Structured notes issuance $375 million in volatile week as Ukraine tensions mount

By Emma Trincal

New York, Feb. 23 – Agents sold $375 million of structured products in 90 deals last week as the stock market was battered because of increasing tensions in Ukraine. Both the Dow Jones industrial average and the Nasdaq lost nearly 2% on the period pushing the U.S. equity markets into correction territory.

Updated data compiled by Prospect News showed the pricing of 302 delas totaling $1.6 billion during the previous week ended Feb. 11. Overall, issuance volume this month through Feb. 18 amounted to $3.39 billion in 635 offerings, a notional amount just about 38% higher than last month’s $2.46 billion.

Compared to last year however, this month’s volume is 17% off the $4.08 billion tally of a year ago.

Volume

Year to date, sales also showed a decline, down 23% through Feb. 18 to $9.37 billion from $12.19 billion during that time last year.

Since the month is not over yet, the data remains a mixed picture. The stock market has declined since the start of the year with the S&P 500 index down 11.75% from its all-time high of Jan. 4. Volatility as measured by the VIX index has approximately doubled from around 16 and 17 in the beginning of January to above 30 or even 32 on Tuesday, when Russia officially “invaded” Ukraine.

“It’s hard to say why we’re doing better this month than last month,” said Matt Rosenberg, director at Halo Investing.

“The correction provides benefits in terms of pricing. But at the same time, more notes are not getting called. I’m not sure what the no-call effect is going to be at this juncture in terms of volume. It’s a little too soon to tell.”

Battered market

A series of fears have contributed to hamper stock returns this year from the spread of the Omicron variant to inflation. Two weeks ago, news came out that the CPI index was up 7.5% year over year in January – its highest level since February 1982. For investors, the concern shifted from Covid to a hawkish Federal Reserve taking aggressive steps to curb inflation when it begins to hike rates next month.

“Inflation rising and Fed tightening are just the two sides of the same coin. These two concerns are not isolated. They’re the key areas of vigilance on the part of investors,” said Rosenberg.

“The Ukraine situation is challenging. But again, it’s another aspect of the overall inflation story. A war in Ukraine would have a negative impact on inflation. As prices continue to rise, especially oil, the stock market will be under more pressure and volatility is likely to climb in this scenario.”

Volatility is not the only factor improving terms on the notes, he noted. Higher interest rates have also contributed to enhanced funding levels.

The jump in inflation pushed up the 10-year Treasury yield to plus 2.05% last week even if a Ukraine-induced flight to quality has brought back the yield slightly below 2% since.

Volatility, worst-of

Worst-of deals continued to be a large part of issuance volume last week. But those types of payoffs are not as widespread this year as they were last year.

A total of $287 million, or 76% of last week’s tally, came from equity indexes.

Of those $287 million, 48% were deals structured around the worst performing of two or more indexes. The remaining 52% consisted of single indexes (31%) as well as of baskets of indexes (21%). The trend seems to indicate a shift toward single asset structures, whether through one index or one diversified basket as opposed to worst-of.

“It’s great for the market,” said Rosenberg.

“I can only think of one reason: volatility is up. People are able to achieve desirable payoffs with more simplistic underlying.

“Worst-of are used to enhance pricing, but people are not necessarily crazy about it. If you can eliminate the correlation risk they’re adding, it’s a positive development for investors.”

Two big worst-of

However worst-of index notes continue to be among the largest in size. Last week was no exception with the two biggest deals falling into the worst-of model.

Morgan Stanley Finance LLC’s $56.64 million of 0% dual directional buffered jump securities due May 20, 2024 linked to the S&P 500 index and the Russell 2000 index was the No. 1 deal.

The digital payout of 22% is paid if both indexes finish at or above their initial level.

There is a 15% absolute return on the downside associated with a 15% hard buffer.

Morgan Stanley & Co. LLC is the agent.

Barclays Bank plc priced the second largest deal with $51.66 million of three-year callable notes linked to the worst performing of the Nasdaq-100 index, the Russell 2000 index and the S&P 500 index.

