Structured products issuance up 93.5% for year; March sets record for deals despite uncertainty

By Emma Trincal

New York, April 22 – Structured products issuance volume in the first week of April hit $547 million in 224 deals, a relatively large notional amount for that early part of the month, according to data compiled by Prospect News.

Last week’s preliminary data showed $227 million in 131 deals. Figures will be revised upward as more deals get filed with the Securities and Exchange Commission.

Stellar March

The first-quarter tally continued to show a strong volume growth from last year. In the first three months of the year, agents priced $21.503 billion in 5,999 deals.

This was twice last year’s first quarter volume of $10.772 billion printed in 3,533 deals.

For the year through the end of last week, sales increased by 93.5% to $22.912 billion from $11.836 billion, the data showed.

Meanwhile the number of offerings rose by nearly two-thirds to 6,521 from 3,959.

March came out with the greatest number of offerings on record for any given month since Prospect News began collecting structured notes data in 2004.

Another interesting point is the consistent strength of this year’s first three months in terms of volume, which contrasts with a stock market that has been moving around in wide swings.

In January, the tally was $7.028 billion, followed by $7.231 billion in February.

March was the top month for the year with $7.244 billion in sales. It was also the second-biggest month since 2004. The top month was February 2008 with $7.40 billion. February 2020 placed third.

Market turbulence

The performance of the S&P 500 index does not show such consistency.

From the beginning of January to its Feb. 19 peak, the index rose but was relatively range bound, up 4.1%. It then dropped 35.4% to a March 23 bottom, setting a record speed for a bear market. The next leg was a strong recovery with the index rising by 31% through the end of last week. At that point, while no longer in bear market territory, the S&P 500 index was still 15% below its February high.

Pricing matters

How to explain the sustained growth in issuance volume remains a difficult question to answer.

“We had and we continue to have a spike in volatility,” a structurer said.

“For most products, it translates into better-looking terms.

It’s especially the case with autocallables, which continue to dominate the market on any given period.

Those products made for more than half of last week’s volume as well as for the year to date.

“You can see significantly improved terms you can price in,” the structurer said.

Fear of missing out

Lately though, as the market rose again, growth notes have made a push.

“Leveraged notes are easier to price with the spike in volatility. They’re a tool to play the recovery, especially with elevated participation rates,” the structurer said.

“You’re a buyer and seller of volatility.

“But if you have a barrier, you are selling out-of-the money puts, you’re generating more put premium, which you can put back into the structure.”

“Autocalls are great but they pay a fixed rate and don’t allow you to participate in the upside.

“We may see a shift into growth as people are trying to catch up with the recovery.

“That’s a trend we’re noticing as investors are cautiously going back.”

BofA Merrill Lynch

Another takeaway from this year’s data is a sense that volatility is dictating the timing on many deals.

For example, the penetration rate of Bank of America’s Merrill Lynch distribution powerhouse is lower this year compared to last year.

It was 13.6% through April 17 compared to 20.5% a year ago.

Merrill Lynch’s sales are up 28% this year, far less than the overall market growth.

Other firms, such as UBS and Morgan Stanley have seen their volume more than double.

Bank of America’s input at the end of the month, a time during which it generally closes the majority of its business according to the so-called “calendar” cycle, has also declined.

In the last week of March, for instance, Bank of America distributed only 28% of the total. But in the past, it was not unusual to see this agent sell two-thirds of the volume for that particular week.

Timing is everything

The structurer offered an explanation.

“Traditionally the bulk of their business comes from the monthly calendar. But we’ve seen fewer calendar deals in this market overall.

“It’s because issuers aren’t able to hold these terms for two-and-a-half or three weeks.

“They’re closing mid-month then there’s a new set for month-end.

“We see that from all issuers.”

A trader agreed.

“Since the shutdowns, we’re seeing weekly or biweekly calendars, not just the monthly calendar,” he said.

“Like everything else, the coronavirus is changing how people do business.”

3x are out

This trader offered an additional explanation.

“They sell a lot of leverage 3x, no downside protection. I don’t know if people are very interested in these types of products in this market.”

He was referring to some of Merrill Lynch’s classic top-selling products known as Accelerated Return Notes.

“These growth notes with no protection are part of widely adopted model portfolios.

“But maybe demand is changing in this volatile environment,” the trader said.

Tech helps

Volume is up this year. But for how long? It will depend on investors’ faith in an economic recovery.

The market direction as always will play a role although it does not explain everything.

The structurer for instance said that his firm has already incurred a decline in volume despite the recent rally.

“A lot of our clients just sit back and wait. I am not sure it’s the case everywhere. I can only speak for us,” he said.

“But last month, the calls did not come back. Money was not available. Volume for us dropped in the past six, seven weeks.”

There has been an exception with certain underlying. But those do not represent much volume, he added.

“We had calls on some single stock autocalls tied to tech names like Netflix, even Apple and Microsoft.

“These stocks are still up. Tech are still down from their highs but up from six months ago,” he said.

It’s not normal

Market participants are cautiously optimistic about the industry outlook for the rest of the year. But they don’t know if growth is sustainable.

“I don’t really understand why anyone would buy equity-linked notes right now with so much volatility,” said a rates structurer.

“The usual pitch is buy structured notes when the market is down. It will protect you.

“This is a valid point in a normal market. But this market is not normal.

“Give me 100% principal-protection with some upside. OK. Then it’s a valid point.

“But in this market, as soon as you’re putting principal-at-risk, you’re not protecting anyone.

“I don’t care if it’s a barrier or a buffer. The volatility in this market is not normal.

“We have no idea how we will go back to normal. And throwing money at it to temporarily fix it is not going to solve anything. We are making it worse.”

Caution among investors

Investors have indeed bid on leveraged notes with barrier or buffers even though income products continue to prevail. Last week, leverage accounted for 20% of total sales versus 67% for autocalls and two-thirds of leveraged notes came with buffers or barriers.

Ideally investors would want to see more principal-protected notes. But those products have become extremely difficult to price, the structurer said.

“Your zero-coupon in a call is expensive especially with rates having been so low,” he said.

“You’re a buyer of calls and the cost of that has increased.

“We’ve seen very little principal-protected this month. The couple we’ve seen had very low caps. It doesn’t price well at all.”

Top deal

Last week’s top deal was Credit Suisse AG, London Branch’s $20.12 million of three-year autocallable contingent yield notes linked to the S&P 500 index.

The notes will pay a contingent quarterly coupon at an annual rate of 9.13% if the index closes at or above its coupon barrier level, 70% of its initial level, on the related quarterly observation date.

The notes will be called at par of $10 plus the coupon if the index closes at or above its initial level on any quarterly observation date after six months.

The repayment barrier at maturity is 70%.

UBS Financial Services Inc. is the agent.

UBS was the top agent last week with $72 million in 50 deals, or 31.8% of the total.

It was followed by Morgan Stanley and JPMorgan.

The top issuer was UBS AG, London Branch which brought to market 49 deals totaling $47 million, a 20.8% share.

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