Issuance tally at $452 million in shortened week; index notes stage a comeback amid rally

By Emma Trincal

New York, April 7 – Agents priced 72 offerings totaling $452 million in a four-day week, which saw the U.S. market rising to new record highs and the S&P 500 index closing above 4,000 for the first time on Thursday.

The market was closed the next day in observance of Good Friday.

Larger trades continued to be seen in continuation with the previous week, which recorded $1.75 billion in sales via 197 deals, according to updated data compiled by Prospect News.

Volume

March’s issuance volume hit $6.16 billion in 1,594 deals, a more than 15% drop from last year’s $7.29 billion (2,161 deals) during the same month. One caveat: March data is still subject to upward revisions. Also, March was the second-best month of last year after December, which is raising the hurdle. The first three months of 2021 may not easily outperform last year’s first quarter as February and January were among the top months as well, each of which generated over $7 billion in volume.

On a yearly basis, sales amount to $21.13 billion through April 2 versus $21.93 billion last year, a 3.65% drop.

The number of deals has remained flat from 6,086 last year to 6,043.

“We’re catching up. A 3.65% drop is noise. It’s pretty much flat,” a market participant said.

Much more encouraging was the trailing 12-month picture with $71.43 billion in 22,495 deals, an 11.6% issuance volume increase from the previous 12 months. The 16% jump in the deal count from 19,374 was also significant.

Economic improvement

Main underlying trends last week included the preeminence of index-linked notes issuance dwarfing stock deals. Among indexes, issuers were able to print large trades on a single index. International benchmarks were in favor and within the United States the technology sector rebounded, pushing the Nasdaq up 2.6% on the week.

“The end of the week saw a return of the heavily-weighted growth stocks, thanks to quarter-end rebalancing/first-of-the month inflows, a retracement in long-term interest rates, and positive-minded analyst recommendations,” said Steve Sosnick, chief strategist at Interactive Brokers in a research note.

The choice of some underlyings however indicated that investors continued to play both value and growth.

The positive momentum about a return to normal continued to be strong, fueled by a $2.3 trillion stimulus package and immunization news that now nearly 20% of the U.S. population is fully vaccinated.

Autocalls and volatility

The flow of autocalls as a percentage of total sales was lower last week at 58% compared to a year-to-date average of 65%. Leverage regained momentum making for 35% of last week’s volume versus a 19% share for the year.

The low level of volatility seen last week may or may not have been a factor playing against autocalls.

Contrarian and value portfolio manager Steven Jon Kaplan, founder of True Contrarian Investments, noted that the VIX index hit its most depressed level on Thursday since Feb. 21, 2020 at 17.29.

“The market is choppier now than it was back in November, December and up until mid-January. The relentless call buying that pushed up vol during that time has somewhat subsided,” he said.

By “choppy market” he was referring to the Nasdaq and the Russell 2000 which remain off their 52-week highs of February and March respectively. The S&P 500 index on the contrary keeps on rallying and is up 8.5% for the year.

“When the Robinhood crowd drove call volume to unprecedented levels, it was some sort of anomaly because typically people buy puts to hedge and that’s usually what drives volatility up. For the first time the cost of out-of-the money calls was higher than the cost of out-of-the money puts. It was odd,” said Kaplan.

He attributes the lower volatility to the same factor that drove it higher.

“The herd is now less excited about buying calls, they’ve gone back to buying stocks,” he said.

The record low VIX is also a market sentiment indicator.

“It shows that investors are not concerned at all about a market correction. It’s a sign of complacency,” he added.

Market timing

Some advisers tend to buy more of the short-volatility products during selloffs as investors are lured by the higher caps and lower barrier levels made possible by the rise in premium.

Could the low volatility seen last week help explain the relatively weak demand for autocalls?

The market participant did not think so.

“While it’s true that low volatility levels hurt pricing of structured notes, I don’t think advisers trade volatility when they buy a note. You may see a 14% coupon today and perhaps a month ago it was a 15% coupon. But do people really care? Should they even care?” he said.

