Structured notes issuance tops $458 million for week despite Elections, Covid-19 market jitters

By Emma Trincal

New York, Oct. 7 – It was a solid week both for the market and structured products despite market turbulence as the U.S. General Election nears.

Agents priced $458 million in 116 deals in the week ended Friday, following a strong close of September with $1.77 billion during the previous week, according to data compiled by Prospect News and recent updates.

The stock market finally turned positive after a four-week stretch of losses in September. The S&P 500 index closed the week up 1.5% at 3,348.42, only 6.6% off its all-time high of Sept. 2.

As it’s been seen, the market can be up yet volatile. Coronavirus and stimulus stalemate in Congress dominated the headlines. In addition, the president testing positive for Covid-19 and a disappointing job report on Friday introduced more uncertainty, spurring more volatility.

Elections season

The impact of the political uncertainty should benefit structured notes sales, sources said. But fear remains an important element leaving investors unsure about the timing of their investments.

“As people look toward the Elections there is so much news to unpack. Whether or not we have a new president or a change in majority in Congress, it’s hard to know what’s going to happen for investors,” a market participant said.

“At the same time, the volatility is up, which creates a compelling story for structured notes.

“For now, most people are looking for protection. They use structured notes to hedge against potential tail risks while making sure they get decent returns.”

Political risk

One problem faced by advisers is to convince investors that the timing is right when volatility climbs. As the market dropped during most of September but has finally regained some traction last week, seeing volatility still at high levels may be puzzling for some. Analysts attribute the above-average volatility to the upcoming elections.

“All things considered, markets have a difficult time dealing with political risks,” said Steve Sosnick, chief strategist at Interactive Brokers, in a recent note.

Delaying investments

“Investors are sitting on the fence. I hear it from advisers all the time. Their clients say: I’ll wait until the Election is over and then I’ll get in,” a structurer said.

“Of course, it’s normal for people to hold off. But they may be missing an opportunity. If you’re talking about holding off buying stocks, ETFs or bonds, I’m with you. But when you don’t know what’s going to happen you should be considering equity derivatives.

“If you’re so sure the market is going to go up, you should be buying stocks.

“If you’re so sure it’s going to go down, you should be shorting.

“But if you’re unsure, you should take advantage of the most valuable thing structured notes, buffered ETFs or buffered UITs have to offer, and that is the protection. With that, your entry point doesn’t have to be as precise as when you’re buying a stock.”

Month, quarters

Volume for September was at $4.77 billion, according to preliminary data. This sets September as the third worst month of the year after April ($4.72 billion) and May ($4.67 billion).

The first quarter was by far the best with a $21.54 billion in notional. Volume sharply declined to $15.41 billion in the second quarter. The third quarter’s drop stabilized at $14.87 billion.

Naturally, the Covid-19 crisis had a negative impact on the second and third quarter, the market participant said.

“After such a strong first quarter and as we got into lockdown mode, April and May were very weak,” he said.

“Most volume was off of subscription calendars. You saw banks cancelling their deals, shifting from monthly offerings to twice-monthly offerings.

“In part it was because traders started to work from home. But also, volatility was moving so fast. You couldn’t hold the terms of a deal for a month. Since then banks have been reshuffling their operations and we’re returning to a more normalized cadence.”

Year to date

For the year, issuance volume rose to $51.93 billion through Oct. 2 from $37.23 billion in the year-ago period, a 39.5% increase.

There have been 15,953 offerings hitting the market this year, or 31.6% more than 12,120 last year.

“We’re still growing but not at the same pace as we used to,” the structurer said.

“There was a point earlier this year when volume was up by more than half. Now it’s about up 40%. But it’s not a drastic deceleration. A lot of what you’re seeing is seasonal.”

He is not optimistic for October, however.

“This month, we may see fewer people coming in. While it’s the best time to buy structured notes, people don’t always act rationally, in fact they rarely do. Hopefully after the Elections people will be coming in,” he said.

