Structured notes tally $475 million for week; May volume stronger than April so far

By Emma Trincal

New York, May 18 – More sales of structured notes took place in the first two weeks of May than during the same time in April, thanks in part to a pickup in volatility.

Agents priced $1.678 billion in 319 deals for the month through May 14 versus $1.428 billion in 381 offerings in April, a 17.6% increase, according to data compiled by Prospect News.

There were six deals in excess of $50 million this month compared to two in April, the data showed.

Last week’s tally was $475 million in 134 deals. Updated data for the preceding week showed an unusually strong debut for the month with $1.2 billion in 185 deals. Figures are constantly updated upward as more deals filed at different times with the Securities and Exchange Commission are counted.

For the year, volume is up 8.4% to $30.272 billion through May 14 from $27.93 billion during the same time last year. The number of deals is up by only 2.3% to 8,333 from 8,143.

Roller coaster week

Volatility of volatility was last week’s main theme in the stock market, which helped volume. For the first three days, the markets sold off due to higher-than-expected inflation numbers, but Thursday and especially Friday staged a strong rebound. The week however ended negative for all benchmarks, with the Nasdaq Composite under the greatest pressure, down 2.3%.

“We had headwinds to tech and growth stocks,” said Matt Rosenberg, director at Halo Investing.

“Not to say we’re going to retrace but with the flurry of headlines whether it’s inflation, the infrastructure plan, the Middle East, people need to figure out which way the market is going. After the surge of Covid-boom stocks, some of the momentum is waning. People are reassessing their portfolios.”

Medium-term horizon

How do those market changes help structured notes buyers pick the right index or asset class, week after week?

Rosenberg offered an answer.

“Fiduciaries are allocators, not traders,” he said.

“While they’re trying to get a broad stroke opinion of the market, their goal for their clients is to set them up for the medium-term horizon. It’s not like they’re buying weekly options.”

As always autocallable notes dominated by far the flow of products sold last week making for 71% of the total, including Phoenix type of autocalls and memory coupon structures or “snowballs.”

The frequent changes in today’s market conditions explain how autocalls help investors navigate uncertainty, Rosenberg said.

Short-term opportunities

“The benefit of these autocall structures is to allow you, when called, to roll into new opportunities so you can reallocate parts of your portfolio when the market is up,” he said.

Leveraged products accounted for 25% of the total sold last week. Issuers have more flexibility with durations with income notes than with growth-oriented enhanced return products, he explained.

“On the growth front we’ve seen a stance toward shorter durations, one or two years,” he said.

“With income, short-term matters less and less because those notes are callable in nature.”

Vol. is back

Volatility helps the sale of autocalls on different levels, a market participant said.

“Autocalls dominate the flows month after month usually on indices. The underlyings matter but what also matters is the pricing,” he said.

It’s too soon to assess volume for the entire month of May. But the advance for the first half is significant compared to April. For the market participant, the explanation is simple.

“In April, volatility was a bit subdued. That could explain the lower issuance volume,” he said.

“Even when you have a few days when vol. spikes up, people don’t always have the time to strike deals.

“Volatility is what drives volume, especially for those opportunistic deals that take advantage of volatility spikes.”

In mid-April, the VIX index hit a 52-week low at 15.38 and never breached the 20 level.

In May however, volatility began to rise. Last week, the VIX surged to more than 28 on Wednesday and nearly 29 on Thursday before dropping below 19 during Friday’s rally.

Too soon to call

“Volatility has been moving around a lot,” he said.

If volatility is a factor behind issuance volume, its consistency matters as well.

“We haven’t had a big shake up in the market. When volatility is up and then goes back down, it can hurt volume,” this market participant.

Higher volatility is compelling for two mains reasons, he explained. For one, it improves the economics of the deals, and second, it makes the downside protection of structured notes more compelling.

“When the market is up, there’s no incentive to substitute structured notes for long only positions. But during a sell-off, people are drawn toward protection, and structured notes offer a definite benefit.”

How volatility evolves for the remaining two weeks will dictate the volume strength of issuance for the month.

“May has been a more volatile month, and that’s good. It has allowed people to take advantage of spikes in premium,” this market participant said.

“It doesn’t really impact calendar deals, which are marketed for a few weeks and printed at the end of the month.

“But volatility spikes will boost volume for custom deals when firms are able to lock better terms.”

Two $50 million trades

Last week saw the pricing of large deals.

Worst-of autocallables on indexes and ETFs prevailed. Those two underlying categories accounted for 65% and 17% of the total, respectively.

“We had volatility toward the beginning of the week; then the market rallied on Friday,” said Rosenberg.

“Issuance desks were busy. We were busy. Volatility is an indicator for autocall issuance.”

Morgan Stanley Finance LLC’s $50.16 million of trigger callable notes due Feb. 15, 2024 linked to the least performing of the S&P 500 index, the Russell 2000 index and the MSCI Emerging Markets index topped the list of deals. The quarterly contingent coupon is 9.39% per year based on a 70% contingent barrier observed daily.

The notes will be callable on any quarterly observation date.

The barrier at maturity is 60%.

UBS is the dealer.

At almost the same price, GS Finance Corp. sold $50 million of three-year autocallable notes tied to the Nasdaq Next Generation 100 index, Nasdaq-100 Technology Sector index and Russell 1000 Growth index.

The notes can be automatically called after one year with a 13% premium if each index closes at or above its initial level.

At maturity, the payout will be 1.51 times the return of the least performing index. Otherwise, investors will be fully exposed to the decline of the least performing index.

Goldman Sachs & Co. LLC is the agent.

Fixed rate

Credit Suisse AG, London branch priced $38.92 million of 15-month callable notes offering a 5.2% annualized fixed rate. The exposure is to the worst of the Russell 2000 index and the Nasdaq-100 index. Interest is payable monthly.

UBS is the agent.

Rosenberg said his clients are eager to get guaranteed coupons.

“It’s a really good-looking note,” he said. Even though it’s callable monthly and you want to hold it as long as possible to keep your return, the fact that it has a 40% protection, and a guaranteed coupon is compelling,” he said.

“It also fits a number of places in the portfolio, and this is the type of protection advisers are interested in seeing.

“As of the issuer call versus the autocall, many advisers are indifferent, and it makes sense if the issuer call allows you to pick up an extra 100 basis points on the yield.”

FAANG 2:0

In the largest stock deal, FAANG (Facebook, Apple, Amazon, Netflix and Google’s parent company, Alphabet) had lost one of its teeth, with the substitution of Alibaba for Netflix.

GS Finance priced $25 million of three-year callable notes linked to the worst of Amazon.com, Inc., Apple Inc., Alibaba Group Holding Ltd., Alphabet Inc. and Facebook, Inc.

This product, distributed by UBS, pays a contingent coupon of 28.75% per year based on a 75% coupon barrier.

The top agent last year was UBS with $298 million in 125 deals, or 62.8% of the total. It was followed by Goldman Sachs and Morgan Stanley.

GS Finance was the No. 1 issuer with $101 million in four deals, a 21.3% share.

So far this year, Morgan Stanley Finance is the top issuer with $4.389 billion in 800 deals, or 14.5% of the total, closely followed by Barclays Bank plc.

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