Structured notes issuance slows during week; year-to-date tally reaches record high levels

By Emma Trincal

New York, Feb. 19 – Agents priced $85 million in 97 structured notes in the week ended Friday, according to preliminary data compiled by Prospect News, a tally likely to be revised upward.

This second week follows a particularly robust start for February with $928 million sold in the first week of the month.

Year up 75%

Sales hit $1.01 billion in 333 deals this month through Feb. 14, an 11% decrease from January’s equivalent period, which recorded the pricing of $1.14 billion in 340 offerings.

However, volume for this first half of the month is up 15.5% compared to a year ago.

For the year to date, sales are up a stunning 74.65% to $7.97 billion from $4.56 billion through Feb. 14.

The number of offerings rose nearly 60% to 2,214 from 1,391.

Adding to the strong start of February, January finished on a very high note with nearly $4.5 billion issued in the last two weeks of this month.

The number of larger deals, those in excess of $50 million, has also doubled this year to 10 from five a year ago.

Good market conditions

During most of that time, the market continued to be bullish except for that last week of January when the fear of the new coronavirus began to take hold.

Still, the market has been resilient, rising consistently this month with the S&P 500 index up nearly 5% year to date. Last week alone saw the benchmark rise 1.6%.

For Matt Rosenberg, head of trading and strategic initiatives at Halo Investing, a mix of bullishness and caution helps explain the appeal of structured notes at the present time.

“People are thinking we’re going to have some kind of correction one way or the other. Investors are starting to see the new virus is real and that it could have an impact on the market,” he said.

Need for protection

For now, investors appear to remain optimistic despite the fears of a global contagion from the new coronavirus now named Covid-19.

But the impact is already felt in China with the economy seeing disruptions in its supply chains and consumption.

“Even if the fears don’t come into fruition, people are definitely seeking protection more than they did before,” Rosenberg said.

“The market has been rising significantly over the past year and a half. It’s not a reason not to be bullish, but certainly it’s time to get some protection if market returns are not positive.”

Yields getting lower

In this uncertain environment, the bond market is rallying as well.

The flight to safety took a new turn last week, pushing Treasury yields to new lows.

The 30-year Treasury bond hit a record-low yield of 2.061% on Thursday.

“Global demand for safe haven assets is real, which should continue to weigh down yields across U.S. Treasuries,” said Rosenberg.

If the Covid-19 virus starts to have a more serious impact on the global economy, yields are likely to remain low, keeping the search for yield among structured notes investors more relevant than ever, he explained.

“For those looking for fixed-income alternatives in this environment, income-oriented structured notes offer above average yields while protecting a portion of the portfolio.”

“Before the last couple of weeks, the fear about the new virus wasn’t real. Now people are realizing that it doesn’t seem to be contained. We might see it spread outside of China and if it continues to have an impact on people, work and production, it will have an impact on the market,” he said.

Income prevails

Continued volatility and low interest rates are big incentives to buy income-oriented products.

Last week showed an overwhelming bid on autocallable notes, which accounted for 80% of the supply versus only 11% for leverage.

“Terms on growth notes, especially uncapped, may not look as attractive to the regular note buyer, and the interest rate impact of the zero-coupon bond are weighing down the potential payoff,” Rosenberg said.

“Until coronavirus takes an impact on overall economy, it has created pockets of opportunity around single name stocks, which benefits income over growth notes,” he added.

A source explained how money can shift from a structure type to another without diminishing the overall size of the market.

“Generally speaking, less leverage doesn’t mean people are bullish and go long the market. I think it’s more like they move into income products. They value the protection more than the upside potential. I would think this is what’s happening right now with the market at all-time highs,” this source said.

Single stocks bonanza

As earnings season rolled on, single stocks took precedence, accounting for 70% of total sales versus 21% for equity indexes.

“Earnings season wrapping up last week was ripe for single stock and worst-of stock income notes,” said Rosenberg.

The usual suspects among tech and internet names showed up, such as Apple Inc., Microsoft Corp. and Netflix, Inc.

Cruising and gambling

Investors also put on more timely trades with Carnival Corp. and Wynn Resorts, Ltd. The share price of the cruise-line company has plummeted by 17% since mid-January as a direct response to the emergence of the new virus.

Wynn Resorts, the Macao-based casino operator, has seen its stock drop 18% in the last two weeks of January.

“We continuously see a lot of interest in tactical or core allocations,” said Rosenberg.

“This is tied to both China and the coronavirus scare.”

The Chinese government announced Monday that the Wynn Resorts casino will reopen Friday after a 15-day closure, pushing the stock back up again, with a 5% gain since the announcement.

The short-term volatility helped raise coupons while the improved outlook gave investors more confidence, which appeared to benefit both pricing and demand.

“Macao opening back up for business and positive prospects of more U.S. states legalizing gambling can explain the interest around Wynn Resorts,” he said.

UBS AG, London Branch priced two small deals on Wynn Resorts, one with a one-year maturity paying an 11.5% contingent coupon, the other with a two-year tenor offering a 14% contingent coupon. Both deals priced with a 60% contingent coupon barrier.

Two of the most popular names were Lyft, Inc. (six offerings) and Uber Technologies, Inc. (five), which reported earnings on Feb. 11 and Feb. 6, respectively. UBS issued all those deals.

FedEx Corp. also was one of the favorite underlying stocks, gathering four offerings.

Top deals

Royal Bank of Canada’s $14 million of one-year 8.2% airbag autocallable yield notes linked to FedEx topped the list of last week’s deals, according to the preliminary data.

Interest is payable monthly.

The notes will be automatically called at par if the shares close at or above the initial share price on any quarterly observation date.

The payout at maturity will be par unless the final share price is less than the conversion price, 90% of the initial share price, in which case the payout will be a number of the shares equal to $1,000 divided by the conversion price.

UBS Financial Services Inc. is the agent.

The second top offering was an index worst-of brought to market by Bank of Montreal in $10.47 million of 18-month autocallables linked to the lesser performing of the S&P 500 index and the Russell 2000 index.

Interest is payable quarterly at an annualized rate of 7.01% if each index closes at or above its coupon barrier, 75% of its initial level.

The notes are automatically called on a quarterly basis after six months above initial price.

The barrier for principal repayment at maturity is 75% of the worst-performing index’s initial price.

UBS was the top agent last week distributing 87 deals totaling $46 million, a 53.9% of the total. This total included all of the deals issued by UBS AG, London Branch along with the RBC’s $14 million autocall on FedEx.

JPMorgan was the second top agent followed by BMO Capital Markets Corp.

© 2015 Prospect News.
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