Structured products tally at $2.75 billion for month to date, up 43% from July pace

By Emma Trincal

New York, Aug. 24 – Structured products agents last week priced $650 million in 146 deals, according to preliminary data compiled by Prospect News. Updated figures for the previous week showed a notional of $1.072 billion in 254 deals. Overall, sales this month through Aug. 19 are up 43% from July’s equivalent period, reaching $2.75 billion versus $1.92 billion.

Sunny rally

The increase in notional in August partially coincided with a summer relief rally in the stock market. From a mid-June bottom, the S&P 500 index jumped nearly 20% until early last week.

But last week reverted into sell-off mode, especially after the release of the central bank’s minutes leading investors to worry about a more hawkish stance on the part of the Federal Reserve. The stock market reached bear territory back in June, but a spectacular rebound followed until last week, which brought the Nasdaq back to bull market territory.

While the trend looking forward remains unclear and highly dependent on Fed action and inflation data, the summer rally has boosted confidence among investors, sources said.

“Structured notes don’t need market timing, but it certainly helps when people see a rebound,” said Matt Rosenberg, director at Halo Investing.

“People are getting more comfortable. They think we may be at a bottom.

“The fact that issuance went up in August is a good sign since August is usually a lighter month.”

Last week’s sell-off pushed the S&P 500 index down 1.2%. But many analysts see it as a typical short-term profit-taking trend after a strong rebound.

Stabilized market

A market participant expressed optimism about the structured notes space.

“Market sentiment has significantly improved this summer with the rally. It definitely helped propel structured notes volume in August,” he said.

“Unless we see a dramatic drop, we won’t go back to the low issuance volume we’ve seen for most of the year.”

Meanwhile, short term volatility spikes are not necessarily detrimental, he added.

“As they regain confidence, I see clients willing to buy notes on a dip.”

Sentiment is driven right now by anticipations regarding the Fed’s behavior.

“People expect the Fed to continue to hike rates but not necessarily aggressively. They’re starting to think that the market will start to turn around. They’re not as scared as they were from January to June,” he said.

Less risk on the coupon

Issuers find ways to attract investors when pricing becomes more favorable.

“It’s hard to read the short-term moves of this market. But if you’re a long-term bullish buyer, there are ways to navigate the volatility,” said Rosenberg.

One way consists of reducing the risk associated with the payoff.

“Some people use worst-of stocks with a guaranteed coupon and a 60% barrier. I’ve seen that on four-year notes,” he said.

A similar mandate may drive people to buy snowball autocalls with a memory feature. “The coupon is not fixed, but the chances of missing payments are reduced.”

More principal-protection

The market participant said he anticipates more demand for indexes and the development of more conservative strategies.

“With volatility rising, single stock underliers are scarier. I see more index-based stuff in the three- to five-year timeframe as people are looking for safer bets,” he said.

“While investors fear higher volatility, as rates creep up, issuers will be able to generate more principal-protected notes. I think you’ll see either baskets or indices with principal-protection.”

Stocks last week made for 10% of total sales while indexes accounted for 78% of the total, according to the data.

Unusual mix

Another interesting trend was the mix of one stock and one index in a worst-of structure.

Citigroup and JPMorgan provided some examples in a few tiny deals.

Citigroup priced a pair of two-year reverse convertibles of $1 million each, both of which carry a fixed coupon of 9% per year.

The first one was linked to the Nasdaq-100 index and Advance Auto Parts, Inc. and the second one, to the S&P 500 index and Charles Schwab Corp.

Not to be outdone, JPMorgan Chase Financial Co. LLC priced 9.3% yield notes linked to the S&P 500 index and Adobe Inc.’s stock. The price and duration were the same as the Citi deals.

For each note, the principal repayment was based on the worst-performing asset with barrier risk.

“Someone may have been interested in the stock at first without wanting the exposure to a single stock. By adding a more stable underlying like a diversified index, they can reach their yield target while lowering the risk,” said Rosenberg.

“I think it probably reflects a personal mandate, some investor doing the price discovery with the sellsider. I don’t know if it’s a trend. To me it complicates the client conversation a bit. But it’s certainly something worth watching.”

Meme stock mania

Last week’s equity markets saw the return of meme stocks with Bed Bath & Beyond plummeting 40% on Friday after a filing disclosed the sale of millions of shares by a top investor. That crash followed a 360% increase in the stock price since the end of June.

Exposure to the distressed company via structured notes is very limited. Since the beginning of 2020 only four deals have been issued on Bed Bath & Beyond totaling $11 million.

“This Bed Bath & Beyond thing is chatter. It’s a short-term trading opportunity for some people buying the stock, but it’s almost the opposite of what structured notes investors are trying to achieve, which is a defined outcome with some level of protection. With meme stocks, you’re talking very short-term fluctuations in price and volatility, intraday trading.

“You might have a conversation with clients on it. But those names are not going to be used in structured notes.”

The market participant agreed.

“Meme stocks like GameStop, AMC and Bed Bath & Beyond are just not long-term plays,” he said.

“A lot of those companies have been on the brink of bankruptcy. Issuers wouldn’t do it anyway.

“You don’t see as much volatility in the blue-chip names like Apple and Amazon. These are the real popular underlying.”

Best-selling stocks

The most frequent single underlying stocks used this year are Tesla, Inc. (231 times), Apple Inc. (156 times), Nvidia Corp. (136 times), Amazon.com, Inc. (127 times) and Ford Motor Co. (91 times), according to data compiled by Prospect News through Aug. 12.

Tesla commended the largest offering with HSBC USA Inc. bringing to market in June $51.23 million of three-year contingent income autocallables.

This ranking does not consider the large cash-settled note offerings, which are a hybrid of structured notes and convertible bonds.

$50 million floater

Last week’s top deal was a rate-linked offering brought to market by JPMorgan. The $50 million of fixed-to-floating rate notes due Sept. 22, 2023 offer a fixed coupon of 4% a year for the first four months. After that, the rate will be the two-year U.S. dollar SOFR ICE swap rate plus 60 basis points with a 1.75% floor. Interest is payable monthly. The payout at maturity will be par.

“It’s a play on the Fed tightening. That’s why it’s a short period,” said Rosenberg.

“These are tactical plays. As the Fed continues to tighten, we should continue to see more of those fixed-to-floaters.”

Digital, leverage

Aside from a JPMorgan $33.65 million issue of two-year digital buffered notes paying 19% if the S&P 500 index ends at or above an 85% threshold, the bulk of last week’s issuance consisted of short-term, leveraged capped notes with full downside exposure.

The largest one was UBS AG, London Branch’s $33 million of 13-month capped gears linked to the Russell 2000 index paying 3x any index gain, subject to a maximum return of par plus 21.1%.

Autocallables were still the top structure last week with 38% of the issuance volume, followed by leverage (28%) and digitals (13%).

Issuance dropped 16.3% for the year through Aug. 19 to $52.41 billion from $62.59 billion last year.

The deal count is 11,131 so far versus 18,516 a year ago, a 40% drop.

The top agent last week was JPMorgan with $206 million in 34 deals, or 31.7% of the total.

It was followed by UBS and Citigroup.

The No. 1 issuer was JPMorgan Chase Financial with 37 offerings totaling $223 million, a 34.3% share.

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