Structured products issuance volume at $852 million at month end; BofA prices block leveraged trades

By Emma Trincal

New York, Sept. 2 – As the market continued to climb to new highs, agents sold $852 million in 256 deals in the last week of August, according to preliminary data compiled by Prospect News.

Stocks rallied for the fifth week in a row pushing the S&P 500 index to a new closing high at 3,508.

Issuance volume for August is up 17.4% through Aug. 28, to $3.62 billion in 1.127 deals from $3.09 billion in 1,227 deals from July 1 to July 28.

Readjusted data for the previous week ended Aug. 21 showed $1.07 billion in sales through 329 deals.

Since last week’s figures will also be revised upward. At this time, since the month has not fully ended, it is too soon to tell whether August’s sales will beat July’s.

For the year, notional sales are up 45% to $45.38 billion in 13,922 deals from $31.3 billion in 10,343 offerings

Bank of America dominated last week, pricing more than 37% of total volume as it booked its calendar month. The agent sold 15 deals totaling $320 million using a variety of issuers, including Barclays, HSBC, and Scotia Bank.

Fed’s milestone

The market rally last week was driven by new hopes for a Covid-19 vaccine, better-than-expected earnings but also a new Federal Reserve stand on inflation. On Thursday, the Fed announced its decision to let inflation exceed its 2% target. The implication was that short-term interest rates will stay low for some time while long-term rates may rise if the market expects inflation to advance due to this shift in monetary policy. On the same day, the yield curve steepened.

It was good news for the stock market, which benefits from the disappointing returns offered by bonds. It is likely to be also good news for equity-derivatives, especially autocallables, which are designed to bring solutions to yield-hungry investors, sources said.

The reign of autocallables was less visible last week than usual simply because Bank of America brought a heavy amount of “Accelerated Return Notes,” or “ARNs,” outsizing other product types.

For the year, however, autocalls represent about half of total volume, versus 38% last year. Leverage made for only 27% of this year’s notional, against 35% last year.

In August, autocalls dominated even more: their market share has so far climbed to 60% of the total while leverage is only 25% of the flow.

Darlings of the industry

“The universe of clients using autocalls is growing,” a sellsider said.

“These autocalls are popular because it’s something that’s unique to structured products.

“You can do it yourself or use alternatives, there are a number of ways to generate growth. It can be done with options; it can be done with ETFs. Structured products don’t have a monopoly on growth.

“With autocallables that’s not the case. They’re fairly unique.”

For one thing, valuations are easy to understand and meet expectations, he said.

“When you buy a leveraged note and the index rises, the valuation of your note tends to lag the market performance.

“An autocall when it’s called will get you exactly the return you are targeting.”

Perhaps even more important is the comfort investors may enjoy when buying autocalls in a rising market.

“Once you use it and your note gets called with the expected return, you have a positive experience. People tend to repeat the positive experience. That’s why they reinvest in autocalls,” he said.

“If the market pulls back, they are not necessarily losing out.

“There’s a compelling case for autocalls.

Deep barriers represent another factor which has contributed to the growth of autocallables, said a market participant.

“People perceive the risk of the potential downside in the market. We still have a lot of unresolved issues, like are we going to get a second wave of Covid? Autocallables are a good fit if you still want to be in the market but are cautious. You get a 30, 40 percent buffer. It’s a contingent buffer, I agree. But if there’s a pullback you still get a coupon and people still have a certain amount of protection. So, we see new clients in structured notes attracted by those products, especially advisers.”

To be, or not to be, bullish

Another signal of confusion for some investors may be found in the divergence between volatility as measured by the VIX index and stock prices. Typically, but not always, volatility is lower when markets are up.

Last week for instance, the VIX index spiked a couple of times while the benchmarks were hitting new record highs.

This market participant was not surprised.

“It makes sense. Uncertainty permeates this market. Unemployment is high. The Elections are coming up. We still have Covid. Volatility shouldn’t be low in this context and it’s not really,” said the market participant.

The sellsider reached a similar conclusion arguing that investors do not appear to be complacent.

“While I don’t think volatility is very high right now, when I talk to clients, I don’t get a sense that they’re necessarily bullish. In fact, I don’t think they’re bullish at all. They’re confused. It’s more like they’re saying: ‘I’m not sure why the market is up. I’m puzzled,” he said.

The bid for yield

The big news moving the market last week came from the Fed’s policy shift on inflation.

“It’s good news and bad news,” the sellsider said.

“On the positive side, people expect rates will be low for a long time. That’s bullish for equities and that’s also good for our industry because people will continue to be hungry for yield, leading to more autocalls.

“What’s not so great is for the principal-protected portion of our industry. Historically low interest rates have been tough for principal-protected notes and they have killed the business of market-linked certificates of deposits.”

One of the possible impacts of higher rates on the longer end of the curve could be a renewed interest for steepeners, the market participant said.

Some of the sellsider’s clients have shown interest for inflation-linked notes or notes linked to assets exhibiting high correlations with inflation.

“We’re not seeing a lot of demand for it. But people have been asking about it,” the sellsider said.

Top BofA deals

Bank of America priced the top five deals last week, deploying its best-selling “ARNs” for investors looking for leverage on indexes.

“They’ve always been doing a lot of that stuff,” the sellsider said.

“It’s a building block for their clients’ portfolios.”

The top deal was Barclays Bank plc’s $96.45 million of 14-month leveraged notes linked to the S&P 500 index.

The payout at maturity will be par plus triple any index gain, up to a maximum return of 14.29%. Investors will be exposed to any index decline.

The second top trade was HSBC USA Inc.’s $58.05 million of 14-month capped leveraged notes on the S&P 500 index. Investors at maturity will get two times the index gain capped at 11.3% with a 5% buffer on the downside.

Barclays issued another large leveraged trade with $44.11 million on the S&P 500 index. The two-year note will pay double the index gain on the upside up to a 15% cap with a 10% buffer on the downside.

A portion of the notes were sold at par to the public and a smaller part to an investor at a discount.

Scotia’s step-up

Finally Bank of Bank of Nova Scotia priced one of Bank of America’s signature deals in $38.71 million of six-year autocallable market-linked step-up notes also on the S&P 500 index.

The notes will be called at par plus an annualized call premium of 6.37% if the index closes at or above the initial level on an annual observation date.

At maturity, if the notes finish below a step-up value of 135%, investors will receive a 35% payout and above this level, they will get par plus the index gain.

The structure includes a 15% buffer on the downside.

The top agent after BofA last week was UBS with $219 million in 103 deals, or 25.73% of the total. Those were followed by Citigroup and Morgan Stanley.

The No. 1 issuer was Barclays Bank plc with $143 million issued in five deals, or 16.75% of the total.

Barclays remained the No. 1 issuer for the year with 1,399 offerings totaling $6.742 billion, or 14.9% of the market.

© 2015 Prospect News.
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