Structured notes top $285 million for week; bids on tech stocks eyed amid market rotation

By Emma Trincal

New York, Nov. 18 – Agents priced $285 million in 87 structured notes during a broad-based rally last week, which saw the averages hitting new record highs.

Updated figures for the first week of the month revealed 103 deals totaling $589 million.

Aside from investors piling up in autocallable products as has been the trend for a long time, last week surprised by the higher-than-usual proportion of stock deals compared to index-linked notes sales.

Such a move may be explained by the drop in volatility seen since the U.S. elections as well as some comforting news on the pandemic front.

Vaccine hope

On Monday Pfizer Inc. announced that its Covid-19 vaccine developed in collaboration with BioNTech SE was 90% effective in final trials, sending the S&P 500 index to a new intraday high at 3,645.99.

The index gained 2.2% on the week and the Dow Jones industrial average, 4.1%.

This precipitated a rotation from high-flying tech stocks into beaten up industries such as travel, oil and retail stocks, which have suffered from restrictions imposed by the pandemic-induced lockdowns. The rationale behind this rotation was investors’ hopes that new vaccines will normalize the economy, which so far has relied a lot on “stay-at-home” names, such as Amazon for instance.

But the move out of tech into cyclicals, while reflecting the broader market, was not the main theme in structured products. Instead investors bid on the highly popular momentum tech stocks as illustrated by the three top deals.

Tech focus

This disconnect between the market and the top sales of structured notes last week was not necessarily a surprise.

“Big tech will continue to perform well regardless of a vaccine,” the distributor said.

“People think tech stocks are the next safe haven.

“Also, the market is still not very clear about where we’re heading.

“People believe that whether the overall market is up or down, tech will still outperform.”

However, he did notice more “circling around” some cyclical industries pointing to airlines, casinos, cruise lines and energy.

Structured products issuance volume for the year to date is up 38.3% to $59.29 billion from $42.88 billion through Nov. 13. Agents priced 18,516 deals this year versus 13,917 last year.

Three GS tech trades

Among the noticeable technical plays last week, three stood out and were on the top of the list in size.

The trades were identical except for slight coupon size differences. UBS was the selling agent for all three.

The top one was GS Finance Corp.’s $28.5 million of three-year callable contingent yield notes linked to the common stocks of Amazon.com, Inc., Microsoft Corp., Alibaba Group Holding Ltd. and the class A common stocks of Alphabet Inc. and Facebook, Inc.

The notes pay a quarterly contingent coupon of 26% per year if each stock closes at or above its coupon barrier price, 70% of the initial price, on the determination date that quarter.

The issuer can call the notes on any quarterly payment date.

The barrier at maturity is also 70%.

UBS sold and GS Finance issued the two other issues, each priced at $25 million with the contingent coupon at 27.5% for one issue and 27.1% for the other.

“If you can get a 26%-27% coupon with a 70% barrier, it’s going to be really attractive. It’s a bit of higher correlation risk if you put five names in there. But these are growth, resilient stocks that people trust,” the distributor said.

Institutional, possibly

The three deals priced at different dates – on Nov. 9, 10 and 12 – which explained the slight differences in yield, a sellsider noted.

“It’s enough to give you different volatilities, different market conditions, different correlations. But they’re all pretty close,” he said.

The fee for each of those trades is 0.675%.

“It looks like it was some kind of a [registered investment adviser], someone specific, since it was one deal after the other,” he said.

He said the notes may have been bought by one or two institutional clients, based on the fee level.

“It doesn’t seem like UBS was broadly distributing within its own channel. I guess it looks more like an institutional deal, maybe a mutual fund or a hedge fund,” he said.

Pricing opportunity

The fact that note investors bid on a declining sector last week as the momentum gained cyclical stocks did not surprise this sellsider.

There was a logic in pricing tech-based deals last week at a time when investors moved out of the normally popular sector into beaten down assets.

