Structured notes issuance $476 million for first week of May; market rattled by inflation fears

By Emma Trincal

New York, May 12 – Agents priced $476 million in 150 deals to start the month in a choppy equity market increasingly concerned about inflation and talks about Federal Reserve tapering, according to preliminary data compiled by Prospect News.

The updated data for the previous week closing the month of April revealed $1.95 billion issued in 223 deals.

Yet preliminary figures for April look weak at this point with $5.4 billion, but figures will be revised upward in the coming weeks as more deals are added.

This year’s best month so far have been January, March and February in decreasing order.

Sales are up 7.5% for the first third of the year to $28.22 billion from $26.26 billion last year. As April data is preliminary, this tally will be revised upward.

The robust issuance volume is more obvious from the trailing data showing a nearly 15% increase to $74 billion in the last 12 months ending May 7 from $64.4 billion during the previous trailing 12 months. Meanwhile, the deal count rose 15.7% to 22,682 from 19,625.

Equity

The repartition of underlying equity asset classes last week was more even than usual. Stocks made for 28% of the tally while indexes weakened at 41% of the total versus two-thirds in the previous week. ETFs accounted for 31% of the sales, in part as a result of a few larger trades.

As has been the case for years, commodities and rates were missing, which is odd considering recent market developments characterized by rising inflation and volatility in the Treasury market.

A big miss

Keith Styrcula, chairman of the Structured Products Association, noted the absence of commodities-linked notes issuance, calling for a change.

“Structured notes are naturally suited to pivot to commodities-based themes,” he said.

“Oil prices today are around $65 to $67 a barrel, but the regulatory restrictions could push it beyond $100 by the end of the year. Commodity prices move in tandem with an upsurge in fuel prices, and the Bloomberg Commodities Agriculture sub-index is up 22% this year to its highest level since 2016. Just this morning, the Consumer Price Index went up 4.2% in a single month, the largest rise since 2008.”

The Labor department’s news release Wednesday morning put pressure on stocks, hitting particularly hard the technology sector. The Nasdaq-100 was down 2.5% in late afternoon session.

“There’s going to be a tremendous need for investors to hedge against surging non-metal commodity prices. That’s an opportunity for structured notes issuance if investment banks offer this theme sooner rather than later.

“We’re seeing significant disruptions in the supply chain in this post-Covid headache. Lots of jobs are not being filled. We’re entering a new phase in the U.S. economy in the shadow of Covid.

“Issuers need to pivot to themes that are in line with where economy is going in year two of Covid. That means inflation plays, volatility exposure, more protection on the downside in buffered structures and agricultural commodity index-linked notes.”

Building hedges

The autocall trend could not be more visible than last week. Those products made for 86% of total sales.

Leveraged notes had a small share of only 8%.

Two concomitant trends have been happening this year regarding leverage. Overall, the structure type has seen its notional volume decline by 25% to $5.579 billion in 2021 through the end of April from $7.403 during the same period last year.

Another trend within the leverage structure class is between notes with some and without any downside protection. The disparity in favor of full risk exposure has been striking, showing a shift from risk aversion to buoyancy. Leveraged products with either barriers or buffers have dropped 37% in volume this year while their counterparts offering no protection are up 3%. Only 58% of enhanced return notes offer barriers or buffers this year versus 70% last year.

“Structures need to evolve to provide more protective investing, more emphasis on the downside protection and less on the upside,” said Styrcula.

“Autocalls fit that bill already and should continue to grow. But we should see more defensive structures in other types of products too, including leveraged notes.”

Crystal ball

The current market uncertainty makes it difficult to forecast trends in the structured notes space for the remainder of the year.

“Frankly, I wouldn’t even try to predict anything in this market,” a market participant said.

“Stock valuations are extended. We’ve seen rotation into other sectors than tech. The focus is going to depend on Covid. Many in the U.S. feel that Covid is behind us but you have to look at the global picture.”

One more predictable trend was the expected growth of notes linked to Environmental, Social, and Corporate Governance assets (ESG) through the use of new indexes or ETFs, he said.

