April ends with $900 million of structured notes issuance for week; BofA prices top trade of year

By Emma Trincal

New York, May 5 – It was a quiet week for the end of the month with agents pricing $896 million of structured notes in 129 deals, according to preliminary data compiled by Prospect News. BofA Securities captured more than half of the issuance volume as the agent was closing its calendar month.

Month, year

April’s volume at $3.88 billion looks weak so far, but the tally will undoubtedly grow as not enough deals have been counted for the month, which just closed.

The first quarter of 2021 with $22.72 billion has already set a record since Prospect News began to compile data in 2004. The monthly deal count during the quarter averaged 2,240 deals. With only 795 deals reported, April sales still have a chance to be strong.

Year-to-date volume is flat so far through April 30 with $26.57 billion compared to $26.27 billion a year before. Numbers here again will be revised upward.

For the trailing 12 months, sales are up nearly 13% to $72.54 billion through April 30 from $64.24 billion in the 12 previous months.

Exhausted bull

The equity market was choppy with the S&P 500 index finishing up the week flat after hitting a new all-time high on Thursday. And yet, it’s not as if market-moving events were missing. Economic data was rosy with a 6.4% GDP increase on an annualized basis, confirming a robust recovery.

President Joe Biden announced another round of stimulus spending while Federal Reserve chair Jerome Powell maintained his dovish stance, staying put both on rates and asset purchases.

Those headlines could have had investors worry that the Fed is behind the curve in fighting inflation, but the 10-year Treasury yield did not move much. Finally, big tech companies announced strong earnings for the first quarter.

Positive earnings surprises, an accommodative Fed, more government spending, and signs the economy is booming should have boosted the stock market, analysts said. But it didn’t.

“The current bull market just isn't entirely its old self,” said Patrick J. O'Hare, chief market analyst of Briefing.com.

For some, it may be the sign that investors are getting concerned about the toppish levels of the equity market. The S&P 500 index has nearly doubled since last year’s bear market in March.

Fears of inflation for stock market investors are still there even if the bond market has quieted down.

Good inflation

But inflation may not be a bad thing for structured notes, a structurer said.

“With rates so low, bond investors have to extend duration, but then bonds become extremely volatile, and you can get crushed when rates go up. In structured products, you’re not playing the duration game. You’re expressing your views on the stock market. Structured notes do have some level of interest rate risk, but compared to bonds, it’s a much smaller part of the equation. The biggest risk for notes is the delta. So, in a way, structured products could become more attractive in an inflationary environment as a way to hedge interest rate risk.”

No1 deal of the year

But the behavior of the stock market does not necessarily reflect that of structured notes buyers who continued to enjoy the bull ride last week bidding on giant deals, which often came without any other hedge than asymmetrical leverage.

The week saw the pricing of the top deal of the year with Toronto-Dominion Bank’s $120.59 million of 14-month Accelerated Return Notes on the S&P 500 index. The payout is 3x the gains capped at 11.6% with no downside protection. BofA Securities, Inc. is the agent.

Big leveraged plays

BofA Securities also sold on the behalf of Bank of Nova Scotia another a 14-month deal with 3x leveraged return and full exposure to the downside for $44.35 million. Capped at 15.5% the return is linked to an unequally weighted index consisting of the Euro Stoxx 50 index, the FTSE 100 index, the Nikkei 225 index, the Swiss Market index and the S&P/ASX 200 index.

Another large 14-month leveraged deal came out from a third Canadian issuer and was also sold under the BofA Securities platform. Royal Bank of Canada priced $34.46 million of 3x leveraged notes linked to the Euro Stoxx 50 index capped at 17.51%. Investors will be exposed to any index decline.

Investors’ appetite for highly levered structures offering no downside protection was not necessarily a sign of complacency, according to the structurer.

“I don’t think leverage is bad. I don’t think it means people are mispricing the risk in the markets,” he said.

“If applied correctly, you don’t really need the buffer when you have 3x upside exposure and one-to-one downside.

“You don’t have to put all your money in the notes. If you’re rational, you’ll know that investing $100 in a stock is not the same as investing $100 in a leveraged note with triple leverage on the upside.

“I don’t think there’s anything wrong with those structures.”

Over $50 million club

A look at the offerings over $50 million in size, which have priced this year, offers interesting insights.

The group is constituted by 24 issues totaling $1.64 billion.

Leverage prevails with $795 million issued in 12 offerings, or nearly half the volume in this category of mega deals.

Perhaps more telling is the predominance of non-protected leveraged notes, which make for a third of the total notional of such deals versus leverage with buffer or barrier, accounting for only 13% of the total.

BofA Securities has distributed about half of these big trades in 10 deals totaling $802 million.

BofA prices big ticket trades, which are not the typical Phoenix autocall. Perhaps for this reason, BofA is no longer the top agent this year, with Morgan Stanley and UBS doing better both in volume and in deal count.

A sellsider suggested that BofA’s ranking suffers from the way the market tabulates new issues.

“If a firm like Bank of America is not doing as many Phoenix autocalls, even if they have big trades, the volume of what they’re doing is not going to increase as much as people who do autocalls day in and day out,” he said.

