Structured products issuance for week slow at $190 million aside from $300 million hybrid deal

By Emma Trincal

New York, March 14 – It was a big week. It was a small week.

Agents priced $490 million of structured notes in 136 deals as of Friday, an unusually high notional sales amount for the first week of the month, according to preliminary data compiled by Prospect News.

But the data was skewed by an oversized $300 million synthetic convertible offering brought to market by Deutsche Bank. Without taking into account the hybrid, unconventional offering issuance volume amounted to less than $200 million.

Data is subject to upward revisions, however. Not all deals are filed with the Securities and Exchange Commission by press time.

Taxes

“The beginning of a month is always slow except when you have a big market move like the sell-off in the beginning of February,” said Jason Barsema, co-founder and president of Halo Investing.

“The calendar offerings don’t close until the end of the month. People don’t pay attention to their books.”

Another reason not to pay attention to investing was tax season, he noted.

“Advisers are focused on their clients’ taxes and not so much on their portfolios,” he said.

“Clients have a lot of 1099s to collect. Accountants have tons of questions for the advisers. Most of them are overwhelmed so their thinking is: I’m not making new investments at this time unless Mr. or Mrs. Market forces me to make a decision...That’s how most advisors handle this tax nightmare.”

Roller coaster

One new characteristic of the market since the February sell-off has been not just the ups and downs of stock prices but what structurers call the volatility of volatility.

As the Dow Jones industrial average can swing several hundred points down and rebound by the same magnitude intraday, issuers have been hesitant to provide higher coupons on their products.

“I don’t think issuers are willing to pay up that much as you would expect with the pickup in volatility,” a structurer said.

“Unless we get a sustained increase in volatility they’re not going to increase the coupons.

“As volatility jumps up, investors say: great, time to short volatility. But issuers are not willing to pay up.

“I’m not saying this is a factor that slows down the business. It’s just that you would expect much better terms that aren’t there.”

Market up 3.5%

Equity markets whipsawed last week but finished on a strong bullish note with the S&P 500 index up 3.5% for the week after a positive jobs report indicating strong job growth with contained inflation, something investors were pleased to see.

“The market was good last week. February was a very strong month for us so far. You have to take a breather and see how the chips fall,” said Barsema.

“People are waiting to see what the Fed does. Fears of trade wars also hit the market.”

An additional factor of uncertainly last week was the fear of global protectionism. On Wednesday the news of the resignation of White House economic adviser Gary Cohn precipitated a sell-off. But the roller coaster market rebounded the very next day on the announcement of a milder version of the trade tariffs exempting Mexico and Canada.

Fear gauge

Barsema said that slower buying decisions to buy structured notes, at least in the advisory space, may have to do with advisors trying to time volatility at a time when volatility itself is unpredictable after years of being muted.

“A lot of people are waiting for volatility to pick up. Volatility is a big driver at least for advisers,” he said.

“Advisers tend to wait for volatility to pick up. They care more about the terms than the strikes.

“What they don’t see is that the market could go up as volatility goes up because people get nervous. If that’s the case they’re buying at a higher price.

“Also you could see a short-term correction followed by a quick rebound. The market can be higher than it was four weeks ago. A 25% protection four weeks ago is not the same a 25% when the market is higher.”

Range bound

Naturally investors’ market outlook will always be one of the main drivers behind not just decisions to deploy cash into structured products but behind the choice of the product type.

“People who buy notes always ask themselves: what is my view on the market? Is it going to go back up, trade sideways or decline?

“I would say the sideways market is the prime opportunity. It’s the Goldilocks for the structured notes market.”

Most income products, especially autocallable contingent coupon deals, fit into that market view, he noted.

Those accounted for 38% of last week’s volume, excluding the $300 million synthetic convertible product.

Leverage made for only 21.5%.

Yearly volume

Issuance volume has been consistently rising this year. Agents have priced $12 billion in 2,993 deals through March 9, a 29% increase from the same period last year.

On a trailing 12-month period from March 10, 2017 to March 9, volume has gained more than 30% to $52.90 billion from $40.62 billion.

A big convertible

Deutsche Bank AG, London Branch priced $300 million of five-year cash-settled equity-linked notes tied to Voya Financial, Inc. stock with a 1% coupon and an initial conversion premium of 30%.

This deal is the second largest of the year following a very similar one from JPMorgan Chase Financial Co., which priced $350 million at the end of January that was also a five-year cash-settled convertible linked to Voya Financial.

Deutsche Bank Securities Inc. is the bookrunner for last week’s offering.

J.P. Morgan Securities LLC was the agent for the January deal.

“It’s a synthetic convertible, a very niche market. It’s a structured note since it’s linked to a stock. It’s also a convertible that offers an arbitrage opportunity,” said Barsema.

“I would suspect it’s an institutional investor. From my experience the only people I see doing it are 40Act, mutual funds or large institutional investors like pensions who have an allocation to convertibles.”

Rate deal

The second deal fell to a much more modest size. It was Barclays Bank plc’s $20.2 million of 10-year fixed-to-floating rate notes linked to the 10-year U.S. dollar ICE swap rate.

The initial fixed rate is 5.25% for the first two years followed by a floating rate equal to the 10-year ICE swap rate.

The payout at maturity is par.

Deutsche Bank and Deutsche Bank AG, London Branch were the top agent and top issuer, respectively, last week with $303 million in two deals, including the top one.

Following Deutsche Bank, UBS and Barclays were the No. 2 and No. 3 agents, respectively.

“People who buy notes always ask themselves: what is my view on the market? Is it going to go back up, trade sideways or decline? I would say the sideways market is the prime opportunity. It’s the Goldilocks for the structured notes market.” – Jason Barsema, co-founder and president of Halo Investing

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