Structured products issuance tops $450 million for week, skewed by another big convertible trade

By Emma Trincal

New York, April 11 – For the third time this year, a behemoth synthetic convertible deal tied to the share price of Voya Financial Inc. helped push up weekly structured products issuance statistics in what would have otherwise been a slow period.

Structured products agents priced $453 million in 112 deals in the week ended Friday. But more than half of that came from BofA Finance LLC’s $250 million of five-year cash-settled equity-linked notes tied to Voya Financial.

Big Voya convertible

Two cash-settled equity-linked notes tied to Voya issued by JPMorgan Chase Financial Co. LLC and Deutsche Bank AG, London Branch hit the market this year – the JPMorgan deal at the end of January for $350 million and Deutsche Bank’s $300 million trade.

Voya Financial is a retirement, investment and insurance company based in New York.

“I would pull that one off to the side,” a market participant said about the hybrid product.

While weekly figures are subject to upward revision, volume without the giant trade was only about $200 million, which is more in line with the beginning of a month.

“I don’t know the rationale behind this deal but it has to be a very targeted portfolio play. It could have been done for a number of reasons. Obviously, it’s a reverse inquiry,” said Matt Rosenberg, sales trader at Halo Investing.

Two TD deals

The next deals based on preliminary data, were in a different league. Toronto-Dominion Bank issued a pair of leveraged notes offerings. The first one was $29.95 million of two-year notes linked to the S&P 500 index.

If the index return is positive, then the payout at maturity will be par plus 1.5 times the index return, subject to a 25.42% cap. There is a 12.5% geared buffer on the downside with a 1.1429 multiple.

Second, Toronto-Dominion Bank priced $20.71 million of two-and-a-half year notes linked to a frequently used basket of international equity indexes. The upside leverage is 2.2 times, the cap, 59.35%. The 20% geared buffer had a 1.25 multiple.

The basket is not a novelty. It 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.

Bad week for stocks

Last week’s equity market was another roller coaster week with the market reacting to a barrage of worrisome news with wide up and down swings on a nearly daily basis. Investors’ fears rose about the U.S. trade actions against China. Volatility traded over 20 whether markets rallied or declined.

After a relief rally on Thursday, the Dow dropped 767 points on Friday due to renewed trade war concerns.

Meanwhile, president Donald Trump’s tweets against Amazon and the Facebook led to a technical stock rally.

Yield is good

None of this should be too much of a concern for investors who buy structured notes, said Rosenberg.

“You could be running for the exit if you’re an equity investor. It doesn’t mean you’re out of structured notes,” he said.

A whipsawing market is a good thing for investors seeking income opportunities. These types of notes are the bulk of Halo’s distribution, he said.

“Volatility is up with the tariffs, the tech issues, Facebook, the FBI versus the president...People who are not picking a direction in the market but see volatility picking up with whatever looming headline is out there, those investors are now getting much better terms,” he said.

“We do a lot of worst-of on the S&P and the Russell. When you can get a 30% barrier and an 8% coupon, there’s a level of comfort with that.

“Alternatively, some people pick single stocks with a lot more risk like Facebook and Tesla. “Ultimately it’s a matter of investors’ risk tolerance.”

Buffers are back

A glance at last week’s structures however revealed a more significant interest for leveraged notes than usual, according to the data.

Leveraged notes accounted for 27% of the total versus 12% for income products. That contrasts with the year-to-date average of 34% for yield-enhancement and 32% for leverage.

It is also a contrast with what usually gets priced earlier in the month: leveraged deals tend to prevail at the end of the calendar month when Bank of America prices its block trades.

Another characteristic seen last week, which is also unusual: nearly all leveraged notes featured some form of downside protection through a barrier or a buffer. The breakdown in leveraged products between no protection on the one hand, and buffers/barriers types on the other, is normally more of a one third to two-third ratio, based on the annual average.

Rosenberg said the market could explain the renewed interest for leverage.

“People are seeking protection because you’re not going to pick the bottom. At the same time, we’re still at lower levels than the January highs. Investors want to get exposure to the market, and if you’re bullish, it’s a good time to get in,” he said.

Rates

The increase in rates on the short end of the curve has also facilitated the pricing of leverage with shorter duration, he added.

“As rates have been moving on the short end, you’re getting better terms. Growth products are more sensitive to interest rates. On a two-year piece of paper, you can now earn more on it. There is more money left to buy the derivatives,” he said.

Pricing is more interest-rate sensitive with growth products, he added.

“Interest rates don’t affect income products as much as they don’t have a fixed duration.”

S&P indicative pricing

Rosenberg said that his multi-issuer platform shows for three-year products on the S&P 500 index indicative pricing of 1.05x leverage with a 15% buffer for uncapped upside. With caps, he sees 1.5x leverage with a 35% cap and a 15% buffer. At 2x leverage, the cap drops to 31% with the same buffer level.

“There is demand for those S&P leveraged notes just like there is demand for income products. People who have bought structured products in the past are putting their money to work taking advantage of the volatility spike and better entry levels,” he said.

Golden structure

A market participant said that leveraged structures have been popular with investors for a very long time for a reason.

“As an adviser you can get upside and downside protection. It seems like the best of both worlds. You can get participation in a broad underlying index,” he said.

“There’s certainly a place for income while we’re still in a low interest rate environment.

“But the more the focus is on a buffered return product, the more the industry will be mainstream.”

Year to date

Market gyrations and their psychological impact on investors’ sentiment may begin to hurt issuance volume and could be a problem if the market remains volatile or declines further, he said.

Issuance is up 13% for the year through April 6 to $15.86 billion from $14.03 billion, according to the data.

It is a big advance but at a much slower pace than earlier on in the year.

On a month-by-month basis, January’s record volume of $6.12 billion had not been seen in a decade and was a direct result of a strong rally. It represented a 39% increase from January of the previous year. In February, sales were still high at $5.52 billion, a 35% increase from the same month a year before.

But March’s total of $3.78 billion shows a 28% drop.

Uncertainty and notional

The greater market, while no longer on correction mode, has yet to rebound on firm ground. On Wednesday’s mid-afternoon session, the S&P 500 index was trading at 2,649, or 7.8% lower than its 2,873 all-time high.

“I think you can make an analogy here between sales volume and the S&P. It reflects people’s emotions with greed reverting to fear,” the market participant said.

“The chances of a trade war with now the possibility of a real war with Syria and the market trading up and down intraday, all those things have an impact on investors’ confidence.

“That’s why I think most advisers should be looking at buffered return notes.”

The top agent last week was Bank of America with $257 million in three deals, or 57% of the total, a skewed figure due to the block trade on Voya.

Next was JPMorgan with $53 million in 10 deals followed by TD with its two offerings.

The top issuer was BofA Finance LLC followed by JPMorgan Chase Financial Co. LLC.

“As rates have been moving on the short end, you’re getting better terms. Growth products are more sensitive to interest rates. On a two-year piece of paper, you can now earn more on it. There is more money left to buy the derivatives.” – Matt Rosenberg, sales trader at Halo Investing

“The chances of a trade war with now the possibility of a real war with Syria and the market trading up and down intraday, all those things have an impact on investors’ confidence. That’s why I think most advisers should be looking at buffered return notes.” – A market participant

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.