Structured notes post strong week with $749 million issued amid stock market rally

By Emma Trincal

New York, Nov. 6 – Action was strong in the final yet not full week of October with $749 million of structured notes sold in 268 deals for the period ended Nov. 1. The robust notional came on the heels of $1.09 billion in 187 offerings for the previous week as Bank of America closed its calendar month, according to updated figures compiled by Prospect News.

New highs

Last week was very bullish in the overall market with the benchmark closing at new record highs.

Third-quarter earnings surpassed expectations, putting fears of a recession on hold while the Federal Reserve cut rates as anticipated. Adding to that was a strong job report on Friday and the S&P 500 index finishing the week up 1.5%, to 3,066.9.

The correlation between a bull market and issuance strength is not straightforward especially over short timeframes.

October sales, which accounted for $3.63 billion in 1,048 deals, were down 31% from a year ago, and yet, unlike last year, the month was bullish for the stock market with the S&P 500 index up 2% versus down 5.6% in October of last year.

For the year, volume remained down 18.7% to $40.507 billion from $49.796 billion with a deal count of 13,103, which was 893 lower than last year.

Rolls

Autocallables dominated the flow last week with 31% of total sales. The bulk of it consisted of autocallable contingent coupons, but about 5% were also snowballs, which pay a premium when the call occurs only.

“We see a lot of autocalls coming back,” a sellsider said. Investors face the reinvestment risk with few alternatives.

“In Europe, everything you look at has a negative interest rate.

“It’s kind of annoying for bond investors. I don’t think it’s going to be as bad in the U.S. because the U.S. doesn’t need negative interest rates. But I don’t think Europe needs negative interest rates either although they managed to do it in a senseless effort to depreciate their currency.”

Whether rates are negative as they are in Europe or low as in the U.S., investors are compelled to buy autocallables and to roll over the proceeds when called, he continued.

“The perception that rates will keep going down or even turn negative is deeply rooted. You have a president putting pressure on the Fed in order to push the dollar lower but also the stock market threatening a tantrum if the Fed doesn’t cut rates. That’s a combination that makes people desperate for yield.”

Lower call thresholds

The structure will always be in demand, according to this sellsider.

“Autocalls have an elegant feature – getting compensated for a risk which is not necessarily related to the risk of the market,” he said.

“You have the uncertainty of not knowing when or if you’re going to get called. In return you get compensated with the higher coupon.”

Some autocallables are more attractive than others in this environment, he added.

“You can structure them with an autocall at 85 for example,” he said.

“The stock is down 10% or 13%, you get called with a double-digit coupon.

“People don’t realize how worthy it is to have a call below par.

“It really adds value to the investor and it doesn’t cost that much to the issuer.”

Worst-of on indexes

Often overlapping autocallables, the worst-of category accounted for nearly 20% of the total. This structure type last week was overwhelmingly represented by index-linked notes.

Despite positive earnings and perhaps as the market was hitting all-time highs, the population of worst-of autocallables tied to stocks was limited to $13 million in 14 deals. Netflix, Inc., Amazon.com, Inc., Apple Inc., Alphabet Inc., Facebook, Inc. were the usual suspects as underliers but also JPMorgan Chase & Co., Workday, Inc., Microsoft Corp. and salesforce.com, inc.

“We’re still moving toward the end of the earnings season. People are still making tactical bets based on volatility and opportunities,” said Matt Rosenberg, sales trader at Halo Investing.

Leverage

Leverage was strong again for a second week in a row. Bank of America’s push during the previous week was no longer a factor as this agent was nearly absent last week. But the upward momentum in the market may have awakened some of the bulls seeking to capture leveraged growth.

The structure type was dominated by buffered and barrier notes making for 23% of total notional while leverage with no downside protection totaled $60 million, an 8% share. This was in line with the year-to-date averages of 23% and 11% for leverage with and without protection, respectively.

Absolute return

A great deal of absolute return pricing took place last week: $105 million in 23 deals, a 14% share. This category overlapped with worst-of and displayed a similar characteristic: all deals except one were linked to equity indexes, not stocks.

“Dual directional deals have been quite popular. With the market rallying, they keep proving people wrong, but it’s an insurance policy. It gives you an opportunity to make money if the market turns negative,” said Rosenberg.

Brexit exposure

JPMorgan Chase Financial Co. LLC priced $26.35 million of 5½-year dual directional trigger Performance Leveraged Upside Securities linked to the FTSE 100 index. It was the fourth larger deal last week.