The biggest contributor of what makes people buy a note is not volatility swings but the price of the underlying, he added.

“It’s your own view on the market and your own entry point that matters.

“If you’re a value investor, you’ll wait for a correction to get a higher coupon. That’s fine. It’s your style. But this is not necessarily everyone’s style. If everyone agrees on what the market is, there is no market.

“In fact, I would argue that waiting for a higher cap is a bad idea. You should buy when the price is right for you.”

Archegos

The dominant news story last week was Archegos Capital Management’s margin call and its effects on some of the hedge fund’s prime brokers such as Credit Suisse. Credit Suisse has announced heavy losses due to the hedge fund defaulting on its calls. This may raise the issue of credit risk, an almost forgotten preoccupation of structured notes buyers 13 years after the fall of Lehman Brothers.

“Banks have experienced billions of dollars in losses as a result of this debacle,” said Sosnick.

“While the losses never rose to the level of systemic risk, the Archegos saga may continue to reverberate across the market and affect investors all throughout the financial spectrum.”

The market so far has downplayed the risk of contagion.

“Several banks got impacted and yes there is a concern,” said the market participant.

“But this is not like the financial crisis when a systemic event – the mortgage blowup – led to Lehman’s bankruptcy,” the market participant said.

The five-year credit default swap spreads of Credit Suisse after peaking at 72 basis points on March 30 compared to 47 bps in the beginning of the year, have begun tightening, according to Markit. The spread was 66 bps on Wednesday, according to the financial information provider.

Underlying

Index-linked notes prevailed last week over stocks. They accounted for 82% of the total in $373 million sold in 24 deals. In contrast, stocks and ETFs made for only 9% and 8% of total sales respectively.

The largest stock deal was UBS AG, London Branch’s $15.1 million of autocallables tied to Intel Corp. This issuer priced the majority of the 46 stock deals last week. Their size was only at $600,000 on average, excluding the Intel trade.

Despite the buoyant performance of the Nasdaq, underlying stocks were a mix of value and tech stocks. The most used names last week were PayPal Holdings, Inc., Royal Caribbean Cruises Ltd., Snap Inc., Alcoa Corp., Boeing Co. and JPMorgan Chase & Co.

On the index side, investors continued to look outside the United States heavily bidding on international equity.

Out of the $373 million of index notes, about 40% came from six offerings linked to international equity benchmarks. Those deals also happened to be the largest ones in size.

Crossing borders

GS Finance Corp.’s $55.4 million of six-year leveraged notes tied to the Euro Stoxx 50 index was the biggest one. The payout is par plus 203% of the index gain and the downside barrier level was 70%.

Morgan Stanley Wealth Management was the dealer.

GS Finance Corp.’s $42.03 million of 14-month capped gears linked to a basket of indexes came second.

The basket consists of unequally weighted foreign indexes, which are the Euro Stoxx 50 index with a 40% weight, the Nikkei 225 index with a 25% weight, the FTSE 100 index with a 17.5% weight, the Swiss Market index with a 10% weight and the S&P/ASX 200 index with a 7.5% weight.

The return is triple the index gain subject to a 15.55% cap. Investors are fully exposed to the decline.

UBS Financial Services Inc. is the selling agent.

UBS sold another 14-month leveraged note issue on the behalf of JPMorgan Chase Financial Co. LLC for $35.82 million and linked to the iShares MSCI Emerging Markets exchange-traded fund. The same three-times leverage factor applied to the upside and one-to-one exposure to the downside. The upside cap was set at 18%.

The top agent last week was UBS with $187 million in 55 deals, a 41.5% share. It was followed by Morgan Stanley and Barclays.

Barclays Bank plc was the No. 1 issuer with $138 million in 10 offerings, or 30.6% of the total.

The bank was also the top issuer for the year with $3.17 billion in 525 deals, a 15% market share.

© 2015 Prospect News.
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