Structured products agents price $171 million amid sharp market sell-off; autocallables popular

By Emma Trincal

New York, Dec. 12 – It was a slow start for December made worse by one of the worst weekly stock market sell-offs since October.

Agents in the first five trading days of the month priced only $171 million of structured notes in 70 deals, according to preliminary data compiled by Prospect News.

Sizes were subdued with the largest deal pricing below $15 million.

“It’s not unusual between Thanksgiving and Christmas to see a very light volume,” a market participant said.

“These are typically slower times. Most companies start to close their books. There’s very little trading, very little risk-taking during that time and you’ll see nothing until the New Year begins on Jan. 7.”

The same couldn’t be said of the stock market last week, which saw all major indexes falling.

The S&P 500 dropped 4.6% on trade concerns and new fears of a recession arising after a portion of the yield curve inverted. The Dow Jones industrial average lost 4.5%.

Indexes, autocallables

Equity indexes prevailed in this volatile market. Notional issuance of notes linked to indexes was 72.4%, greater than the annual average of 66.5%, especially early in the month, according to the data.

For structures, autocallable contingent coupon notes and leveraged products were on equal footing, each capturing about a third of total sales. However, the amount of leveraged notes with delta one downside was very low – less than 5% – compared to the year-to-date average of 12.5%. For the most part, investors opted for some kind of protection.

“In this highly volatile environment, leveraged notes with buffers are increasingly popular,” an industry source said.

Barriers were also widespread, especially when volatility allows issuers to lower the threshold, improving the optics of the structure, noted the market participant.

Buy low

“I think those autocallables make so much sense when you have a sell-off like last week,” he said.

“If you have a stock down 20% and you add to that another 20% barrier, what are the chances of not getting paid your coupon? How likely are you to lose your principal? There’s always risk, of course. You can’t eliminate it. But buying when stocks are lower is obviously a better strategy than getting in when the market is toppish.”

The share price of Apple Inc. for instance is down 20% since the company released its earnings in October. Facebook, Inc. had dropped nearly 9% in November alone before beginning to recover late last week.

Index autocalls

While encouraged to buy autocallables, investors however continued to bid on those linked to indexes rather than single stocks. To offset the lower volatility, most of those index-linked autocalls were offered as worst-of in continuation with a trend seen throughout the year. About 43% of all autocallables were equity index-based.

Exchange-traded funds made for a little bit more than a third, an unusually high proportion but it was due to the role of the largest deal, which was tied to this asset class.

Finally, the rest were autocallables on single-stocks.

Regardless of the underlying, last week’s pullback was severe enough to attract buyers.

“People like those deals when the market drops because they can get a big coupon. Also, the likelihood of falling beyond the barrier is just not there after a big sell-off,” said the market participant.

November

Last week action was negligible compared to revised figures for the previous week. Courtesy of BofA Merrill Lynch, the final week of November recorded 371 deals for a $1.64 billion total, according to the data.

Yet the seasonal pattern of a year-end slowdown can already be felt. November was the weakest month of the year with $3.25 billion or nearly twice less than the best monthly notional of 2018, which was January’s $6.4 billion.

Best year ever

Still, as previously reported, the data confirmed that 2018 is already the best year on record since 2004, the date at which Prospect News began tracking issuance volume.

The record so far was 2017 with $52 billion for the entire year.

So far this year, notional sales already amounted to $53.14 billion, and that’s only thru Dec. 7.

This figure showed a 9.4% increase from the $48.58 billion priced last year during the same period.

The number of deals through that time has increased by more than 14% to 14,969 from 13,106.

UBS tops

UBS was the top agent last week with $57 million in 35 offerings, a 33.45% share.

A sellsider said this agent, which typically prices more deals than any other firm, has been grabbing market shares for some time.

“UBS is globally established and their wealth management is flourishing,” he said.

“They have a lot of branches. Like BofA who only sells notes to Merrill, they distribute internally within their captive channel. Same process to diversify portfolios. UBS is an agent. They use other credits and they help the banks put together the product. What they do are agency trades.”

Biggest deals

The top deal was sold through UBS last week.

UBS AG, London Branch priced $14.43 million of two-year trigger autocallable contingent yield notes linked to the SPDR S&P 500 ETF Trust.

Each quarter, the notes will pay a contingent coupon of 8.12% based on a coupon barrier of 80%.

After six months, the notes will be automatically called at par if the ETF closes at or above its initial level on any quarterly observation date.

The principal repayment barrier at maturity is 80% of the initial price.

Another two-year deal came second. Brought to market by Canadian Imperial Bank of Commerce the $12.95 million offering consisted of leveraged buffered notes with a cap linked on the S&P 500 index.

The upside leverage factor was 1.5 times, and the cap was 28.875%.

The buffer on the downside had a 15% size with a 1.1765 times gearing.

Citigroup Global Markets Holdings Inc.’s $10.35 million of five-year step-down trigger autocallable notes linked to the S&P 500 index, and the MSCI Emerging Markets index was the third deal.

The notes will be automatically called at par of $10 plus 11.95% per year if each asset closes at or above its initial level on any annual observation date, except the final one when the call threshold will be the 70% downside threshold level.

As a result, without a call, investors will be exposed to the decline of the lesser-performing asset from its initial level.

The top agents after UBS were Morgan Stanley with five deals totaling $26 million and JPMorgan, which sold $22 million in five offerings.

UBS AG, London Branch was the No. 1 issuer with $36 million in 32 deals, or 21% of the total.

BofA Finance LLC was the previous week’s top issuer with $351 million in 11 offerings.

For the year, JPMorgan Chase Financial Co. LLC holds the top ranking among issuers with $7.92 billion in 2,075 deals, or 14.91% of the total volume.

© 2015 Prospect News.
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