Structured notes issuance $177 million for week; investors eye pre-Election volatility

By Emma Trincal

New York, Oct. 21 – Structured products agents priced $177 million of notes in the second full week of the month in 64 deals with stocks-linked structures making a strong push versus indexes, according to preliminary data compiled by Prospect News.

With the kickoff of earnings season and the Presidential Elections just weeks away, volatility rose enough to send investors to autocallable contingent coupon notes without resorting so much on worst-off payouts. More than 50% of the volume was in single stocks.

Other factors pushing volatility higher last week continued to be the lack of progress on a stimulus bill and the increasing number of Covid-19 cases in the United States and in Europe.

Pre-Elections

Autocallables have been the structure of choice this year. Last week was no exception.

“It’s a way to put money to work before the Elections without knowing the outcome or what the impact of the outcome is going to be,” said a market participant.

“Because we are three weeks away from this key event, investors have a preference for structures that are a little bit less directional.

“That’s certainly the case with autocallable contingent coupon notes. As long as you don’t breach your barrier you continue to get paid.”

A total of $875 million priced in 331 deals this month through Oct. 16, based on the latest update. These figures will likely be revised upward again when all offerings are filed with the Securities and Exchange Commission. The September tally through the same period showed $2 billion in sales via 793 deals.

Outlook

It is unclear what activity will look like in October, a sellsider said.

“Something big is on the horizon. It seems like people are sitting on the sidelines looking to see what happens with the Elections,” he said.

But this pause is not likely to last, he predicted.

“As we’re getting closer to Nov. 3, more people will be positioning themselves, taking advantage of the offerings and even after the Elections.

“October is not over. The majority of the deals come at the end of the month. So, we don’t know yet what the month is going to look like.

“But I think volume should pick up in the next couple of weeks.

He also expects November to be “fairly busy,” he said.

“We’re already seeing more people looking for deals going into the Elections to take advantage of the elevated volatility. We expect a lot of movement after the Elections as well.”

Year to date

Sales are up 38% so far this year to $53.35 billion from $38.65 billion. The deal count increased as well to 16,620 from 12,526. A major growth factor was the explosion of autocallable products, whose volume rose 88% this year to $28.13 billion from $14.94 billion a year ago.

Those figures include autocallable contingent coupon notes and snowballs paying a call premium only upon early redemption. The deal count for those products is up 46.2% to 9,358 from 6,399.

Near-zero interest rates have driven investors to income-oriented structured notes.

“Rates have been low since March,” the market participant said.

“At the start of the year, the 10-year Treasury was at about 2%. Since March, it’s been below 1%.

“You had the Fed buying larger amounts of bonds to support the market. That’s been a big factor.

“People are increasingly concerned that the 60/40 portfolio doesn’t work anymore because their bond yields may not even be enough to cover expected inflation.”

The 60/40 strategy is a traditional asset mix long recommended by financial advisers that allocates 60% to equities and 40% to bonds.

In addition, traditional bonds lack some of the investment benefits they use to offer.

“You can’t rely on bonds to hedge your stocks anymore,” the market participant added.

“People used to buy bonds in the hope they would rally when stocks fall.

“But bond prices have nowhere to go with rates near zero.

“People allocate to bonds for safekeeping. It’s just a place to store cash.”

Basket of tech

On an unusual note: the top deal was not a worst-of but a basket-linked offering.

UBS AG, London Branch priced $40.51 million of three-year autocallable contingent yield notes linked to an equally weighted basket consisting of Apple Inc., Amazon.com, Inc., Alibaba Group Holding Ltd., Baidu, Inc., Facebook, Inc., Alphabet Inc., Netflix, Inc., Nvidia Corp., Tesla, Inc. and Twitter, Inc.

Each quarter, the notes will pay a contingent coupon of 10.5% per year if the basket closes at or above the coupon barrier, 65% of the initial level, on the observation date for that quarter.

The notes will be automatically called quarterly after six months if the if the basket closes at or above the initial level.

The principal repayment barrier at maturity is 65%.

Worst-of on indexes

A typical worst-of on indexes came next from Bank of Montreal, which priced $24.03 million of two-year autocallable barrier notes linked to the S&P 500 index and the Nasdaq 100 index.

The contingent coupon payable monthly is 12.5% per year based on a 70% coupon barrier observed on the worst-of.

The notes are automatically called after six months if the worst-of is above its initial price on a monthly basis.

The barrier at maturity is also 70%.

Single names

Among larger single-stock deals, Barclays Bank plc priced two fixed coupon autocallable note offerings on Alibaba Group Holding Ltd. distributed by Morgan Stanley Wealth Management. The top one, for $20 million, is a one-year note paying a guaranteed 12.35% annual coupon with an 80% barrier at maturity. Coupon payments and automatic calls if the underlying is at or above initial price are monthly. Barclays did a nearly identical deal (12% fixed rate) for $10 million. In addition, it priced another $10 million of one-year 13.3% fixed-coupon autocallable securities linked to JD.com, Inc. also through Morgan Stanley Wealth Management.

“Alibaba has an implied volatility of 43%. It’s fairly high, and that’s how you’re getting a good coupon,” the sellsider said.

“But it’s also fairly risky. You could have an 80% barrier on Alibaba and still be wiped out in a few days.”

Current volatility levels allow for the pricing of fixed rates even with a single underlying, he noted.

“The bottom line is that interest rates are very low, and uncertainty is high, so people want fixed returns. They can get it via autocalls or even with in-the-money digitals. Investors are trying different things.”

Tech stocks continued to be the most popular underlying. A total of seven offerings priced on Apple, as a single underlier. The largest one was Royal Bank of Canada’s $10.33 million of three-year autocallable contingent coupon barrier notes with a 10% contingent coupon based on a 70% barrier for the coupon and at maturity.

Volatility

“These trades on single stocks are popular because it’s a way to monetize a relatively high market volatility,” said the market participant.

“The VIX is double what it was in the beginning of the year. It’s not a pricing indicator but it’s a good gauge.”

The CBOE VIX index measures volatility based on S&P 500 index options over the next 30 days.

The VIX rose nearly 7% last week to close at 27.41. Up 95% from its level in the beginning of January, it is well above its long-term average of 19.

“A lot of people are sitting on the fences right now due to the Elections. But my outlook for the next couple of months is optimistic,” he said.

“If the market is shooting up, you’ll see more activity.

“If it drops, you’ll see even more activity.

“Our industry has the structures that helps people make investment decisions at all times.”

UBS was the top agent last week with 50 deals totaling $62 million, or 35.3% of the total.

It was followed by Morgan Stanley and Royal Bank of Canada.

The No. 1 issuer was UBS AG, London Branch with a deal count and notional identical to what it distributed.

The top issuer for the year is Barclays Bank with $7.82 billion in 1,604 deals, a 14.65% share.

© 2015 Prospect News.
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