“You always have some contrarians. Pricing must have been attractive,” he said.

Technology was indeed the only sector to register a loss last week.

“You’ve got Alibaba in there. That’s probably a play on China. It’s another way to benefit from the new political environment,” he said.

Fewer indexes

Stocks dominated the market last week.

Either individual stocks or baskets of stocks made for 60% of total volume versus 40% for equity indexes.

For the year-to-date average, the distribution is 23% for stocks and 67% for indexes, according to the data.

For the distributor, last week’s surge in stocks was due to a drop in volatility.

“Personnally, during this month of November, between the elections and Covid-19, I thought we would have seen more volatility,” he said.

The resolution of the elections however does not mean the market is not about to face more headwinds.

“There’s still a lot to figure out between the new administration policy, what happens in the Senate, the tax plans,” this distributor said.

Whether this will translate into a volatility spike is unclear.

“The market kind of looks past this. I don’t think the market cares. The market continues to be that normal, agnostic being,” he said.

The announcement by S&P Dow Jones Indices on Monday that Tesla Inc. will be added to the S&P 500 index in December may be a volatility mover, he said.

“With Tesla, the S&P may be more volatile. You may have more attractive terms once it happens or even now.”

Selling research themes

For the sellsider, last week’s prevalence of stocks versus indexes has to do with distribution.

“It’s pretty much of a brokerage story,” he said.

“The fee-based RIAs tend to be asset allocators. They’re more interested in sector-specific or asset class-specific products. They may not have the time or the resources to look at individual stocks.”

But the wirehouses or research powerhouses such as Raymond James provide more opportunities to research various companies, he added.

“They have their own recommendations. More advisers may focus on individual stocks.”

The distributor believes that notes tied to stocks will become more and more mainstream.

“I think we’ll see more retail investors using stocks,” he said.

“It depends on the market of course but also on investors’ risk tolerance. But I think there will always be a space for stock-pickers,” he said.

Autocalls for range view

Autocallable notes dominated the flow last week, accounting for 65% of the total. This penetration rate was much higher than the 50% average for the year to date.

“If you can get 8% or 9% in coupon on indices with a decent downside protection, people are going to pay attention to that,” the distributor said.

“Clients don’t expect the market to be up 30% next year. They see a flatter trend. So, you get your coupon. You get called. Your upside is capped. But you have some downside protection, and that’s the trade-off.”

For the sellsider, income notes with autocallable features are here to stay.

“Whether we’re in a bullish market or bearish market, there’s an insatiable appetite for them,” he said.

“I don’t think a change in market direction is going to end that trend at all. Income notes have done fairly well in different market scenarios.”

BofA’s step up

Other newsworthy deals last week included Barclays Bank plc’s $20.57 million three-year market-linked step up trade linked to the S&P 500 index. An annual call premium of 9.75% is paid if the index closes at or above its initial level. At maturity, investors will get a minimum return of 26% if the index is positive or the index gain if it increases above the 126% level. They are fully exposed to losses. Bank of America distributed the notes.

Stock basket

Finally, to keep with the mega-tech stocks themes, UBS AG, London Branch priced $20.38 million of five-year autocallable contingent yield notes linked to an equally weighted basket of 10 stocks.

The basket stocks are Apple Inc., Amazon.com, Alibaba Group Holding, Baidu, Inc., Facebook, Alphabet, Netflix, Inc., Nvidia Corp., Tesla and Twitter, Inc.

Barrier levels are at 70%. The contingent coupon rate is at 8% payable quarterly. The notes are automatically called on a quarterly basis if the basket return is flat or positive.

The top agent last week was UBS with $158 million in 72 deals, or 55.6% of the total. It was followed by Morgan Stanley and Bank of America.

GS Finance was the No. 1 issuer with $107 million in seven offerings, a 37.7% share.

For the year, Barclays Bank is the top issuer, bringing to market 1,728 deals totaling $8.25 billion, or 13.9% of the overall market.

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