Structured products issuance at $1.29 billion for month as market rallies, volatility high

By Emma Trincal

New York, Feb. 17 – Structured products agents priced $1.29 billion in 379 deals this month, according to preliminary data compiled by Prospect News through Feb. 12. During that time last month, 445 deals hit the market totaling $1.685 billion.

Last week’s preliminary data showed 106 deals making for $164 million. Revised figures for the previous week (first week of the month) revealed $1.125 billion in 273 deals.

Year

For the year through Friday, agents sold $7.882 billion, slightly less than last year’s $8.6 billion last month but this year’s figures are subject to changes and will be revised upward because the data is live. It is therefore too soon to assess the direction of the trend.

In the same way, the current year-to-date deal count of 2,292 will be upgraded as more deals get filed on the Securities and Exchange Commission website. Last year saw the pricing of 2,314 offerings during the same time.

Automation

The trailing 12-month totals are more telling.

Agents priced 22,516 offerings between Feb. 13, 2020 and Feb. 12 last week, a 26.2% increase from 17,840 during the 12 previous months.

Issuance volume during that time grew by nearly 25% to $71.50 billion from $57.22 billion.

“We see more and more deals for sure. It’s been like that for a couple of years,” said a sellsider.

“More desks are using those automated systems like Simon, Halo and Luma. Things are getting customized so that people can express more diverse perspectives.”

Sellsiders are pushing the trend.

“Everybody is on board right now. Some firms don’t even allow their brokers to do structured products other than through those three marketplaces. In part it’s for compliance reasons. When the process is done manually with spreadsheets and e-mails, there is room for error. It’s easier to keep records and to track portfolios when you use those automated systems, and that’s why you see more deals and smaller deals,” he said.

Luma Financial Technologies, Halo Investing and Simon Markets (Structured Investment Marketplace and Online Network) are online distribution platforms designed to directly connect financial advisers to issuers. Banks are investors in those platforms. The technology also helps banks with back-office, record-keeping and client services.

Rally, volatility

The market continued to rally with the S&P 500 hitting new highs and finishing the week up 1.2%.

But volatility as measured by the CBOE VIX index is not dropping on a historical basis, according to Charles Schwab chief strategist Liz Ann Sonders. It has been trading above 20 for most of the past 12 months, which is above historical average.

“Our current VIX is elevated despite [the market] making new highs basically every day since November,” she said in a recent note.

“It's the second-longest stretch in history. The longest was in the aftermath of the 2008 financial crisis.”

In early 2009, few investors knew the market had bottomed, which explains the stretched volatility. Now it seems like the market is pricing risk ahead, a sellsider said.

Autocalls

Higher volatility of course is good news for the issuance of autocalls, which made for 62% of total volume this month.

“Volatility is higher and therefore autocalls are cheap. These products have always been a way to monetize volatility,” the sellsider said.

“The vega of autocalls is more negative.”

An option’s vega is a measure of the impact of volatility changes on the price of the option.

As autocalls are short volatility, the position is known to have a negative vega since it makes money when volatility goes down.

The market’s love affair with autocalls may not necessarily be driven by investors, he said.

“Banks decide what to offer. I don’t think it’s based on demand. If something makes sense because it prices well, you’ll see more of it,” he said.

Yet autocalls would not sell so well if rates were not so low, other sources said.

Leverage

Leveraged notes this month accounted for 21% of total sales, a majority of which (80%) came with no barriers or buffers.

“It’s been tougher to find leverage. I know that when we shop for them, we don’t see as many as we used to,” said Andrew Valentine Pool, main trader at Regatta Research & Money Management.

However leveraged notes issuance picked up last week making for 48% of total sales. It was mostly the result of a large block trade issued by Canadian Imperial Bank of Commerce. The Canadian bank priced $77.35 million of 13-month capped leveraged notes linked to the S&P 500 index paying 1.5 times the index gain up to a 19.8% cap. Investors will lose 1% for each 1% index decline.

CIBC World Markets Corp. is the agent, according to the prospectus.

“These types of notes have been done for years. They’re offered by some of the biggest banks. You have to be able to pull out $77 million. My guess is there’s probably another agent in this trade,” he said.

