Structured products issuance $208 million for week; rates-linked notes eyed amid inflation fears

By Emma Trincal

New York, April 14 – Agents priced $208 million in 14 deals for the first week of April as the stock market pushed to all-time highs, according to preliminary numbers compiled by Prospect News. These figures will be revised upward.

Updated data for the previous shortened holiday week showed 93 deals totaling $629 million. The result was a $6.66 billion tally for last month in 1,801 offerings, making March the third month this year after January, which recorded over $8 billion in sales, and February’s $6.88 billion.

For the year, total sales amounted to $21.935 billion in 6,273 deals, a slight decrease of 3.6% from $22.754 billion a year ago. The difference may in part be due to delays in filings with the Securities and Exchange Commission.

On a 12-month trailing basis, volume is up 10.7% to $71.41 billion in the past year through April 9 from $64.5 billion in the previous 12 months. The number of deals jumped more than 14% to 22,381 from 19,577.

Steeper curve

One of last week’s noteworthy trends was the pricing of interest-rates-linked notes, which amounted to nearly 10% of the total sold, a share not seen in a long time. Equity indexes continued to lead with nearly two-thirds of total sales.

“We’re going to see more new issues on rates,” a fixed-income structurer said.

“With the government injecting in the economy trillions of dollars in stimulus money, the market is pricing higher inflation and higher interest rates. The yield curve is steepening. Meanwhile, a lot of older issues are getting called leading to more interest in new issues.”

With their high fixed-to-floating yields and principal protection, steepener notes make sense for income investors, he said.

The leveraged spread in some areas of the yield curve offers substantial returns, he said, and buyers can lock in 5% or 6% in guaranteed coupon on the first year.

“Where else can I get those rates?

GS Finance Corp. brought to market last week two issues of 10-year callable fixed- and floating-rate notes linked to the difference between the 30-year Constant Maturity Swap rate minus the five-year CMS rate. The first one for $17.25 million offered a 5% fixed rate on the first year, followed by 3.5x the spread with a floor of 1% and a cap of 8%.

GS Finance priced another deal for $2.92 million with slightly similar terms.

No protection, no problem

The equity market rallied for a third consecutive week last week. The factors keeping the bullish momentum on were the same, including a $2.2 trillion infrastructure package announced earlier by president Joe Biden, the expanded vaccine distribution and an improved employment picture. Both the S&P 500 index and the Dow Jones industrial average hit new record highs.

In this bull market, investors continued to look for leverage as evidenced by two big deals. This structure type represented 62% of the total versus 34% for autocallable income-oriented products.

Buyers of leveraged notes were overwhelmingly more interested in high gear, short tenor and unprotected structures following the “Accelerated Return Notes” model fashioned by BofA Securities. Those big trades were issued last week by the same Canadian banks, which are actively part of the BofA Securities platform. But this agent did not distribute those deals having closed its monthly cycle two weeks ago.

The first trade was Canadian Imperial Bank of Commerce’s $56.56 million of 18-month leveraged notes linked to the S&P 500 index. The upside payout is 3 times the index gain, capped at par plus 18.15%. Investors will be fully exposed to any loss.

CIBC World Markets Corp. is the agent.

Bank of Nova Scotia issued the second deal in $40.4 million of 18-month enhanced participation notes linked to the MSCI EAFE index.

The payout at maturity will be par plus 3x any gain up to 18.75%.

Investors will be fully exposed to any losses.

Scotia Capital (USA) Inc. is the underwriter.

Headwinds

Some sources found the appetite for deals with no downside protection a sign of “exuberance” on the part of investors.

“It’s not smart to trade without a hedge especially with structured products; otherwise, you just buy the underlying,” said a market participant.

“People are not afraid of a correction apparently. But inflation is a serious risk. That and higher taxes. I think those two could put an end to this bull market,” he added.

The fixed-income structurer had a similar opinion.

“Look, everyone has their own view. People make different decisions based on the information that they have. The market is not like a religion. Personally, I think those notes with one-to-one downside exposure are way too risky right now. It’s a little bit crazy,” he said.

“The Fed keeps on downplaying inflation. They’re telling the market they won’t raise rates for a while. Investors in turn are aggressively buying stocks. But the Fed is like Dr. Fauci. They tell you what’s going to happen until they change their mind. At some point the Fed won’t be able to ignore inflation. They will have to raise rates. There is no other way. It’s the marketplace that’s telling you where interest rates are going, not the Fed. I wouldn’t want to buy anything without protection in this stock market,” he said.

This structurer however does not expect inflation to hit just now. More pressing was the immediate impact of tax hikes.

“Raising capital gains taxes would put tremendous pressure on the stock market even if it’s just for high earners. What do you think people would do? They would stop buying and start selling,” he said.

Autocalls, ETFs

On the autocall front, issuers used more ETF underliers than usual. Those assets made for 25.2% of total issuance volume, versus 11% for the year-to-date average.

This may be due to a pause in stock-picking. But the need for yield remains a key driver for autocall issuance.

“Advisers and money managers realize that we’re at all-time highs. If you’re topped out, autocallables are a great way to get attractive coupons and downside protection,” an industry source said.

The top autocallable deal was Morgan Stanley Finance LLC’s $21.55 million of three-year trigger autocallable contingent yield notes linked to the least performing of the SPDR S&P 500 ETF and the SPDR S&P Regional Banking ETF.

The notes pay a contingent quarterly coupon at an annual rate of 7% if each ETF closes at or above its coupon barrier level, 70% of its initial level. The notes are automatically called after six months above par.

The downside barrier at maturity is 60% of the worst-performer’s initial level.

UBS is the agent.

Heavy metal, Asia

The bid on anything designed to hedge U.S. dollar depreciation and inflation, from gold to silver, continued to be seen last week. The trend reflects the renewed preoccupation with higher long-term yields and increased fiscal stimulus. The surge in the crypto market value, which topped $2 trillion for the first-time last week, is part of the same rationale.

As an example of a miners’ trade, UBS AG, London Branch priced $10.29 million of three-year autocallable contingent yield notes linked to the SPDR S&P Metals & Mining ETF.

The contingent quarterly coupon is 9% per annum based on a 60% coupon barrier, which is at the same level as the barrier at maturity. The notes are automatically called after six months when the underlier is at or higher than its initial level.

Investors continued to diversify away from U.S. assets, sometimes through more unusual underliers. Bank of Nova Scotia’s $3.5 million of three-year leveraged notes on the Vanguard FTSE Pacific ETF was an example. It was sold within the BofA platform.

The top agent last week was CIBC World Markets Corp. with $65 million in two deals, or 31% of the total. It was followed by Scotia Capital (USA) Inc. and UBS.

Canadian Imperial Bank of Commerce was the No. 1 issuer with the two deals it sold.

For the year, Barclays Bank plc is the leading issuer with 557 offerings totaling $3.262 billion, a 14.87% share of the total volume issued through April 9.

© 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.