Structured notes issuance $295 million in first week of 2020; December sees record number of deals

By Emma Trincal

New York, Jan. 13 – Structured notes issuance kicked off the first week of the New Year with $295 million in 111 deals amid a rallying market, according to data compiled by Prospect News.

The market shrugged off pro-Trump riots on Capitol Hill on Wednesday and a disappointing jobs report on Friday, making new intraday and closing highs. The S&P 500 index jumped 1.8% for the week.

“Nobody knows why the market is up when you have riots in Washington. But it’s not the first time stocks behave that way. We already know the market has nothing to do with the economy. Now it looks like there’s also a disconnect between stock prices and politics,” a sellsider said.

“The market was down on Monday [Jan. 4]. It was a short window of time to find buying opportunities. You didn’t have to look for too long. Wednesday’s attack on Capitol Hill erased all the losses. It makes no sense.”

But the market has some reasons to cheer the New Year, he said, such as vaccine distribution and the likelihood of more fiscal stimulus as Democrats control Congress.

Big December

The year-end figures have been upgraded as more deals have been added during the holidays.

The holiday week between Christmas and the New Year saw the pricing of $871 million in 261 deals.

More interesting: December is now the fourth best month of the year after those of the first quarter. A revised total for last month will probably increase the tally above its current $6.98 billion.

It is common for December data not to be available right after the holidays. But the delay may have been exacerbated by a flood of deals last month. In addition to 1,970 deals currently tallied, Prospect News estimates another 1,000 coming up, which would set a record.

The months showing the greater number of deals since Prospect News began collecting data in 2004 have been last year, first in March (2,161 offerings) and then in September with 2,124 deals. It is likely that December will be far ahead.

Another factor for the unusually high volume seen last month is the “stay-at-home” consequence of the pandemic.

“Usually, December is not such a great month for structured products. People are travelling. We didn’t have that this year obviously. When you’re stuck at home, you’re more likely to be on your computer, look at your statements and buy products,” the sellsider said.

Record year

As noted before, 2020 was a record year in terms of issuance volume with $71.36 billion, over a third more than the $53 billion issued in 2019.

The number of deals at 22,192 (not including the expected increase for December) also set a record.

The robust autocallable market was one of the key drivers for growth last year. A total of $39 billion in 12,921 offerings came out in this type of product, or nearly 55% of the market.

“This high volume of autocalls illustrates the critical need for income. There are not many alternatives for yield, even in the high-yield market. These days, high-yield is not high-yield.”

Stock-picking also contributed to boosting sales. Stocks (whether as single names or in baskets) saw their volume double to $17.5 billion from $8.78 billion in 2019.

One call plus participation

Last week, however, indexes prevailed with 65% of the total.

Autocalls posted an unprecedented level of issuance with $224 million in 95 deals, or 76% of the total.

The top deal however did not totally fit into the pure autocall category. Instead, the product was built around a hybrid structure which emerged last year combining uncapped participation at maturity if the notes fail to be automatically called on one observation date, which typically (and this deal was no exception) falls on the first anniversary of the notes.

The $48.64 million two-year deal, named “buffer autocallable securities” with no reference to the delta one upside participation was linked to the S&P 500 index and issued by Citigroup Global Markets Holdings Inc.

The notes will be called at par plus 7.95% if the index closes at or above its initial level on Feb. 4, 2022.

If the notes are not called and the index finishes above its initial value, the payout at maturity will be par plus the index gain. On the downside, investors benefit from a 15% hard buffer.

Brit plays

Another top deal brought by Morgan Stanley Finance LLC for $38.93 million was a callable contingent yield note with a two-and-a-half-year tenor introducing the FTSE 100 index in the index mix along with the S&P 500 index and the Russell 2000 index. The U.K. equity benchmark is not new but its use in a worst-of is not quite common.

The 10.1% contingent coupon rate is paid based on a 70% coupon barrier, which is observable any day. The barrier at maturity set at 60% is observed point-to-point. The notes are callable on any quarter.

Another note using the FTSE 100 index was Barclays Bank plc’s $23.55 million of three-year trigger autocallable contingent yield notes due Jan. 11, 2024 linked to the FTSE 100 index and the Russell 2000 index, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will pay a contingent quarterly coupon at an annual rate of 6.3% if each index closes at or above its coupon barrier, 70% of its initial level, on the observation date for that period.

The notes are automatically called after six months if both indexes close above their initial levels on any quarterly observation date.

The Brexit event may explain the bid on the FTSE 100 index last week, at least in those two deals. British stocks jumped following the signature on Dec. 30 of the post-Brexit trade agreement sealing the departure of Britain from the European Union.

“Structures don’t change that much. Leveraged notes, autocalls always have the same structure. The variables are mostly the underlying assets. Underlying are based on market themes and as the market evolves in one direction or the other, you will see different types of underlying from time to time,” a market participant said.

Making up for low vol.

Another reason for the use of this index along with U.S. equity averages could be the need to reduce the correlation between the underliers in order to boost returns as lower or negative correlations bring additional risk, hence higher premium.

“When volatility isn’t high – and volatility isn’t high right now – you need to pick assets that are not correlated to each other if you want a good payout,” said the sellsider.

“The large-cap European index and the U.S. small-caps are not going to be hugely correlated.”

Another effort in obtaining premium from dispersion risk was seen in Bank of Nova Scotia’s $15 million of three-year autocallable review notes linked to the worst of Advanced Micro Devices, Inc. and the VanEck Vectors Oil Services ETF.

It paid off. After one year, if the notes are called – both assets are at or above their initial price – the notes will pay a 20.55% call premium. At maturity, investors get a cumulative “coupon” of 41.1% if the worst performer finishes above a 60% barrier.

J.P. Morgan Securities LLC was the agent.

“Energy is now doing well. Tech has been doing well for a long time. It’s an economic trade,” the sellsider said.

UBS was the top agent last week with $146 million in 92 deals, or 49.4% of the total.

It was followed by JPMorgan and Citigroup.

Barclays Bank plc was the No. 1 issuer bringing to market nine offerings totaling $124 million, a 42% share.

© 2015 Prospect News.
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