Structured products weekly tally tops $1 billion; big week for BofA, Canadian issuers

By Emma Trincal

New York, Aug. 2 – July ended on a positive note for both the equity market and structured notes issuance.

Issuance volume last week exceeded the $1 billion mark at $1.048 billion in 147 deals, according to preliminary data compiled by Prospect News. BofA was the key player, pricing its monthly calendar as it always does at the end of each month.

Yearly gap narrows

Figures for the year to date were encouraging.

Issuers brought to market $51.14 billion in 11,755 deals through July 28, a 4.71% decline from the same period a year ago.

“It’s down but not by a lot. We’re catching up from earlier this year when we were down double-digits,” a structurer said.

A sellsider agreed.

“We’re not at the same level as last year, but in the last couple of months, we’ve seen an uptick in our own volume.

“It’s equity-driven. The continued stock market rally has benefited equity-linked notes,” he said.

Record rally

Last week’s stock market was up, pursuing its nearly uninterrupted rally since the regional banking crisis in March. The S&P 500 index rose 1% last week and the Nasdaq gained 2%. It was a busy week marked by strong earnings, slowing inflation, positive GDP data and the well-anticipated 25 basis points interest rate hike by the Federal Reserve.

The S&P 500 index logged its best year-to-date performance in more than 25 years, according to a news release from S&P Dow Jones Indices. In July, the benchmark rose 3.2%, bringing its year-to-date gain to 20.65%, its largest year-to-date gain since 1997, according to the release.

“Who would have thought that the S&P would be up 20% this year?” said the structurer.

But a market going up doesn’t always boost sales of structured products, he noted.

“This year, it helped. The rally had a positive impact. There are people, many people, who made money this year. Now that the market is doing very well, people don’t want to chase stocks,” he said.

Alternative to stocks

Caution is warranted however, especially when the stock market rises so much in such a short period of time, he said.

Some more skeptical investors may seek safety in more conservative structures or even cash, he added.

“The rally is driven by this new feeling that we don’t have a recession. Personally, I’m cautious. It’s when everything looks hunky-dory that danger is lurking,” he said.

“The market climbs a wall of worry. But it rarely shoots up, and when it drops, it drops huge.

“I think some people are buying notes for the downside protection. But many are also keeping money on the sidelines, especially when you can get more than 5% in Treasuries or in money market funds.”

Russell recovery

Callable notes, including contingent coupon notes and snowballs, are starting to recover from the decline in sales observed earlier this year. They now amount to $23.91 billion through July 28 compared to $23.5 billion last year, a 1.75% increase. If such growth appears very modest, it contrasts with the 36% year-over-year decline recorded at the end of the first quarter.

“Many callable notes last year were tied to the S&P, the Nasdaq and the Russell. The Russell was the lagging component for a while, but it has significantly bounced back this summer,” the sellsider said.

“Some of the deals issued in 2020 or 2021 have been called away and can now be replaced.”

Single underlying

In contrast with most recent weeks, the volume in notes tied to a single underlier dwarfed the amount of worst-of sales.

A total of $873 million of notes tied to a single underlier (index and ETF) priced last week in 51 deals.

“I think it’s the dealer. BofA; they don’t do the worst-of deals. They typically print notes on a single underlier,” the structurer said.

To be sure, BofA priced $653 million in 26 deals out of the $873 million of notes tied to a single underlier, or three-quarters of them.

Snowballs rolling

Last week also saw a boost in snowball issuance, whose volume ($224 million) exceptionally outpaced the $199 million sales of autocallable contingent coupon notes, also known as “Phoenix.”

“Both structures offer a similar value. But they serve different purposes,” said the structurer.

“Phoenix are designed for income. Their buyers need the cash flow. They’re willing to get a lower coupon to increase the odds of getting paid. Snowballs offer more since you have to be up to get paid. People who do that want a higher premium and don’t really care about the income.”

Canadian issuers

More than two-third of last week’s issuance originated from the five top Canadian banks – Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada and Toronto-Dominion Bank. Combined those issuers brought to market $702 million in 43 deals.

BofA Securities was the agent for 23 of those deals totaling $622 million.

The successful penetration of Canadian issuers in the U.S. market is a trend, which has been observed for many years.

“Their credit is rated higher than U.S. banks. Their credit spreads are tighter. Investors are attracted to the credit quality of the paper,” said the sellsider.

But the appeal of these issuers’ credit is nothing new, he added.

“What we do see more right now is those banks showing more aggressive pricing. So, a lot of it is a function of their trading desks willing to be more aggressive than other banks in order to bring better terms,” he said.

ARNs

Six equity deals over $40 million in size priced last week, one of which was for more than $100 million.

BofA was the agent for all of them except the second one, sold by Morgan Stanley.

As No. 1, Canadian Imperial Bank of Commerce priced $102.72 million of 14-month Accelerated Return Notes (ARNs) linked to the S&P 500 index. The payout at maturity will be par of $10 plus triple any index gain, capped at par plus 14.13%. Investors will be exposed to any index decline.

“Almost systematically, every month, BofA brings out those big leveraged trades. They probably did a big one 14 months ago, and it matured. Now they roll that out back in the same strategy. They do that every 14 months,” said the sellsider.

Another “ARN” deal, ranked fifth was Royal Bank of Canada’s $46.42 million of two-year notes linked to the S&P 500 index paying 2x leverage up to 19.72% with a 10% buffer.

Bank of Nova Scotia also issued $42.21 million of 14-month notes on the Euro Stoxx 50 index paying 3x the gain up to a 19.8% cap with full downside exposure.

Other top deals

Using a different structure, BofA priced on the behalf of TD Bank $69.59 million of 14-month capped notes with absolute return buffer on the S&P 500 index. The upside provided a one-to-one participation up to a maximum gain of 10%.

BofA also distributed $49.73 million of autocallable notes issued again by TD Bank with annual observation dates and a 10.24% call premium. The term was three years. The downside was unprotected.

The second largest deal last week was Morgan Stanley Finance LLC’s $75 million of callable contingent income securities due Aug. 1, 2024 linked to the Technology Select Sector index and the Nasdaq-100 index. The quarterly contingent coupon was 9% a year. Both the coupon barrier and principal threshold at maturity were set at 80%. Morgan Stanley & Co. was the agent.

BofA Securities was the top agent with 34 deals totaling $739 million, or 70.5% of the total.

It was followed by Morgan Stanley and Goldman Sachs.

The top issuer was Toronto-Dominion Bank bringing to market $253 million in 11 deals, a 24.2% share.

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