Structured notes issuance at record $67 billion in year so far; volume up 35.5% from last year

By Emma Trincal

New York, Dec. 23 – Just a few trading days left before year-end and the picture of 2020 looks brighter than ever for structured notes issuance.

Agents sold $67.04 billion of structured products for the year through Dec. 18, a 35.5% increase from $49.48 billion during the same time last year, according to data compiled by Prospect News. This amount of sales propelled 2020 to the best year on record since Prospect News began collecting data in 2004. The best preceding year was 2018 with $56.77 billion.

Meanwhile the year also saw a 32% surge in the deal count to 20,900 deals from 15,844 deals.

“This huge increase in the number of deals has boosted issuance volume this year,” a structurer said.

“Customization drives the volume.

“The more nimble you are, the greater your ability to do smaller deals and more deals.”

Such trend was predictable because the industry is perfectly capable of producing more at lower costs, he explained.

“Volume increases in any industry when costs can go down.

“If you think of labor costs for structuring the deals, what is it? The biggest part is legal fees.

“There’s no reason why you could not automate this. It’s just cut and paste.”

Structuring the deals itself is not labor-intensive, he said.

“There are not so many new structures.

“We price so many deals. Even the pricing is automated.

“Once you price one deal, whether you do 10 or 50 is not that different.”

2021 outlook

This structurer has a positive outlook for 2021.

“I’m optimistic. I think the trends that we have in place, automation, massive volume of autocalls, none of this is going to change. And they boost the volume. So, I’m confident that 2021 should also be a good year for structured products,” he said.

A market participant said he is himself almost “shocked” about the steep growth seen this year.

“We see more and more demand. It keeps on growing. They want growth on single names, income on indices...you name it,” he said.

He foresees sales continuing to grow in 2021 due to the difficulty investors have to predict any market trend.

“If you ask financial advisers, investors, analysts what their outlook is for 2021, there’s no consensus,” he said.

“Fixed-income yields continue to crumble.

“There is a great deal of uncertainty in the equity market.

“People don’t know what the market is going to be like. All they can do is make themselves a little bit more comfortable by adding some protection.”

As a result, alternative investment allocations in portfolios are increasing, he said.

“There are more compelling reasons than ever to look at structured notes.”

Last week

Agents sold $646 million in 257 deals in the week ended Friday.

Revised numbers for the previous week showed $1.605 billion in 401 offerings, pushing volume for December to $3.044 billion, a 35% increase from November’s $2.255 billion in 615 deals.

From a year ago, volume in December through Friday is up 52% from $2 billion.

The market was up last week, with the S&P 500 index posting a new all-time high at 3,726.70 on Friday. It rose 1.3% on the week. As has been the case, the rally did not eliminate volatility given conflicting headlines. On the negative side: cases of Covid-19 and hospitalizations continued to rise, and Congress still failed to pass a relief bill.

On the positive side: the distribution of the Pfizer/ BioNTech vaccine was underway and the U.S. Food and Drug Administration approved Moderna's vaccine. The Vix was in the mid-22 range above its long-term average of 19.5.

Autocall explosion

The penetration rate of autocalls was greater than ever last week, those products (Phoenix autocalls and snowballs combined) accounting for 93% of total volume in $601 million. A total of 223 autocall offerings was priced, which is 87% of the deals. These figures have never been seen before. This year, the average market share for autocalls was 55%, already more than 40% in 2019.

Not all deals were filed with the Securities and Exchange Commission by press time, but it would take a high amount of leveraged notes issuance to modify this proportion rate significantly, which is unlikely.

The structurer said some of his clients themselves are surprised to see the large increase in autocallable sales.

“I’m not. People want the autocalls,” he said.

“You can now get leveraged exposure through ETFs and UIT, but you need a structured note to replicate the autocall payout.

“If you want an income play autocall, there’s no way around a note.”

He predicted the trend will persist in the upcoming year.

“We’ll see even more autocalls in 2021. They’re attractive both from the standpoint of the buyer and the standpoint of the seller,” he said.

ETF growth

Another noticeable trend last week was the greater amount of ETF deals totaling $115 million in 10 offerings, including the second and third largest deals. In market share, ETF underliers accounted for 18% of the total versus a 7% average for the year.

The structurer said he has noticed that trend for some time.

“The gap is getting smaller between ETFs and indices,” he said.

In terms of market share, ETFs which used to represent 4.85% of the total last year, now make for 7.14% of it. In comparison, equity indexes, which represented 78.83% of last year’s sales, saw their market share fall to 65.12% this year despite the many uses of indexes in worst-of deals.

ETFs in absolute notional amounts have doubled to $4.79 billion from $2.4 billion last year.

Meanwhile, equity indexes, while still prevalent, have grown by only 19.5% to $43.66 billion from $36.53 billion.

“ETFs have grown much faster. The use of ETFs has rapidly increased this year,” he said.

“They’re easy to hedge. And if you want to play a particular sector, the ETF is much better known than the sector index they replicate.”

Top deal

BofA Finance LLC priced the top deal last week, with $31.29 million of three-year autocallable contingent yield notes linked to the Russell 2000 index and the S&P 500 index.

The notes will pay a contingent quarterly coupon at an annual rate of 6.15% if each index closes at or above its coupon barrier, 70% of its initial level, on the observation date for that quarter.

The notes will be called at par if each index closes at or above its initial level on any quarterly observation date after six months.

The payout at maturity will be par plus the final coupon unless either asset finishes below the downside threshold level, 70% of its initial level, in which case investors will lose 1% for every 1% loss of the worse performing asset from its initial level.

UBS Financial Services Inc. and BofA Securities, Inc. are the agents.

Two Citi ETF worst-of

Next, Citigroup Global Markets Holdings Inc. priced $29.54 million of two-year autocallable contingent coupon notes linked to the least performing of the Communication Services Select Sector SPDR fund, the Financial Select Sector SPDR fund and the SPDR S&P Regional Banking ETF.

The quarterly contingent coupon rate is 11.05% based on a 70% coupon barrier.

The notes are automatically called on any quarterly autocall date if all ETFs are at or above their initial price.

The barrier at maturity is 70%.

Citigroup Global Markets Inc. is the underwriter.

Citigroup offered another ETF autocall deal using the SPDR S&P Regional Banking ETF again. Citigroup Global Markets Holdings’ $28.23 million of two-year autocallable contingent coupon notes linked to the least performing of the Technology Select Sector SPDR fund, the SPDR S&P Biotech ETF and the SPDR S&P Regional Banking ETF was the third largest deal last week.

The contingent coupon annual rate is 14.8%; the coupon barrier and barrier at maturity are 70%.

Citigroup Global Markets Inc. is the underwriter.

Morgan Stanley on indexes

Finally, back to the index space, Morgan Stanley Finance LLC priced $27.81 million of two-year contingent income autocallables tied to the Nasdaq-100 index, the Russell 2000 index and the Dow Jones industrial average.

The notes pay a 9.05% contingent coupon rate per annum based on a 75% coupon barrier. The final barrier is also set at the 75% level.

Morgan Stanley & Co. LLC is the agent.

The top agent last week was UBS with $217 million in 166 deals, a 33.56% market share.

It was followed by Morgan Stanley and Citigroup.

Credit Suisse AG, London Branch was the No. 1 issuer with $144 million in 21 deals, or 22.3% of the total.

Barclays Bank plc is the top issuer for the year with $9.09 billion in 1,850 offerings, or 13.55% of the total.

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