Autocalls, stocks, ETFs

The market last week switched back to its normal mode with an abundance of autocallable products, this structure type making for 79% of total sales in 86 deals. Leverage on the other hand strongly diminished with only 9% of the total in nine deals. To be fair, leveraged issuance overwhelmed the previous week due to the large block trades sold by Bank of America.

Stocks last week took the lead as the earnings season is approaching and volatility is rising. Stocks either as sole underliers or in baskets/worst-of deals amounted to $183 million in 71 deals. Equity indexes, after a strong week ending BofA’s month, decreased to 39% of the total in $177 million via 28 offerings.

One important surprise was the strong increase in ETF-linked notes issuance volume. This underlier represented 21% of the total in 16 deals last week, a total of $97 million.

Sector bets

“People are increasingly playing ETFs for their structured notes tactical plays,” said the structurer.

“They want to bet on certain sectors,” he said.

Investors also want better terms.

“To make a good worst-of you need underlying assets that are different. One way to do that is getting into sectors.

“Of course, you can play one stock against another to achieve the dispersion. But you don’t have the diversification of an index or sector.”

Dispersion refers to the low or negative correlation between underliers. The greater the dispersion, the greater the risk, hence the higher the premium paid to the investor.

“If you do a large-cap index versus another large-cap index, you’re pretty much doing the same thing. You’re not going to get a lot of premium. It’s going to be a low coupon,” he said.

ETFs offer a way in between, he said, making them increasingly popular as underlying assets.

“They give you the dispersion and it’s not as risky as betting on two or three stocks,” he said.

ETF deals

An example of such a deal was Citigroup Global Markets Holdings Inc.’s $15.96 million of three year autocallable contingent coupon notes tied to the least performing of the Financial Select Sector SPDR fund, the SPDR S&P Bank ETF and the VanEck Vectors Semiconductor ETF. The contingent coupon rate is 15% per year with a 68.8% coupon and final barrier.

Citigroup Global Markets Inc. is the underwriter.

Citigroup also issued $18.47 million of five-year autocallable contingent yield notes on the worst of the Invesco S&P 500 Equal Weight ETF and the iShares Russell 2000 ETF. UBS was the distributor.

Worst-of on indexes

Naturally worst-of on indexes remained a leading category with $131 million in 21 deals, or 28% of the total.

Bank of Montreal priced the top deal in this group with $24.32 million of 18-month autocallable contingent coupon autocallable notes linked to the worst of the Nasdaq-100 index and the S&P 500 index. The notes pay a monthly contingent coupon of 9.75% per year based on a 60% coupon barrier, equal to the level of the principal repayment barrier at maturity. The notes are automatically called after three months if the underlying is above its initial price.

Metals, tech

Precious metals via the equity shares of miners ETFs are in vogue. As an example, Morgan Stanley Finance LLC priced of $19.89 million of leveraged notes tied to the iShares Silver Trust paying 3x the upside capped at 53% with a 15% downside buffer, a surprisingly large size for this type of underlying.

The VanEck Vectors Gold Miners ETF was also employed in several small deals.

Technology remained the sector of choice for income-oriented products. A total of 11 deals linked to Apple Inc. were priced totaling $40 million.

The largest one came from Morgan Stanley in an $18.4 million three-year offering paying a contingent coupon of 10.6% per year on the basis of a 65% coupon barrier.

Morgan Stanley also sold $18.18 million of three-year contingent income autocalls on Microsoft Corp. paying 9.35% in contingent coupon on a 70% barrier. GS Finance Corp. issued a product with identical terms in a $13.73 million offering. Morgan Stanley distributed both deals.

Morgan Stanley was also the distributor of UBS AG, London Branch’s $14.12 million of three-year contingent income autocallables linked to the worst performing of Apple, Alphabet Inc. and Microsoft.

The top agent last week was Morgan Stanley with $171 million in 13 offerings, or 37.3% of the total.

It was followed by UBS and Barclays.

The No. 1 issuer was UBS AG, London Branch with nine deals totaling $65 million, a 15.16% share.

Barclays Bank plc remains the top issuer for the year with $7.64 billion in 1,569 deals, a 14.7% share of the total.

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