“You’ll see more themes around clean energy because regulators are moving in that direction,” he said.

“You even have new indices that can select companies based on their carbon footprints. You can filter a variety of stocks that way and attribute different weightings depending on the ratings.”

Taper tantrum angst

Inflation fears continued to be the prevailing focus last week with choppy price action. The week ended in a rally after a weaker-than-expected job report, which eased investors’ fears about the Federal Reserve abandoning its accommodative monetary policy if the economy overheats and inflation spikes.

The Dow Jones industrial average and the S&P 500 jumped on the news and posted new record highs.

“Above and beyond all else, equity markets are addicted to central bank liquidity. It is quaint to think in terms of stock valuations, economic strength, and the like, but ultimately they are all pale in importance to easy money,” said Steve Sosnick, chief options strategist at Interactive Brokers, in a research note.

Whether inflation will reach levels forcing the Fed to taper its asset purchases is anyone’s guess. But rising prices have created a new source of uncertainty, contributing to recent volatility spikes firms should focus on, Styrcula said.

“Overall, issuers need to work with the various ways to play with volatility,” he said.

“You can readjust the terms by taking more off the cap and putting more on the downside. That way, you’re hedging your downside risk against a precipitous drop in the market. The turbulence in the economy provides an opportunity to the investment class to demonstrate its superiority in volatile market conditions.”

Tech deals

The stock market is split between recovery expectations played out through the Dow Jones industrial average and popular technology stocks, which appeal for their growth potential. While the Dow gained 2.7% on the week, the Nasdaq finished flat after a tech sell-off on Tuesday. Recent sell-offs in tech stocks have been attributed to rising inflation, which hamper performance of growth stocks.

A couple of issuers took advantage of the rise in stock volatility in the technology sector to price sizable stock deals last week.

Two of them for a $20 million size each came from Bank of Nova Scotia with J.P. Morgan Securities LLC acting as placement agent.

For the first issue, the underlying was the worst of Amazon.com, Inc., Qualcomm Inc. and Spotify Technology SA.

The structure carried a 15.8% annualized call premium and stepping down to 60% at maturity.

Apple Inc., Intel Corp. and Spotify were the underlying for the second deal, which offered the same structure but a different annualized premium of 15.1%.

Separately, GS Finance Corp. priced $21 million of three-year callable notes linked to the worst of Amazon.com, Apple, Alibaba Group Holding Ltd., Alphabet Inc. and Facebook, Inc.

The 29% annualized contingent coupon is based on a 75% barrier observed quarterly. The downside threshold is 75% as well. UBS is the selling agent.

Big worst-of

A total of $572 million, or 57% of last week’s notional, was priced as worst-of, mostly through indexes and exchange-traded funds, as exemplified by the two top deals.

Barclays Bank plc priced $53.74 million of 2.5-year contingent yield notes linked to the worst performing of the Nasdaq-100 index, the Russell 2000 index and the S&P 500 index. The pricing of a 60% barrier at maturity was facilitated by the discretionary call and a daily coupon observation at a 70% level. The contingent coupon annualized rate is 9%. UBS is the agent.

Separately, UBS priced on the behalf of Citigroup Global Markets Holdings Inc. $40 million of three-year autocallable contingent yield notes on the Invesco S&P 500 Equal Weight ETF and the iShares Russell 2000 ETF with a 6.19% annual contingent coupon, a 70% barrier for the coupon and principal repayment as well as a quarterly automatic call after six months.

Citigroup issued another large ETF deal this time on a single underlier with $30 million of one-year contingent income autocallable tied to the Invesco QQQ trust, series 1.

The annualized coupon rate of 11.2% is paid monthly if the price is above a 90% barrier. Morgan Stanley is the agent.

The top agent last week was UBS with 133 deals totaling $264 million, or 55.5% of the total.

It was followed by Morgan Stanley and JPMorgan.

The No. 1 issuer was Citigroup Global Markets Holdings Inc. with $124 million in seven offerings, a 26% share.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.