The upside payout is par plus 1.95x the index gain.

If the index finishes negative but above a 65% barrier, the payout will be par plus the absolute value of the index return. J.P. Morgan Securities LLC is the agent. Morgan Stanley Wealth Management handled distribution.

The note was interesting for its sole reference to the United Kingdom’s equity benchmark.

“It’s 100% related to Brexit,” said Rosenberg.

“Usually U.S. investors are not seeking U.K. stocks. But the Brexit situation has slightly improved.”

On Oct. 28, European Union ambassadors and U.K. prime minister Boris Johnson agreed on a further Brexit deadline extension to Jan. 31, 2020.

“Investors are a little bit less negative about Europe in general. People are hoping the region is going to show a little bit more growth. It has an impact on the U.K. market too,” he said.

“There are enough political and economic issues of interest surrounding the country and its benchmark that more people are able to form a thesis around the U.K.”

A handful of bears

Anecdotally, four bearish notes were priced last week totaling nearly $13 million. While those products remain rare, there have been a few coming out lately, which indicates concerns about a pullback from investors.

The biggest one last week was Credit Suisse AG, London Branch’s $9.5 million leveraged notes linked to the Nasdaq-100 index. The payout at maturity is par plus 3x any index decline, up to a 13.7% cap. Otherwise, it will be par minus 1% for every 1% of index gain.

This deal had a relatively good size for a bearish product, noted the sellsider.

“They’re a hassle to sell,” he said.

“They go against the opinion of the bank. Right now, banks are cautiously bullish but still bullish.

“We’re not in a recession. There’s no major war. It doesn’t really matter if there’s a trade war. People work, produce value so stock prices are going up.”

For issuers, those notes also pose challenges.

“Those bear notes are so difficult to price. Getting the timing right is mission quasi-impossible.”

Wells Fargo’s $71 million

But the big deal last week did not fit into any traditional category. It was a large convertible trade.

Wells Fargo Finance LLC priced $70.77 million of equity-linked notes due Nov. 1, 2024 linked to the common stock of Bristol-Myers Squibb Co.

The payout at maturity will be the greater of par or final parity.

Final parity is the share ratio, 13.37812, multiplied by the final stock price on the determination date, Oct. 29, 2024. In order to receive a positive return, the underlying stock price must appreciate about 34.15% from its initial stock price.

“I would call it a structured convertible,” said Rosenberg.

Voya series

Indeed, this issue was reminiscent of some of the trades priced in the first half of last year, which contributed to make 2018 a record year. The most common example was a series of convertible notes linked to the share price of Voya Financial, Inc. In April 2018, JPMorgan Chase Financial priced $600 million of cash-settled equity-linked notes tied to Voya after doing $350 million of it in January. BofA Finance LLC priced $250 million in the spring of last year as well. And there were more...

While much smaller in size, last week’s Wells Fargo offering presented a similar structure.

“This is not a run-of-the-mill structured note,” said Rosenberg.

“Your average adviser wouldn’t buy this. It’s much more situational in nature. An institution wanting to take a position on it might consider it. But it’s really a special circumstance deal.”

Global exposure

Back to normal, JPMorgan Chase Financial priced the second top deal in $32.25 million of three-year leveraged notes linked to a basket of indexes. Those are the Euro Stoxx 50 index with a 36% weight, the Topix index with a 27% weight, the FTSE 100 index with a 19% weight, the Swiss Market index with a 10% weight and the S&P/ASX 200 index with an 8% weight. The upside exposure is 2.4533 times the basket return. If the basket return is negative, investors will be exposed to the decline.

This structure along with the underlying basket is a repeat offering and one of the most popular products among investors for its longevity.

“This deal allows you to mimic an exposure to Asia and Europe, adding some leverage to your portfolio,” said Rosenberg.

UBS was the top agent last week with $199 million in 76 deals, or 26.6% of the total.

It was followed by Morgan Stanley and JPMorgan.

The No. 1 issuer was JPMorgan Chase Financial with $204 million in 53 deals, a 27.3% share.

JPMorgan is also the leading issuer this year with $5.629 billion in 2,131 deals, or 13.9%. In close third is Barclays Bank plc, which has brought to market 1,406 deals totaling $5.592 billion, or 13.8% of the total.

© 2015 Prospect News.
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