Structured products agents price $639 million in rocky week dominated by short squeeze, volatility

By Emma Trincal

New York, Feb. 3 – Structured products issuance volume hit $639 million in 149 deals last week amid a surge in volatility spurred by erratic trading on a few stocks targeted by day traders. BofA Securities closed its monthly calendar capturing 61% of total sales, according to preliminary data compiled by Prospect News.

The revised numbers for the previous weeks showed a $1.06 billion tally in 259 offerings. Last week’s tally will be revised upward as well.

Leveraged deals prevailed (54% of total volume) versus autocallables (27%) as BofA Securities priced block trades in which leverage often dominates the flow. Index-linked notional reached 70% of the total versus 16% for stocks and 14% for exchange-traded funds for the same reason.

In equities, it was no ordinary week.

The Standard & Poor's 500 index dropped 3.3% as retail day traders joining force via social media website Reddit heavily bid on shorted stocks such as GameStop Corp. and AMC Entertainment Holdings Inc., spurring volatility as hedge funds got squeezed.

While the event had a limited impact on structured notes, it was the buzz among sellsiders.

GameStop

Videogame retailer GameStop was the focus: the stock surged 400% on the week despite losses on Thursday due to trading restrictions imposed by several brokerage firms.

Since 2007, only 35 structured note deals tied to GameStop have been issued for a total of $47 million, according to Prospect News data. The last one was Barclays’ $1.3 million offering of Phoenix autocallable. It priced in November 2015 and matured a year later.

The limited amount of issuance referencing this stock was not a surprise to an industry distributor.

“How often do you see small cap stocks with no growth potential used as underliers?” he said.

“You can’t even get pricing on it especially with autocalls that have to be all hedged upon issuance.”

Issuers still have to sell puts over the life of the product if it’s not called, he explained.

“Nobody will touch it.”

Switching to metal

Now the “Reddit traders” have turned their attention to silver.

“That’s where the new hot retail flow is,” he said.

From the futures price of silver contracts, volatility has quickly expanded to the iShares Silver Trust ETF (ticker: SLV) which tracks the price of the metal. The ETF is down nearly 15% since Monday.

“SLV has been a highly popular underlying. People like it. They see value in precious metals. It’s a safe haven asset. Investors have been flocking to silver over the winter,” the distributor said.

“This one might still scare off sellsiders. But the ETF is liquid and if people want more SLV in their notes, they’ll get it. The issuers could take the risk. I priced some of this stuff. It’s a big market. You could see a pickup,” he said.

Partial disruption

Sources are confident that the direct impact of heavy call buying on the structured notes market should be limited.

One of them explained that issuers are likely to steer clear from stocks hyped in social media sites like Reddit.

“The stocks that skyrocketed last week are thinly traded, they’re not large-cap. The amount of call options bought was crazy and the liquidity is tough especially with the trading restrictions,” this sellsider said.

“Such market abnormalities would make it very difficult to link notes to stocks like GameStop. Most desks would stay away from it.

“I’m not saying that what happened didn’t have an impact on the equity market. The overwhelming amount of calls did create a short squeeze. The market was completely out of whack.

“But I don’t see this disruption happening in structured notes because we use large caps for the most part. That’s where the volume is. A big crowd of retail traders could not push up the price of stock like Facebook or Amazon. The amount of buying pressure would just be too big.”

Shorts and small

Another reason is that investors in structured notes are growth or yield seekers, not traders, he added.

“The Reddit crowd is picking depressed businesses with heavy short interest, companies that face a risk of going bankrupt in some cases. GameStop, BlackBerry, Bed Bath and Beyond, AMC, these are not growth stocks,” he said.

Day traders switching their interest toward metals may have more of an impact given the size of the market, he said.

“Whatever is pushing that price up will impact notes on silver ETFs, and there are a few.