“It would be interesting to adjust the autocall volume taking into account reinvestments versus new money.

“All these deals getting called after three months and immediately rolled over are not necessarily what I would characterize as volume growth.”

But not all of BofA’s bread-and-butter deals are bullet notes. Another hallmark from this agent is the market-linked step-up autocall. Prospect News does not categorize those structures as autocalls due to the upside participation.

The deals differ from the traditional “Phoenix” autocall, which pay a contingent coupon at a barrier below the initial level. Instead, market-linked step-up autocalls pay an annual call premium, which is cumulative. At maturity, uncapped participation is offered above the certain step-up level, which is also a digital payout for any gain below the step strike. Most often those notes lack any downside protection unless the term is extended.

Scotia’s step-up

Bank of Nova Scotia priced $55.14 million of one such deal last week with a six-year tenor and 15% buffer linked to the S&P 500 index. The step-up payment is 30% and the annualized premium 4.75%.

Another one was Scotia’ $35.39 million of three-year autocallable market-linked step-up notes on the S&P 500 index. The annualized call premium is 7.71% and the step-up return, 26%.

In order to get downside protection, the autocallable market-linked step-up products have to extend the duration. They tend to be longer dated than the short-term accelerated notes.

“It makes sense,” the structurer said.

“Unlike leverage where you really need the market to go up, with those autocall step-up, you sit there and wait. The market does not have to be up, it can be flat. You just don’t want it to be down. For you to benefit from the features of those notes, you need time.”

As a sign that renewable energy continued to attract investors, Scotia priced another three-year market-linked step-up autocall for $31.47 million tied to the iShares Global Clean Energy exchange-traded fund.

Other agents offer similar autocallables with cumulative premium under different names, such as Morgan Stanley’s “jump securities.” But BofA is the incontestable leader, especially for the size of those trades. It had three such deals in excess of $50 million this year.

Investors continue to bid on non-U.S. markets as seen with one of last week’s leading trades – Royal Bank of Canada’s $34.46 million leveraged notes on the Euro Stoxx 50 index. Following the BofA Securities structure, the notes offer 3x leverage with a 17.51% cap and full exposure to the downside.

BofA’s push last week left a footprint in the structure breakdown with autocallables slightly receding with 39% of the total versus 43% for leverage. This is quite different from the year-to-date distribution, which shows nearly two-thirds in autocalls versus only 20% in leverage volume-wise.

Earnings fatigue

More surprising was the weakness of income-products tied to big tech in what was one of the busiest earnings weeks. Apple Inc., Microsoft Corp., Amazon.com, Inc., Facebook, Inc., and Google-parent Alphabet Inc. reported their results last week as well as carmaker Tesla, Inc. Yet very few notes were linked to those names. One exception was Morgan Stanley Finance LLC’s $11.41 million contingent income autocallables lined to the worst of Amazon.com, Netflix, Inc. and Tesla. But notes on one of the “FAANG” stocks (Facebook, Amazon, Apple, Netflix and Google,) used as sole underliers were sporadic and small (less than $500,000), according to the preliminary data.

This lack of reaction mirrored the stock market where the blowout results failed to move the stocks significantly.

“I don’t know. Maybe investors were not playing the earnings game,” the structurer said.

“If the issuers don’t think they have the demand for a particular stock or sector, they won’t issue the deal.

“People in general shouldn’t buy autocalls just because volatility is higher and the terms better. Terms are better for a reason. A deeper barrier just means there is more volatility, more chance to breach.”

JPMorgan Chase Financial Co. LLC used Apple in a nearly $10 million worst-of autocall with Valero Energy Corp. and Bank of America Corp., the two other underliers.

Oil and banks

Structured notes buyers showed interest for financials and energy stocks.

Scotia issued $33.03 million on Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley put together in an equally weighted basket within the BofA Securities platform. It was last week’s biggest stock deal.

Barclays Bank plc priced $18.75 million of contingent coupon autocallable notes on Exxon Mobil Corp.

In technology, non- “FANG” stocks were used in mid-sized deals, especially tied to semi-conductors’ names. Examples include HSBC USA Inc.’s $14.5 million on Qualcomm Inc. and UBS AG, London Branch’s $13.98 million on Intel Corp.

Another relatively big single stock deal was JPMorgan’s $14.66 million on industrial name ADT Inc., the alarm system provider.

Worst-of hiding

The takeaway is that most stock-linked notes were single asset plays either tied to single stocks or to a diversified basket of stocks. Worst-of payouts on stocks nearly evaporated.

The same held true for index-linked notes. Last week’s top four deals included three on single indexes and one on a basket of international index. Worst-of were not in vogue, at least not last week.

BofA Securities priced 12 deals totaling $460 million, or 51.3% of the total. It was followed by UBS and Morgan Stanley.

Canadian issuers were the top issuers.

Bank of Nova Scotia captured a quarter of the volume with $225 million priced in six offerings and Toronto-Dominion Bank, 15.6% of the shares in just two deals totaling $139 million.

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