxx 50 index came next as the No. 3 deal of the week.

The payout at maturity will be par of $10 plus triple any index gain, up to a maximum return of 24.2%.

Investors will be exposed to any index decline.

BofA Merrill Lynch is the underwriter.

The top agent after BofA Merrill Lynch and UBS last week was Morgan Stanley with $79 million in 26 deals, or 8.2% of the total.

HSBC USA Inc., which brought to market 21 deals totaling $152 million, was the No. 1 issuer.

For the year, JPMorgan Chase Financial Co. LLC is the top issuer with 1,630 deals totaling $6.44 billion, or 15% of the year-to-date volume.

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