Structured products weekly tally at $462 million; equity indexes capture bulk of volume

By Emma Trincal

New York, May 17 – Structured products agents priced $462 million in 74 deals last week, according to preliminary data compiled by Prospect News. Equity-index-linked notes issuance weighed heavily on total volume making for $388 million in 52 deals, an 84% share. On a year-to-date basis, equity indexes represent about two-thirds of total sales.

Worst-of notes issuance was unsubstantial compared to single indexes making for 17% and 77% of the equity index volume, respectively. The remaining 6% went to weighted baskets of indexes.

Going solo

“There’s always been demand for notes on a single index because for advisers it’s easier to allocate to a portfolio and it’s also much more straightforward,” a sellsider said.

“As rates continue to rise, it’s also easier for issuers to structure notes on a single index. So why wouldn’t they do more?”

Another factor may be the positive outlook many investors have on the Nasdaq, he noted.

“The Nasdaq is leading the other indices by huge margins so far this year,” he said.

The Nasdaq-100 index is up 18.5% year to date while the S&P 500 index has gained only 7.5%.

Meanwhile, the Dow Jones industrial average and the Russell 2000 index are both flat.

“When people do worst-of, they want indices with similar performance. While you may get better terms with apples and oranges, most investors, if they do worst-of, want somewhat correlated underliers. You don’t see worst-of on real estate and technology for instance,” he said.

Income solutions

Regarding structures, last week’s market was divided into three blocks: 50% of the flows went to autocallables, 25% into leverage and another 25% into digitals.

Autocallables have seen their notional amount decline this year. The tally fell from $15.42 billion through May 12 last year to $11.86 billion this year, a 23% drop.

“The rise in interest rates is helping pricing across the board, and that’s a positive. But the reverse of the coin is that higher rates have also provided more alternatives in the fixed-income market,” the sellsider said.

A market participant agreed.

“Back a couple of years ago, you had tons of income-oriented notes because there was no income to be had,” he said.

“Now that you can get 4% in a money market fund or short-term CD and over 5% in a Treasury, it’s a bit harder for issuers to match those risk-return profiles. Income notes have all but disappeared as far as feasibility.”

The differences in returns between autocalls and risk-free bonds was not an incentive to use structured products, he added.

“Why would I buy a three-year note to collect 7% when I can get 5.5% in a one-month Treasury? The difference in yield between the two is not worth the hassle and risk.

“I’m a huge, structured notes fan. I’ve done this for years.

“But right now, I won’t be looking at structured notes for income. I’ve got the bond market,” he said.

A $300 million series

Autocallables, however, have recently shown novel features. As previously mentioned, a series of $10 million deals continued to be seen last week.

The notes have in common a $10 million size (except a couple of issues priced at $20 million) a 13% or 15% geared buffer at maturity serving as the coupon barrier level as well as contingent coupons ranging from 11.5% to 14.15%. Exposure is essentially to the S&P 500 index via the SPDR S&P 500 index and also to the Nasdaq-100 index via the Invesco QQQ ETF.

At least $301 million of such notes has been issued in 29 deals since the beginning of April until May 9.

Issuers include UBS AG, London Branch, HSBC, Bank of Nova Scotia and Royal Bank of Canada.

The three private banks involved in the distribution are Morgan Stanley, JPMorgan and UBS.

Last week, HSBC USA Inc. priced two of those buffered contingent income autocallable securities with memory coupon and geared buffer for $10 million each.

The first one linked to the SPDR S&P 500 ETF trust offered an 11.9% contingent coupon based on an 87% coupon barrier. The downside protection employed was a 13% geared buffer via Morgan Stanley Wealth Management.

The second issue was linked to the S&P 500 index. Buffer and coupon barrier levels were the same. The coupon was nearly identical, at 12%. Distribution was handled by JPMorgan.

“These features are very attractive. Short term, double-digit coupon with memory, buffer...It goes back to higher rates. Funding levels give issuers more flexibility,” said the sellsider.

“Buffered autocalls are great. I hope we’ll see more of these. As long as issuers have the ability to price these features, I think we will.”

A series of deals with common features and identical sizes has intrigued market participants especially as the identity of the client remains a mystery.

“I don’t think it was just for one client. My guess is that they first locked in the terms and filled in the $10 million trades. It worked, so they decided to do it again. They’ve been successful given the frequency of these deals,” he said.

Hot BofA paper

Another recent trend is BofA Securities using its own paper via its affiliate, BofA Finance LLC.

In April alone, BofA Securities sold $943 million in 128 deals. About half of it, $469 million in 91 deals, was issued by BofA Finance. Canadian Imperial Bank of Commerce was the second largest issuer for this agent bringing to market $148 million in 10 deals. Bank of Nova Scotia, TD Bank, Royal Bank of Canada and HSBC USA Inc. followed in decreasing order.

“People have been a little bit scooped by the regional bank runs two months ago,” the sellsider said.

“I wouldn’t be surprised if investors were looking for the paper of big banks, brand names like Bank of America and JPMorgan.”

Barclays moving on

Another intriguing tidbit was the absence of Barclays Bank plc as an issuer within the BofA Securities distribution network, according to data compiled by Prospect News which is based on the Securities and Exchange Commission filings.

“I’m sure there must still be a little bit of a stigma. They’re a great bank, the largest bank in the U.K., and they have a lot of structured products capabilities here in the U.S. But they had their own missteps with the over-issuance blunder last year,” the sellsider said.

“That said, they may still be the counterparties in deals. Banks auction out both the credit and the hedge. It’s very possible that Barclays is still doing the hedges, which don’t show in the term sheets, while another bank, a Scotia for instance, would be the credit.”

Listed agents for deals issued by Barclays Bank plc are Barclays Capital Inc., Morgan Stanley and UBS.

Top deal

Bank of Nova Scotia priced last week’s top deal with $50.94 million of five-year buffer autocallable gears on the S&P 500 index.

If the index finishes at or above its initial level on May 1, 2024, the notes will be automatically called at par of $10 plus 8%.

At maturity, the payout will be par plus 1.7091 times the index gain.

The downside is partially protected with a 20% buffer.

UBS Financial Services Inc. is the selling agent.

Last week’s top agent was JPMorgan with $103 million in 22 deals, or 22% of the total.

It was followed by Morgan Stanley and UBS.

The No. 1 issuer was Bank of Nova Scotia with $95 million in five deals, a 20% share.

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