Structured products issuance volume strong at $519 million for week amid continued rally

By Emma Trincal

New York, Jan. 24 – Demand for structured notes was robust during the week with agents pricing $519 million in 166 deals, according to data compiled by Prospect News, even as the Martin Luther King Jr. federal holiday left participants with one fewer trading day.

Market participants also had their eyes on a short-lived shutdown of the U.S. federal government and a continued stock market rally.

The results for the week are likely to be revised upward as not all deals are in at press time. The previous week ended Jan. 5 was revised to $776 million.

“We have demand for a lot of different products,” said a sellsider.

“We have demand for conditional and unconditional protection. We’re doing more interest rates products to address the challenge of pricing full principal protection. We’re seeing demand for callable or autocallable products, and that comes in the form of a huge bid on worst-of.”

Worst-of deals getting better

The worst-of bid which prevailed in the equity-linked market last year has shown no sign of abating this year. This sellsider does not anticipate any change if only perhaps even more sales of these products.

“Absolute levels of volatility are so low you can’t structure an attractive product on single assets,” he said.

“At the time, correlation is low, which adds value to the product with either a higher coupon or a stronger barrier or even both sometimes.”

The decrease in correlation can be partly attributed to the current rally.

“When the markets are calm, people tend to focus more on company results, country or region-specific bets and monetary policies. That decorrelates the market.”

While worst-of deals have not always been easy to market, investors by now have gotten familiar and comfortable with the structure, he said.

The exception is for investors who bought worst-of deals prior to the financial crisis. If one of the underlying stocks was a bank stock for instance, the aversion for those products has been long-lasting and may continue to be dissuasive.

“It’s the kind of very bad experience you don’t want to go through again. But in 2008, the entire market crashed,” he said.

“Overall I don’t find it difficult to sell those products to clients.”

Leverage, yield: 50/50

Income-generating structures and leveraged notes were evenly distributed last week.

The need for income remained a top priority for investors, pushing sales of autocallables to 41.5% of the total or $216 million.

“The traditional yield search is still on,” a market participant said.

Two-thirds of those autocallable products went into contingent coupon autocallables. The rest consisted of pure autocall plays in which investors get paid a call premium, not a coupon, when the notes are called and only at that time.

For the sellsider there is a snowball effect behind the growth of autocallables.

“What I see this year is more autocalls because you have rollovers of expiring autocalls all the time,” he said.

“At these levels, all autocalls come back, which creates a tremendous amount of available cash. As people don’t want to stay on the sidelines, they reinvest even though market valuations are not ideal at this stage.”

Focus on hedges

Leveraged products totaled $206 million, or about 40% of the total.

There were fewer leveraged notes with barrier or buffer last week ($88 million) than leveraged structures with full exposure to the downside ($118 million), the data showed.

For the year, however, leverage with partial protection accounts for 16% of the total versus 12% for unprotected notes. However, autocallables dominate with 45% of this year’s volume so far.

“Buffers should be appealing to people even if pricing is not the most attractive right now,” said the market participant.

“Return enhanced notes are not as sexy as the high coupons but if I was an investor or an adviser advising investors I would go for leverage. Hey why don’t we find a way to still get some exposure to the market while taking some chips off the table? It seems like a rational proposition to me.

“These autocalls gave people some steady stream of income above the market and that’s great. It could continue to be like that until the market is repriced.

“In 2008 the entire market corrected. But those individual notes tied to high volatile assets didn’t do too well. There is no such thing as a free lunch. There is a reason why those notes pay high coupons.”

Goldman’s top two

Goldman Sachs’ finance subsidiary issued the top two deals last week. Both were leveraged products with full downside exposure.

GS Finance Corp. priced $51.58 million of 18-month leveraged notes tied to the Euro Stoxx 50 index.

If the index return is positive, the payout at maturity will be par plus 246% of the index return.

In addition, it priced $38.07 million of 18-month leveraged notes linked to an unequally weighted basket of the stocks of the 71 companies included in the Technology Select Sector index.

The payout at maturity will be par plus 1.5 times any basket gain, subject to a 21.22% cap. The initial weight of each basket stock is equal to its weight in the index as of Dec. 31 and may not change in accordance with the index reweighting if any.

Rates

Finally, good news for interest rates structurers and investors: the next two on the list showed a pair of $25 million offerings linked to rates.

Citigroup Global Markets Holdings Inc. priced $25 million of 13-month digital securities linked to the 10-year Constant Maturity Swap rate. If the final rate is greater than or equal to the initial rate, the payout at maturity will be par plus 14%; otherwise, investors will share fully in the losses.

Barclays Bank plc priced $25 million of five-year fixed-to-floating rate notes linked to the 10-year U.S. Dollar ICE swap rate.

Interest will be fixed at 3.25% for the first two years. After that, the rate will be equal to the 10-year ICE swap rate. Interest will be payable quarterly.

The payout at maturity will be par.

The top agent was UBS with $115 million in 92 deals, or 22.1% of the market. It was followed by JPMorgan and Goldman Sachs.

GS Finance Corp. and JPMorgan were the top issuers with $93 million each. GS Finance brought to market seven deals, JPMorgan, 20 deals.

“We’re doing more interest rates products to address the challenge of pricing full principal protection. We’re seeing demand for callable or autocallable products, and that comes in the form of a huge bid on worst-of.” – A sellsider

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