Short-term notes with upside leverage, cap and no downside protection are one of the most popular products of BofA Securities. Typically, BofA deals come with 2x leverage on a 13 to 15-month tenor. Alternatively, this agent will print deals paying 2x the gain on a two year with cap and a modest buffer. Other large dealers, such as UBS, JPMorgan and Morgan Stanley, also offer leveraged capped notes with full downside exposure from time to time, according to the data.

Not the last dance yet

Because volatility has not dropped, the bull market is not playing against the sale of structured notes, sources said.

“Certain clients have already done structured products in the past and they want to continue,” said Pool.

“If you did 2x, S&P, on a 15-month up to a 28% cap, you did pretty well for the past 15 months. We have a number of clients who continue to do just that, when we can find the right product.”

If some strategists worry about excessive valuations and speculation, fears of a bubble are overdone, according to this trader.

“My position is that with all this money in the system in both the U.S. and Europe, the chances of a large pullback or even a recession in the next couple of years are not likely. The valuations are higher, that’s true. But we had trillions of dollars in the U.S. alone. A lot of that money is finding its way into the stock market. I don’t know if it’s a good thing for consumers but it’s great for investors,” he said.

Pool said his firm uses both autocallables and leverage.

“We keep track of what’s in autocall and what’s in leverage. We try to keep it within the parameters of what the client’s goals are,” he said.

Assets for the month

Equity indexes remained the top asset classes. Two-thirds of total sales so far this month came from equity index-linked notes.

In an environment where downside protection is expensive to price, investors use broad index exposure to reduce the risk via diversification.

“Even though we’re bullish, we do have some concerns around tech stocks or names that are richly valued. Those are more susceptible to a pullback. If we buy structured linked to the Euro Stoxx, you’re less likely to get hurt,” said Pool.

Stocks this month represented about 23.5% of the total.

Commodities and rates have nearly disappeared from what can be characterized as an equity-centric marketplace. In the last 12 months, only $118 million worth of commodities-linked notes priced in 15 deals, which was 0.15% of the total. Interest rates accounted for less than 1% as well with $263 million in 26 deals.

When it comes to interest rates, Prospect News does not include lightly structured notes linked to Libor such as step ups, fixed-to-floating notes and capped floaters.

Two equal weight

Among the noteworthy deals last week, Citigroup Global Markets Holdings Inc. priced a couple of fixed-rate notes with a 15-month maturity linked to the Invesco S&P 500 Equal Weight ETF.

The notes are callable at par on any monthly coupon payment date after three months.

The payout at maturity is par if the ETF finishes at or above 55%, otherwise, investors will be fully exposed to losses.

One issue priced for $27.1 million and paid a fixed coupon of 4%. The fee is 1%. The other offered a 6.22% fixed rate and priced for $8.39 million with no fee. Both deals priced on Feb. 10.

Citigroup Global Markets Inc. and UBS Financial Services Inc. are the agents for both.

“The barrier is so low, the risk here is the call risk,” said Pool.

“We’ve used the equal-weight in our portfolio. It’s a way to limit the over exposure to big tech stocks.”

Popular stocks

The asset class mix last week was more diversified than usual with 56% in equity indexes, 23% in ETFs and 21% in stocks.

UBS did several deals on Uber Technologies, Inc. along with the usual Amazon.com, Inc. and Facebook, Inc. Health care and biotech stocks were not overly represented except for Pfizer Inc. and Teva Pharmaceutical Industries Ltd. Instead, shares of carmakers (Tesla, Inc., Ford Motor Co. and General Motors Co.) and banks (Morgan Stanley, Goldman Sachs Group, Inc. and Bank of America Corp.) were in focus.

ETFs such as the SPDR S&P Oil & Gas Exploration & Production ETF were used as proxies for commodities bets on oil. Some other deals were tied directly to oil stocks such as Marathon Oil Corp. and BP plc.

Metals underliers were spotted such as Southern Copper Corp. and Freeport-McMoRan Copper & Gold Inc. The sector enjoyed volatility in the aftermath of a second “short squeeze” on the silver bullion after readers or the Reddit site WallStreetBets placed heavy call bets on GameStop, which disrupted the market a few weeks ago.

However, metal stocks have long been regular underliers, including the iShares silver trust ETF, well before the call buying spree on the part of retail speculators.

UBS is the top agent this month with $379 million in 279 deals, or 29.4% of the total. It was followed by Morgan Stanley and JPMorgan.

The No. 1 issuer was Barclays Bank plc with $231 million in 17 deals, or nearly 18% of the total.

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