May opens on robust note with $444 million of structured products brought to market during week

By Emma Trincal

New York, May 9 – Agents priced $444 million in 134 structured products deals, a not-so-bad pace early in the month, sources said.

The previous week’s figures showed $2.35 billion, according to updated data compiled by Prospect News.

There were no oversized deals such as JPMorgan Chase Financial Co. LLC’s $600 million of synthetic convertible notes on Voya Financial, Inc., which priced the previous week.

Volume year to date is up 21% to $21.53 billion from $17.79 billion through May 4, the data showed. The number of offerings climbed to 5,565 from 4,528, a 23% increase from last year. But block trades in excess of $100 to $200 million and even up to $600 million as seen at the end of April are really pushing up volume this year.

Trendless market

The overall U.S. stock market ended flat last week despite very strong first-quarter earnings. Since February the trend has been choppy with big intraday moves.

Volatility has increased on tariffs and geopolitical concerns while the Federal Reserve’s continued tightening stance is perceived as a risk for equity markets. Despite fears of inflation, a strong jobs report on Friday helped the week finish on a rally.

According to a market participant, this market is not bad for the distribution of structured products.

“You always have these panic buyers. When prices go down they want in by fear of missing out. People are still buying the dip,” he said.

“These ups-and-downs give financial advisers an opportunity to pick up the phone every time it goes down. They tell their clients just what’s going on: ‘hey Mr. Client, haven’t you noticed? Each time the market is down three or four days in a row, it comes back up for three or four days. It’s volatile but you get a buying opportunity.”

For now the pitch is working, he said while noting that these strong daily market moves have not advanced the overall market performance. So far this year, the S&P 500 index is down 0.5%.

“It’s very choppy.”

Indexes, leverage

Last week’s top asset class was equity indexes with $326 million, or 73.5%, of the total in 74 deals, according to the data. Single-stocks were noticeably lagging with only $39 million in 35 deals, an 8.7% market share.

Leveraged deals took a strong lead with two-thirds of the volume last week. Most of those products came with some form of downside protection – buffers or barriers – as they accounted for 59% of the sales while unprotected leveraged notes made for only 7.8% of the total, according to the data.

“People are looking at buying opportunities. They want effective ways of getting returns in a choppy market,” the market participant said.

“You get that with leverage, you get that with autocalls. Anything with a buffer or barrier is good even if it limits your upside because people don’t expect a huge run.”

Absolute return

A distributor agreed.

“We’re still seeing a lot of worst-of and income notes,” a distributor said.

“But without a doubt, leveraged notes with some kind of downside protection are very much in demand right now.”

This distributor explained that investors do not mind a cap in exchange for protection. In the same vein, getting downside participation through a dual directional or absolute return note is also a desired trade.

“Between high leverage with no downside protection or less leverage with downside participation and some barrier protection, people don’t hesitate right now,” he said.

“Some dual directional are very interesting. They can come with leverage. We just saw one recently from JPMorgan. It had a 70% barrier, some leverage and no cap. We’re paying attention to those deals,” he said.

He was referring to JPMorgan Chase Financial’s $1.79 million uncapped dual directional contingent buffered return enhanced notes due Oct. 29, 2021 linked to the lesser performing of the S&P 500 index and the Russell 2000 index. The notes offer 1.2 times the gain of the worse performing index.

Last week, six dual directional or “absolute return” deals were brought to market totaling $20.5 million.

Most of the time though investors get their protection through worst-of contingent coupon notes, as they may offer deep barriers, as well as capped leveraged notes.

Lower expectations

“If you think this rally has reached its top but don’t think the market will collapse, these notes are appropriate to have in the portfolio,” he said referring to absolute return structures.

“The market goes sideways up a little bit, you get some decent return. It trades sideways down a little bit you get some return as well.

“Investors are still optimistic but the memories of the last bear market are still there.

“The advisers I talk to are still bullish but cautiously bullish. They sort of expect a correction. They want to play it safe.”

With volatility on the rise, demand for protection but also protection levels are rising.

“People look at 20% barriers and they’re not paying attention. If you show them 30% they are a little bit more interested. At 40% they’re very comfortable,” he said.

Big Scotia

One big deal priced last week: Bank of Nova Scotia’s $76.47 million of two-year and two-month leveraged notes linked to the S&P 500 index. The notes offer at maturity par plus 150% of any index gain, up to a 28.72% cap.

There is a 12.5% geared buffer on the downside with a 1.1429 multiple.

The agent listed on the prospectus is Scotia Capital (USA) Inc.

A market participant suggested that a big U.S. agent was involved in the distribution of the notes.

“As an issuer Scotia has a very robust U.S. operation,” he said.

“For distribution, we know they use [BofA Merrill Lynch] a lot. But they’ve also been using Wells Fargo and Goldman for some time.”

Looking at the filing, a source said “it’s not Merrill and it’s not Goldman. It looks like Wells Fargo,” based on the design of the prospectus.

Noting that the notes were sold at par with no fee, the market participant concluded that clients must have been registered investment advisers for their fee-based accounts.

“Weird. Nobody does anything for free. I suppose they made money on the funding. They could have sold it to a mutual fund. But it’s an odd number. It’s probably multiple sales tickets they aggregated. It could have been an institution but more likely several RIA accounts. It’s a pretty sizable deal.”

Morgan Stanley deals

The next top deal was brought to market by JPMorgan Chase Financial with Morgan Stanley Wealth Management acting as dealer. It is $28.75 million of six-year trigger performance leveraged upside securities linked to the Euro Stoxx 50 index. The upside leverage is 3.4 times the index gain with no cap. The barrier at maturity is 65% of initial price.

Morgan Stanley was also the dealer on the next deal: Barclays Bank plc’s $23.03 million of three-year leveraged notes linked to the MSCI Europe index. This product offers close to full principal-protection. The payout at maturity will be par plus 182% of any index gain. If the index finishes flat or falls, the payout will be par plus the index return, subject to a floor of 90% of par.

The top agent last week was Morgan Stanley with $176 million in 21 deals, or nearly 40% of the total.

The second one was Scotia Capital (USA) Inc. with its one $76 million deal, based on the deals’ filing.

The top issuer was JPMorgan Chase Financial with 20 deals totaling $89 million, or 20% of the market share.

This issuer is also No. 1 for the year with $3.63 billion in 753 offerings, or 16.9% of total issued volume.

“You always have these panic buyers. When prices go down they want in by fear of missing out. People are still buying the dip.” – A market participant

“We’re still seeing a lot of worst-of and income notes. But without a doubt, leveraged notes with some kind of downside protection are very much in demand right now.” – A distributor

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