Structured products issuance $839 million for week; $106 million basket deal eyed

By Emma Trincal

New York, March 23 – Agents priced $839 million in 168 deals in the March 14 week with two block trades topping the list, one on non-U.S. equity, the other on rates according to preliminary data compiled by Prospect News.

Revised data for the previous week ended March 11 showed $1.66 billion in 303 offerings. This gives a monthly notional amount through March 18 of $4.13 billion, 5% higher than a year ago. However, volume this year is on the decline.

The tally through March 18 is $17.07 billion, a 16.8% decline from last year’s $20.52 billion.

The deal count is down more than 45% to 3,385 deals versus 6,180 deals.

These figures remain subject to upward revisions due to lags between pricing and filings dates.

Different views

“Investors are a little frozen. Nobody was expecting Russian troops to roll into Ukraine. That changed peoples’ attitudes about risk. They’re sitting on the sidelines,” a sellsider said.

“We’re also coming off a record year. Relative to a more normal year, I think we’re not doing too bad.”

A buysider implied that volume may be drying up because pricing may not be matching expectations.

“Although the market has experienced a lot of volatility, I’m not seeing it show up in the terms of the notes,” he said.

“What I’m looking at right now is not that exciting. You’re talking about S&P, Russell, Nasdaq worst of, three major indices only paying 8% while you should be seeing things in the 9’s or 10’s.

“Given the current inflation environment 8% is not looking nearly as attractive.”

Big rally

Amid increasing uncertainty around the war in Ukraine, higher oil prices and inflation, last week staged a robust rally as the Federal Reserve hiked rates for the first time since 2018 as expected.

It was the strongest weekly rally since November 2020 according to news reports. The S&P 500 index posted a 6.2% gain and the Nasdaq jumped 8.2%.

“Personnally I was expecting a 50-basis points hike, and a number of analysts did too. I think the market was relieved even though the 25-bps hike was not a surprise for most people,” an industry source said.

When Fed chair Jerome Powell said earlier this week that the Fed needed to be more aggressive, the Dow fell 200 points in reaction, he noted.

“Maybe the market is rattled because you can’t trust what they say. They said they won’t raise rates. Then they said they’ll do it in 25-bps increments and finally they said they need to do more. If you want to combat inflation 50 bps is fair.

“But we know they can’t raise rates too much, too quickly because of the level of debt we’re in. We’re inflating our way out of debt. That plus the situation in Europe generates a lot of volatility.”

Stock prices have declined this year while interest rates have increased.

At the end of last week, the S&P 500 index was no longer in correction but still 7.4% down for the year. The two-year Treasury yielded 0.75% in the beginning of January and has now reached 2.11%.

Enhanced technicals

Higher volatility and rising rates have had an impact on deals, the sellsider said.

“The increase in short-term rates has been pretty significant. We’re seeing better pricing,” he said.

“In May, we did with GS Finance a four-year autocall on the S&P, one-year non-call with semiannual fixed-coupon payment and a 20% geared buffer. The rate then was 3.56% per annum. Today they can price it at 5.35%.

“We’re now able to do much better structures.”

One direct consequence of those improved conditions has been the rise in equity-index notes issuance this year versus last year, not so much in notional ($11.5 billion in 20222 versus $11.6 billion last year) but as a percentage of total sales, with market shares rising from 57% last year to more than 67% this year, according to the data.

Another development has been a move towards single asset structures.

Goodbye worst-of

“Given that we’re seeing better pricing on more vanilla products, I expect issuers to take the opportunity to hopefully get rid of their correlation exposure,” he said.

“You don’t need the worst-of to get higher coupons anymore. You still get a pickup, but the pricing has improved so much on single indices, it doesn’t give you that much of a lift.

“Everybody wants to get rid of that risk. Issuers would rather trade on a single index versus a worst-of.

“And when it comes to investors, they don’t really understand correlations. The payout is too convoluted.

“If we see rates go up another 100 bps on the short end, I think we won’t see any worst-of. It will take away some of the complexity we’ve had to put up with for the sake of getting better terms.”

Zero is everything

Credit default swap spreads have widened, which has facilitated the pricing of plain-vanilla deals.

“Anything we price, we have to put it on a zero-coupon. Compare the structure to a car. The rest of the car, the leather seats, the dashboard, the doors...everything has to go on a zero. And that’s going to cost you money,” the sellsider said.

“When rates are higher, when CDS spreads widen, you have more money at par. You have a whole lot of room to do a lot more.”

Some market participants have looked at the widening spreads as a potential constraint for the industry arguing that banks’ treasurers may be reluctant to issue more notes since the payable coupons are higher.

The sellsider disagreed.

“I have heard that theory before. It’s wrong. Issuance has nothing to do with the issuer’s funding needs,” he said.

“They will do deals to do the derivatives on the other side on the swap market. They sell puts. They buy calls. They don’t care about raising money for the bank.

“They make money on the trade.”

International bets

The top two deals last week differed from the typical S&P 500 index trade.

JPMorgan Chase Financial Co. LLC’s $105.89 million of five-year notes linked to a weighted basket of international equity indexes was the top offering.

The basket consists of the Euro Stoxx 50 index with a 36% weight, the Topix index with a 29% weight, the FTSE 100 index with a 16% weight, the Swiss Market index with a 11% weight and the S&P/ASX 200 index with an 8% weight.

The upside is 1.921 times the return. On the downside, investors have a 10% geared buffered protection.

J.P. Morgan Securities LLC was the agent.

Morgan Stanley Finance LLC did a smaller deal on the same basket with the same maturity date for $21.62 million. But the leverage factor was 231% and investors were fully exposed to the downside.

Morgan Stanley & Co. LLC was the agent.

Big rate deal

The second top deal was a rate-linked block trade for $73 million brought to market by Royal Bank of Canada.

The three-year notes offer a floating rate payable quarterly tied to the two-year U.S. dollar SOFR ICE swap rate, with a coupon floor of 2.25%.

The payout at maturity will be par.

RBC also priced the top single stock deal with $7.92 million of three-year autocallable contingent coupon notes linked to Devon Energy Corp. The contingent quarterly coupon is 16% per year based on a 50% coupon barrier.

The notes are automatically called on a quarterly observation date after six months. The trigger price at maturity is 50%.

The top agent last week was JPMorgan with $177 million sold in 21 deals, or 21.1% of the total. It was followed by Morgan Stanley and UBS.

The No. 1 issuer was JPMorgan Chase Financial Co. LLC with 20 offerings totaling $174 million, or 20 deals, a 20.7% share.

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