The notes pay a contingent quarterly coupon at a rate of 11.9% per year if each index closes at or above its 70% coupon barrier level on any trading day during the quarter.

The issuer has the discretion to call the notes on any quarterly observation date.

The point-to-point barrier at maturity is 55% of the worst-performer’s initial level.

UBS Financial Services Inc. and Barclays are the agents.

International interest

Investors have shown renewed interest for international markets of late, with the Euro Stoxx 50 gaining some traction. The third largest deal gave them exposure to this benchmark. Goldman Sachs priced on the behalf of Bank of Nova Scotia $35.23 million of 18-month leveraged notes on the Euro Stoxx 50 index.

The payout at maturity will be 3 times any gain up to a 32.16% cap, but investors are fully exposed to any losses.

This structure is the same as the classic “Accelerated Return Notes” BofA Securities price each month in large block trades.

The bid on non-U.S., developed market equity last week was also in evidence via several basket-linked notes giving investors exposure to proxies of the EAFE index.

Morgan Stanley Finance priced one for nearly $20 million in the form of a five-year digital note paying at least 38% on the upside and up to 25% on the downside, when the negative basket price closes at or above a 75% barrier.

The underlying basket includes 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.

Stocks go solo too

The departure from worst-of payouts could also be observed with stocks last week.

Nearly all deals on stocks were tied to single names.

One notable exception was GS Finance Corp.’s $15 million of four-year autocallables tied to Bank of America Corp., Alphabet Inc. and Amazon.com, Inc.

The notes will be automatically called at par plus a 14.25% annualized call premium if the worst-performing stock closes at or above its initial price on any annual observation date. The call threshold at maturity steps down to the barrier level, enabling investors to capture the entire 57% premium if each stock is at or above the 60% downside threshold.

Goldman Sachs & Co. LLC is the agent with JPMorgan acting as placement agent.

Tesla, tech, Exxon

The top stock deal however was on a single name, which is among the most popular picks.

JPMorgan Chase Financial Co. LLC priced $17.94 million of autocallable contingent interest notes due Feb. 21, 2025 linked to Tesla, Inc. common stock, according to a 424B2 filing with the Securities and Exchange Commission.

The monthly contingent coupon is 15% per year payable based on a 50% coupon barrier.

The securities can be called automatically after six-month.

The trigger level at maturity is 50%.

“As tensions continue to grow in Ukraine, Tesla will be on many people’s radar,” said Rosenberg.

“The Ukraine crisis is going to impact oil supply. If we get to $150 a barrel, electric vehicles will increasingly be the sweet spot.

“Tesla and other electric vehicles makers will continue to be a hot area.”

Exxon Mobil Corp. was another popular name used by JPMorgan in a $14.8 million issue of three-year autocallables.

Other frequent single stock underliers included Apple Inc., Nvidia Corp., Advanced Micro Devices, Inc., PayPal Holdings, Inc. and Meta Platforms, Inc. and Uber Technologies, Inc.

Leverage push

Regarding structures, autocallable notes made for 40% of last week’s totals while leverage rose to 20%.

The reintroduction of leveraged structures in the market has been one of this year’s newest trends. Leveraged notes make for 22% of total sales this year versus 15% a year ago, according to the data.

Scotia’s $35.23 million euro zone deal was the largest play of this kind last week.

“Terms on leveraged notes have improved,” a market participant said.

“Rates unfortunately are still lower than three years ago, lower than pre-pandemic levels. But they’re going up and will rise further this year, which will help.

“The higher the rates, the more money you have at your disposal to buy the call options.

“We know the three ingredients for good pricing: high interest rates, high volatility and high dividends.

“Right now, vol. is up, rates are up, dividends are up. It’s all good.”

The top agent last week was UBS with $165 million in 72 deals, or 44.1% of the total.

It was followed by Morgan Stanley and JPMorgan.

The No. 1 issuer was Morgan Stanley Finance with $85 million in three deals, a 22.6% share.

For the year, GS Finance is the top issuer with $1.46 billion in 218 deals.

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