Agents price $338 million of structured products during week; investors bullish again amid rally

By Emma Trincal

New York, June 13 – Structured products issuance volume was healthy last week as U.S. markets continued to rise for the third week in a row despite geopolitical tensions ahead of the G7 summit.

Agents priced $338 million in 97 deals for the unofficial start of the summer. Volume for the previous week, which closed the month of May, was revised to $1.04 billion, according to preliminary data compiled by Prospect News.

Despite tariffs disputes around the G-7 meeting during the weekend as well as uncertainty in anticipation of this week’s summit between president Donald Trump and North Korean leader Kim Jong Un, the Nasdaq-100 index and the Russell 2000 hit new highs last week while the S&P 500 index posted a 1.6% weekly gain.

Last week’s top asset class reflects this bullish momentum: 94% of the volume consisted of equity underliers versus 88% for the yearly average, the data showed.

Three biggies

Three deals over $44 million were priced. They contributed to skew the data pertaining to the types of asset classes and structure types most favored last week. Yet the same trend observed in the previous weeks continued to play out. Leverage is back in volume even though the number of deals remains in majority income-oriented products.

Volume for autocallable contingent coupon notes last week was only 13% of the total.

Leverage tidal wave

In all, 71% of total volume consisted of leveraged notes, a figure very much above the one-third figure for the year-to-date average. Leveraged notes with full downside risk exposure made half of total volume, another trend seen over the past few weeks, which some view as a possible shift in sentiment, as investors are turning more bullish again in the face of stock prices pushing higher week after week.

A distributor of structured products who caters to registered investment advisers said he was surprised to see so much risk-taking.

“We’re seeing more bullish sentiment than a couple of months ago,” he said.

“That said, our investors are still cautious.

“The correction of a decade ago is still prevailing in their minds and how they go forward.”

Cautiously optimistic

Clients of his firm favor protection over returns, he said.

“I’m starting to see more conversations about twin-win where you can participate in the upside but also in the downside.

“That’s where our advisers have been thinking more about and doing trades...”

While the S&P 500 index is up not even 2% this year – returns having been crushed by the February sell-off and market choppiness – sales of structured notes is climbing fast.

Volume is up 16.6% to $26.57 billion this year through June 8 from $22.78 billion in the same period last year, according to the data.

The market may be nearly flat for the year. But wild swings are common within a week or even intraday, he said.

“We just had a rally for a few weeks. People get excited. I think volume is up for the same reason the markets are up: no one wants to miss out on the upside.

“They’re chasing the returns. Market is up, they go in. Market is down, they go out.

“I think it hurts more when you do that strategy.”

Tackling risk

Tim Bonacci, president of Navian Capital, a distributor of structured products, believes that investors have not dropped their guard despite the good mood that reigns in the market.

“It’s a mixed bag. While bullishness is back, there’s still a lingering sense of uncertainty.

“There’s still plenty of uncertainty on the geopolitical front.

“There’s still more uncertainty than a year ago,” he said.

The fact that issuance volume growth is robust this year has perhaps something to do with the flexibility of structured products, which investors use in their asset allocation models, he added.

“It used to be that the U.S. indices are up and everybody is buying S&P products.

“Now people are managing risk by diversifying by sectors, by countries.

“You’re seeing strategic investments to these structured products rather than one allocation to the broad markets.”

This type of tactical allocation is in itself a form of risk mitigation. It helps explain why certain cautious investors may still feel comfortable investing with leverage and no downside protection.

“When you think risk mitigation you shouldn’t just think downside protection. Risk mitigation is the moving part of the allocation into a sector, or geography or asset class where you believe it makes sense to get exposure to,” he said.

“The shift from a regular equity position into a diversified asset allocation for your portfolio will go a long way to reduce your risk.”

Playing defense

Leverage itself could be seen as a form of risk mitigation given the fact that it is asymetrical, Bonacci noted.

“Structured notes sales have gone up a lot in the past couple of years in part because people are getting more familiar with these products.

“There are different ways to protect your portfolio. Leverage is certainly one of them because you can increase your notional with a lower amount of capital.

“People are starting to understand that the benefits of risk mitigation are not just found with the downside protection. Selective allocation, asymmetrical leverage, those things also play an important part.”

Top deals

Canadian Imperial Bank of Commerce’s $89.45 million of two-year capped leveraged notes linked to the Euro Stoxx 50 index was the No. 1 offering last week. The notes offer 4 times the index gain, subject to a 64% cap. There is full exposure to losses.

JPMorgan Chase Financial Co. LLC priced the second deal in $46.11 million of 18-month leveraged noted linked to a basket of indexes. The basket consists of the Euro Stoxx 50 index with a 37% weight, the FTSE 100 index with a 23% weight, the Topix index with a 23% weight, the Swiss Market index with a 9% weight and the S&P/ASX 200 index with an 8% weight.

The uncapped leveraged upside gives par plus 2.23 times the basket return. Investors will be fully exposed to any basket decline.

BofA Merrill Lynch on the behalf of Barclays Bank plc priced a very similar note for $44.06 million, adding a small buffer of 7% to the structure. The term was six months longer and the leverage multiple slightly lower at 1.79.

The basket was different in minor ways: the Euro Stoxx 50 weighting was at 40%, the FTSE 100 at 20%. The Nikkei 225 index replaced the Topix for the Japanese bucket with a 20% weighting. The Swiss Market index and the S&P/ASX 200 index had a slightly lower weighting. Finally, the Australian benchmark was replaced with the Hang Seng index, taking on 5% of the portfolio.

“These are great deals but more bullish than what we see on our end,” the distributor said.

“The no-cap, no buffer, except for the Merrill Lynch one, is not our bread and butter. It’s a bit of a surprise to see how popular they are. I would imagine that it’s because these are brokers’ deals, which we don’t see on our platform. We deal with RIAs, not retail. We tend to think of risk first.”

In the past week, this distributor said he saw “very nice deals,” including twin-win with buffers and CMS steepeners. A deal on the Korea Composite Stock Price index is even “talked about,” he said.

But so far investors are cautious about their international exposure.

“There’s a lot of uncertainty on the table and that brings pricing opportunities. But so far the customer base is more on a wait-and-see mode,” he said.

Another type of structure, long abandoned due to low interest rates – principal-protected notes – is resurfacing, he noted.

“We’re starting to hear more of those partially principal-protected notes. These are the kinds of things advisers are looking for,” he said.

The top agent last week was CIBC World Markets Corp. with $92 million, including the top deal plus another small one.

JPMorgan was next with $62 million in nine deals followed by Bank of America, which priced three offerings totaling $51 million.

Last week’s top issuer was Canadian Imperial Bank of Commerce.

The No. 1 issuer for the year is JPMorgan Chase Financial Co., LLC with $4.36 billion in 985 deals.

“We’re seeing more bullish sentiment than a couple of months ago. That said, our investors are still cautious.” – A distributor

“People are starting to understand that the benefits of risk mitigation are not just found with the downside protection. Selective allocation, asymmetrical leverage, those things also play an important part.” – Tim Bonacci, president of Navian Capital, a distributor of structured products

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