Structured products tally $1.57 billion for week; BofA leads with $865 million share

By Emma Trincal

New York, Feb. 2 – The first month of the year ended with BofA closing its monthly calendar with 37 offerings for the week totaling $865 million, more than half of the week’s total issuance volume of $1.57 billion sold in 212 deals, according to data compiled by Prospect News.

It was a very volatile week for equities, marked by vertiginous price swings. The week began with a 1,000-point drop in the Dow Jones industrial average and a 5% decline in the Nasdaq Composite as investors were anxiously waiting for the Federal Reserve’s FOMC meeting.

The more hawkish tone of the Fed chair on Wednesday moved the VIX index to a 52-week high at 38.94. But the week ended with a rally on Friday due to a nearly 7% increase in Q4 GDP and upbeat earnings from Apple.

Maturing industry

Updated data for last year’s structured notes issuance showed the pricing of $94.38 billion in 25,223 deals, a nearly 30% jump from 2020. The year 2021 was the best on record.

For the trailing 12 months, issuance volume rose 22% to $91.84 billion through Jan. 28 from $75.27 billion during the previous 12 months.

“We had a phenomenal year in 2021,” a market participant said.

“The pandemic has helped. I’m sure the platforms have helped too. You have Simon, Halo and Luma. They all make distribution much more efficient.

“Ultimately, structured products have a place in the world. Derivatives have a role to play whether it’s in the form of buffered ETFs or structured notes.”

One aspect of growth is the maturation of the market characterized by a change in investors’ attitudes toward structured products, he added.

“The industry has progressively overcome the stigma and stereotypes against structured notes.

“A lot of it came from Lehman. Lehman Brothers’ bankruptcy hurt bondholders, but derivatives were not to blame. The problem with Lehman had nothing to do with structured notes.

“Over the years common sense finally prevailed,” he said.

Equity-linked notes represented 91% of total sales last week. The category encompasses single stocks, baskets of stocks and equity indexes. ETFs made the difference.

Rates and commodities were not part of the action. One exception: Royal Bank of Canada priced a small leveraged deal on two commodities ETFs for $1.93 million. The underlying was a basket of the SPDR Gold Shares with a 75% weight and the iShares Silver Trust with a weight of 25%. BofA Securities, Inc. is the agent.

Leverage tops

Leveraged or “growth” notes slightly surpassed autocallable income products in volume last week with market shares of 41% and 38%, respectively.

“It’s the BofA effect. They do much more leveraged notes than tactical income notes,” the market participant said.

On average, autocallable issuance is three-fold the size of the tally for leveraged notes, according to Prospect News data for the past 12 months.

“It’s also the time of the year where people put in their asset allocation.”

Pricing conditions also improved recently.

“As rates move away from zero, we now have better opportunities for leverage,” said a sellsider.

“You’re stripping those rates to derive call spreads on a note.

“The rate uptick lets you buy more calls and get more leverage.”

$140 million trade

BofA Securities was the agent for 21 of the top 25 deals, including the top three.

Royal Bank of Canada priced the largest issue with $140 million of 14-month leveraged notes linked to the S&P 500 index. The notes pay triple any index gain, capped at par plus 14.94%. Investors will be exposed to any index decline.

Another leveraged block trade came from Canadian Imperial Bank of Commerce with $46.83 million of 14-month notes linked to the S&P 500 index providing two times upside exposure capped at par plus 11.8%. The downside offers a 5% buffer. BofA Securities is the agent.

Worst-of, leverage

A look at last week’s data for leveraged notes issuance confirmed what is known intuitively. Only 3.5% of the $645 million sold in leveraged notes was structured as worst-of. The rest consisted of single assets in the form of one index, one basket of securities or one ETF.

The market participant offered an explanation.

“Leveraged notes are mainly used for asset allocation purposes. It’s harder to use a worst-of Phoenix autocall as part of your asset allocation. If your note is tied to the S&P, the Russell and the Euro Stoxx, where do you put it?”

Another factor may have to do with pricing. The dispersion risk used to generate higher coupons in a worst-of may not be as high if correlations increase, which they tend to do during pullbacks. If this is the case, the dispersion premium may diminish and the marginal benefit of the worst-of may be reduced, a source offered.

The market participant rejected that theory.

“I don’t think it has to do with pricing. It’s not because correlations go up that people give up worst-of to do single assets. What really drives the use of worst-of is need, not pricing. Do you need the note for your asset allocation? Then a single underlying index or ETF makes more sense. Do you need income? In that scenario, take advantage of the dispersion risk with a worst-of, so you can enhance the yield.”

Stretching the duration

Pricing autocallables on a single underlier may not provide “good optics” unless issuers resort to other features. “Extending the maturity is a typical way to make the structure work,” the market participant said.

Bank of Nova Scotia’s $54.77 million of six-year autocallable notes linked to the S&P 500 index illustrated his point.

The notes will be called at par plus a call premium of 8.45% per year if the closing level of the index is greater than its starting value on any of the six annual observation dates. Investors have full exposure to the downside.

Market-linked step-up

The second top deal last week was CIBC’s $87.34 million of three-year autocallable market-linked step-up notes on the S&P 500 index. The annualized call premium of 10.15% is cumulative. The return is an 18% digital payment if the index finishes positive but at or below 118%. If the gain is higher or if the index is negative, investors have the delta one exposure to the index.

Doing good

As money has been pouring into Environmental, Social and Governance (ESG) funds, structured notes issuers are following suit. One trend emerged last week among a couple of Canadian issuers, which offered not just notes tied to an ESG underlying but also or in place of it, a commitment to use the proceeds to fund ESG or green projects.

RBC priced $2.51 million of five-year notes linked to the MSCI World ESG Quality Select Low Volatility 8% Risk Control 3% Decrement index. This index was used by this issuer for the first time in December. The issuer disclosed its intent to use the proceeds to fund green projects as defined in the bank’s sustainable bond framework dated June 2020. RBC Capital Markets, LLC was the agent.

Use of proceeds only

Scotia last week priced two “sustainable bond” issues following the same principle. The issuer disclosed its intent to use the proceeds for green or social projects based on its Sustainable Bond Framework dated July 2021. But the issuer did away with a sustainable underlying.

The first one, which priced for $44.91 million, was a five-year issue of leveraged notes linked to the Euro Stoxx 50 index. The notes pay 1.56x leverage with no cap and provide a 20% buffer.

The other, sold for $44 million, consisted of two-year leveraged notes on the S&P 500 index.

In December, Scotia used another non-ESG index – the Stoxx Global Select Dividend 100 index – to price $22.93 deals with a similar use of proceeds disclosure.

BofA Securities was the agent on those three Scotia deals.

“Personally, I care about the terms of a note and about the issuer not going bankrupt. I’m a pragmatic guy,” the market participant said.

“If ESG was an important factor for me, my priority would be to get the notes tied to an ESG index. Alternatively, I would consider an asset-backed deal based on the credit of an ESG asset.

“But what the issuer is going to do with the proceeds of my notes, I really don’t care.”

The top agent last week after BofA Securities was UBS. This firm priced $370 million in 93 deals, or 23.5% of the total. It was followed by Morgan Stanley.

Three major Canadian issuers – Scotia Bank, RBC and CIBC – priced collectively nearly $800 million last week or more than half of total sales.

The top one was Scotia Bank with $316 million in 13 deals, or 20% of the total.

© 2015 Prospect News.
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