The silver ETF last year was used either as a stand-alone underlier or in conjunction of other funds, such as gold ETFs, in 147 deals totaling $283 million, the data showed.

This year, the tally is $22 million in 20 deals.

Liquidity

“There are concerns on the desks about volatility and potential manipulation. But it’s specifically on the equity side,” he said.

A more direct effect could be via index underlying, he said, pointing to the fact that GameStop briefly became the top component of the Russell 2000 last week.

“It may have some sort of impact, but again a very limited one in my opinion,” he said.

“We use underlying with plenty of liquidity.”

Getting tactical

For the distributor, the retail price action that happened last week is more of a “story people talked about” limited to certain stocks.

“I see more opportunities than risks. In a way, it’s a good thing to see the democratization of the market. Of course, liquidity was a concern when the brokers had to halt trading to settle the trades or meet margins.

“But at the end of the day, the risks are isolated. You won’t see desks putting silver or GameStop in a structured note because it’s hard to price, it’s hard to hedge and advisers won’t go for it.

“That said, this whole mess opened the door for a conversation. People who are already comfortable with income-notes on indices may want to explore more tactical plays and look at single stocks. That’s a positive because deals can be customized easily,” he said.

This distributor said that events like last week were unlikely to trigger a broad market pullback even though they have proven to be able to quickly push up volatility levels.

“To me the risk for this market is the spread of Covid, the vaccine distribution and the economy,” he said.

Almost forgotten in the news, big tech companies such as Apple, Microsoft and Facebook released better-than-expected earnings last week.

Nineteen deals priced on Apple, seven on Amazon. Shares of car makers such as Tesla but also General Motors and Ford were also popular.

BofA’s big trades

Last week’s top eight deals originated from the BofA Securities’ platform. First came two 14-month leveraged notes on the S&P 500 index, one issued by Bank of Nova Scotia for $86.59 million with 3x the upside capped at 15% and full downside exposure; the other by Canadian Imperial Bank of Commerce, which priced $54.51 million with double the gain capped at 11.8% and a 5% buffer on the downside.

“Those three-times leverage are the thematic deals Merrill does systematically every single month,” the sellsider said.

“People may be putting new money to work. Or it could also be rolling out from 14 months prior.”

The next deal, also tied to the sole S&P 500 index, was HSBC USA Inc.’s $49.1 million of six-year autocallable market-linked step-up notes.

Each year, the notes are automatically called if the index is flat or up with an annualized call premium of 6.08%.

If the index finishes at or below the step-up level, 135% of the initial price, the payout is 35%. If the index is above the 135% step level, the return is par plus the index gain. There is a 15% buffer on the downside.

Bank of Nova Scotia priced a similar deal on the S&P 500 index for $35.86 million but with a three-year maturity. The call premium was 10.12% per year and the step-up value, 126%.

Another leveraged deal priced by BofA Securities was a $39.85 million offering of 14-month notes on behalf of HSBC USA linked to the iShares Global Clean Energy exchange-traded fund.

The payout is capped at par plus 44.01%, and investors are exposed to any decline in the ETF’s share price.

“People like ESG and this ETF offers good pricing. It’s been up quite a lot,” said the distributor.

The ETF has gained 10% year to date.

The same 14-month accelerated return format with 3x the upside, a 21% cap and no downside protection came from Toronto-Dominion Bank in a $33.85 million issue linked to the Russell 2000 index also distributed by BofA Securities.

Yearly volume

So far, volume for January is lagging December (minus 48%) and is also lower than January last year (23% decline). However, the tally is not finalized yet.

Trailing volume for the last 12 months is at $75.69 billion, a 26% increase from $60 billion in the previous 12 months.

The top agent last week was BofA Securities with $389 million in 10 deals. It was followed by UBS and JPMorgan.

Bank of Nova Scotia was the No. 1 issuer, bringing to market three deals totaling $157 million, about a quarter of total issuance volume.

© 2015 Prospect News.
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