Small bears and block trades abound in buoyant month, strong November so far at $3.98 billion

By Emma Trincal

New York, Nov. 29 – Issuance volume in the first half of November jumped from last month while the year-to-date notional held relatively well, according to preliminary data compiled by Prospect News.

Agents sold $3.98 billion in 764 deals this month through Nov. 17 compared to $2.86 billion in 713 offerings during the same period in October, a 39% increase.

The year-to-date tally was $83.95 billion in 20,359 deals, a 2.9% decline from $86.45 billion in 26,333 offerings a year ago.

Data was not available for last week given the abbreviated week and light trading volume ahead of the Thanksgiving holiday.

Looking good

Each week of the month except last week was unusually strong. For instance, the week ending in Nov. 17 brought $1.61 billion in 364 deals, according to updated data. Even more impressive although overlapping with October, the week ended Nov. 3 had the pricing of 399 offerings totaling $2.22 billion. Meanwhile the second and full week of the month showed nearly $1 billion in 239 deals, or $939 million.

With two more weeks to be accounted for (last week was not compiled) an extrapolation for the month could put November as one of the top six months in the neighborhood of $8 billion. In addition, the data is still preliminary. As more deals get filed, these figures will be revised upward.

The current week will close the month, which in general marks the peak of the period. But so far, sales for the middle of the month have been strong, noted a sellsider.

“We also did most of our deals midmonth,” he said.

“Certainly, a number of issuers and distributors may have wanted to close earlier.”

Big deals

An impressive number of larger deals came out this month, including 16 over $30 million and seven over $50 million.

The largest one was Morgan Stanley Finance LLC’s $104.46 million of cash-settled equity-linked notes tied to RTX Corp., which was a three-year synthetic convertible trade.

GS Finance Corp. priced $96.63 billion of two-year buffered digital index-linked notes on the S&P 500 index.

Many digital issues were block trades. As an example, Bank of Nova Scotia issued $90.57 million in another short-term digital linked to the S&P 500. JPMorgan Chase Financial Co. LLC used the same digital format and underlier in a $68.86 million issue.

Baby bears

On a much smaller scale, the mood has been bearish for some investors.

A variety of different structures were employed this month to reflect a view that is not among the most popular among structured notes buyers.

Citigroup Global Markets Holdings Inc. for instance used leverage to price $6.99 million of 14-month bearish barrier securities inversely linked to the S&P 500 index.

Investors will gain 3% for each 1% decline of the index from its initial level, subject to a maximum payout of par plus 37.25%. The barrier at maturity was 120%.

Taking the shape of an autocall, another bear deal was spotted – Citigroup’s $1.24 million of one-year notes.

The structure was unusual as it employed an American barrier for the determination of the call, paying a 14.5% annualized premium. The upside barrier against the risk of a rising market was 115%.

“These have got to be customized deals coming from one or several advisers’ teams. They either have a negative outlook on the market, and that’s a market call – or they want to hedge their long positions for a portion of the portfolio,” the sellsider said.

JPMorgan Chase Financial Co. LLC also priced $1 million of six-month bearish digital notes, again on the S&P 500 index. An 8.25% digital payout was paid at the end of the six months if the index finished flat or negative. The barrier was at 115%.

Not to be undone, a principal-protected “bear” came out from the same issuer, selling for $1 million and also tied to the S&P 500 index. A decline of up to 40% at maturity triggered a payout of 1.484 times the absolute return of the index. In all other scenarios, investors would receive par.

Depressed VIX

Those trades do not reflect the bullish mood pervasive among equity investors this month. Since its most recent low at the end of October, the S&P 500 index has jumped 11.3%.

Rising stock prices foster autocalls, which may have been a factor behind the solid tally this month. But the uptrend also has some negative effects, according to the sellsider.

“The market rally comes with some problems,” he said.

“A number of deals were announced earlier in the month, advisers took orders and now the deals have been canceled because the terms are no longer valid. With stock prices up, volatility down and rates coming in, the terms are no longer working. Deals have been shut down and advisers are not too happy about it. That’s a problem.”

The VIX from its recent high in Oct. 23 through Nov. 17 dropped more than 40% to 13.67 from 23.08. It traded below 13 on Wednesday at 12.9.

Complacency

“For veteran options pros, it seems strange to see VIX mired in the 12-13 range,” said Steve Sosnick, chief strategist and head trader at Interactive Brokers.

“Traders seem quite sanguine at present, and not actively seeking volatility protection at current levels.”

He invoked several other strong possibilities as reasons other than complacency, such as low correlations between stocks and increased short-selling activity from ETFs.

Finally, current depressed volatility levels may impact advisers’ appetite for autocalls, whose premium derives from writing call options.

Autocallables accounted for 38% of total notional for the month versus 47% for the year to date.

“The best months for autocalls are when volatility spikes. You get better entry points and better terms,” said a market participant.

High multiples

Another structural trend seen this month was the use of higher leverage multiples in a few offerings.

GS Finance Corp. for instance priced $1.17 million of four-year notes tied to the worst of the Euro Stoxx 50 index and the Stoxx Europe 600 index. On the upside, the gain was levered up four times up to a cap of 84%.

The barrier at maturity was 70%

Another one came from BofA Finance LLC which sold $1.03 million of five-year basket-linked notes paying 5.3 times any basket gain with a 70% downside barrier. The basket consisted of the S&P 500 and a bond ETF with 40% and 60% weights respectively.

Leveraged notes notional represented 21% of this month’s total, aligned with the 20% share for the year.

Morgan Stanley was the top agent for the month through Nov. 17. It sold $977 million in 133 deals, or nearly a quarter of the total notional.

It was followed by JPMorgan and Goldman Sachs.

The No. 1 issuer was GS Finance which brought to market 120 offerings totaling $826 million, a 21% share.

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