Natixis to build up U.S. franchise via equity derivatives, hybrids push

By Emma Trincal

New York, March 26 – In an effort to build up its U.S. structured products franchise, Natixis is developing its cross-asset platform with an emphasis on equity derivatives and hybrid products, Samuel Rosenberg, head of equity derivatives sales in the Americas, told Prospect News.

Rosenberg, who is based in New York, joined Natixis’ Americas platform in October from Societe Generale with the mission to develop the cross-asset investment and financial engineering businesses of the bank.

Prior to his move, he was global head of financing engineering at Newedge, a subsidiary of Societe Generale.

Cross asset

“We’re making a very strong push in structured products. We’re evolving from our traditional fixed-income role into a much broader, cross-asset-class model,” Rosenberg told Prospect News in an interview.

“My role is to expand our equity derivatives platform, which is one of the reasons why I joined the bank six months ago. While we’re making strong progress in equity derivatives, in all fairness, our expertise is broader. We also do a lot in FX and commodities. Overall, our ambition is to grow our capabilities in terms of clients’ reach.

“We’re having a lot of conversations with our clients and distributors about a number of new structures, investment themes and innovative payouts. We’re offering investors a way to diversify their credit exposure with a solid name that has a strong rating.”

In the United States the structured products team consists of sales professionals, financial engineers, marketers who promote trade ideas as well as strategists who come up with their own trade ideas, he explained.

Natixis recently created a sales joint venture between the equity derivative and fixed-income departments to cater to private banks, registered investment advisers, wealth managers and broker-dealers.

Each sale within the joint venture “is now cross asset and can offer every asset class to the targeted clients,” he said. Rosenberg’s role is to cater to his distribution networks in equities, forex, commodities and fixed income.

“Investors have been largely interested in equities because of the potential returns. But things are changing rapidly. People are looking into energy or FX trades. They’re going beyond the traditional fixed-income typical structured note. At the same time, demand for hybrid products is growing,” he said.

Pairing components

Falling oil prices have made commodities-based structuring a “hot topic,” he noted.

“The strong depreciation of the euro has also generated a lot of interest for euro bearish bets. This trend reinforces demand for hybrid structures that mix equity and fixed-income components.”

The typical example is the range accrual note with a fixed rate during the first one or two years. After that, the coupon turns into a floater whose level depends on how often the underlying stays within a certain range. The hybrid aspect comes into play when the structure adds similar conditions with equity indexes and/or FX components.

“We found that investors are attracted by hybrid components, especially if they can capture higher yield,” he said.

“This trend has become so significant for us that we have established a hybrid desk that handles all cross-asset-classes products, including those which combine equities and fixed-income components.

“Our fixed-income group of course remains fairly predominant. But the equity derivatives department is growing as a result of our clients’ quest for returns and the need for a bank to diversify its source and length of funding.”

Diversification

For a bank, having the ability to diversify sources of funding with structured products and to raise the durations of the funding base “gives treasury more control,” he said.

“You can issue deposits or money market funds for retail investors or benchmark bonds for institutional buyers. You can also issue structured notes. The important thing for a bank is not to rely on one source of buyers for its funding.”

For investors, Natixis has the advantage of being a lesser-known name with an A rating, which allows for credit diversification.

“While we have a very strong credit rating, we also have a funding that’s competitive compared to some of our peers,” he said.

“For a lot of structures, what matters most is the aggressiveness of the traders who hedge the positions. The funding component embedded in pricing, while important, is not the most important factor.”

Yield hunting

Natixis’ push into equities was also a response to new factors.

“Marketwise, we continue to be in a very low interest rate environment. At the same time, baby boomers are entering or are in retirement. As a result, affluent people are looking for yield. Satisfying that type of demand is a very difficult proposition,” he said.

“In terms of products, we use yield-enhanced notes as a way to attain a targeted yield. The focus is on equity products, which try to monetize volatility by selling it.”

Reverse convertibles, especially the phoenix type, represent a strong trend, he noted.

With those products, investors get a coupon when the price is at or above a certain barrier level on the observation date. An autocall feature usually kicks in at the initial strike price.

“Because those structures are short volatility, they don’t work as well in a low-volatility environment. And that’s one of the problems,” he said.

“One way to solve that is to boost the volatility of the underlier.”

This would include the use of more volatile stocks in a basket or the choice of stocks picked in more volatile sectors, such as energy or biotech.

“It works well from a coupon perspective, but since those notes involve more risk, conservative investors tend to shy away from it,” he said.

Alternatively, structurers can try to give up a little bit of the yield and modify the product into a more growth-oriented structure.

“That’s the concept behind our ‘Phoenix Plus.’ Those products offer a coupon, but if the stock is up, you get some of the performance of that stock,” he said.

Commodities, FX

Another trend is oil-related issuance.

“We’ve seen a robust demand since the beginning of the year because of crude oil diving below $50 a barrel, which is less than half the level seen last summer,” he said.

“As some investors expect further but limited downside to the price of oil, Natixis is offering structures that sell oil with a strike at $30 a barrel to match these expectations. Meanwhile, selling volatility in oil remains a way to enhance yield or returns.”

Currency-linked notes, the less-commonly used asset class in the U.S. structured products market, should be considered in a year marked by major actions on the part of central banks worldwide and increased forex volatility.

Rosenberg pointed to the opportunities offered by this asset class.

“In FX, structures can be very creative with fixed-income components, making for interesting hybrids,” he said.

He offered the example of a 15-year callable note with a non-call provision for one year carrying an accrual contingency across three different asset classes: above 70% of the S&P 500’s initial level, the euro/dollar exchange rate below 1.5 and Libor at or above 6%.

“Not surprisingly, we’re seeing more interest in these FX bets due to the sharp decline of the euro. It has become a macro trade as the quantitative easing push in Europe solidifies the bearish view on the euro and the bullish view on the Euro Stoxx 50,” he said.

Natixis doesn’t have its own retail distribution in the United States. Therefore it acts as issuer or works with third-party issuers who distribute to their own networks of private banks, RIAs, broker-dealers and private wealth managers.

“We sign a distribution agreement. They purchase the notes for us and offer them to their clients,” he said.

Natixis issues notes through Rule 3(a)(2). The rule refers to section 3(a)(2) of the Securities Act of 1933, which gives non-U.S. banks among others the possibility of issuing securities exempt from registration.

Natixis is the corporate, investment and financial services arm of Groupe BPCE, the second largest banking group in France with 36 million clients spread over two retail banking networks, Banque Populaire and Caisse d’Epargne.

© 2015 Prospect News.
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