Structured products issuance tops $301 million for week; leveraged deals make a comeback

By Emma Trincal

New York, July 29 – Structured products agents last week priced $301 million in 99 deals in a choppy equity market, according to data compiled by Prospect News.

For the first time since June the S&P 500 index finished lower, declining 0.3% for the week. Investors were rotating out of big tech stocks, pushing down the Nasdaq 1.3% for the week. The picture was mixed for investors as rising coronavirus cases and renewed tensions between the United States and China partly blurred the more positive picture of vaccine research progress and hopes for an additional stimulus package.

Month, year

Volume for the month through July 24 dropped 47% from June to $1.986 billion from $3.732 billion.

The number of deals was also significantly lower: 740 versus 1,209.

However, these recent figures will be revised upward as not all deals could be counted by press time.

“The market has run up. It’s hard to say how much is left to go. That’s what’s keeping people on the sidelines,” a sellsider said.

On the other hand, July’s sales so far are 6.77% higher than the $1.86 billion amount priced a year ago.

For the year, total issuance volume is up 52% to $38.921 billion from $25.608 billion. The deal count is up 47% to 11,858 from 8,433.

More leverage

One slight change seen last week was a resurgence of leveraged notes, making for 45% of the total. While their market share remained below the 52.2% share of autocallables, the gap between growth and income was muted compared to previous weeks. For instance, on a year-to-date basis, autocallables represent 51% of total notional on average compared to 27% for leverage, according to the data.

“Leveraged with caps if you don’t think the rally will continue to run is a good way to play the market. It’s the most classic type of structured product. It’s been done for years,” he said.

Full protection

The missing product in these totals are the principal-protected notes or PPNs, which offer 90% to 100% of principal protection. This year their notional amount is far less than 1% of the total at $224 million in 93 deals.

No such deal priced last week.

“We have different clients looking for different things. A fairly large portion wants principal-protection in CDs with the FDIC insurance,” the sellsider said.

“Unfortunately, right now because of the extremely low rates, we haven’t been able to deliver on those elements.

“What those investors ideally want are shorter-dated CDs – we’re talking five to six years – linked to domestic market indices. These products are very difficult to put together.”

“We’ve seen principal-protection done with proprietary indices or some other variations. But you can’t do that on the S&P, Dow Jones and Russell especially in a CD.”

Search for yield

Income-generating notes remain prevalent on any given week because they serve a specific need, he added.

“Getting income is a challenge because interest-bearing investments are not yielding enough.”

Equity-linked autocallables, even on indexes, are not for everyone, however.

“For conservative investors, barriers and even buffers are not always seen as acceptable alternatives to bonds because your principal is still at risk,” he said.

However, when the search for yield is the main goal, investors will inevitably switch to autocallables or digital notes.

“Some deep buffers or deep barriers are attractive,” he said.

The fourth index

Worst-of on indexes continued to dominate essentially as autocallables. However, some offered upside participation.

In some instances, the issuer used four indexes rather than two or three. Often, the objective was to price an attractive buffer, not just raise the coupon.

As an example, Barclays Bank plc priced $2 million of 18-month SuperTrack notes linked to the lesser performing of the S&P 500 index, the Russell 2000 index, the Nasdaq-100 index and the Dow Jones industrial average. The notes pay the gain of the worst-performing index up to a cap of 27%. The buffer on the downside is 20%.

The Nasdaq is usually the index of choice added to the usual mix of the three main U.S. equity benchmarks – S&P 500 and Dow Jones for the large-cap segment of the market – along with small-caps via the Russell 2000.

Investors’ interest in momentum stocks contributed to give the Nasdaq a strong run as the tech-heavy benchmark is up more than 17% for the year while the S&P is flat.

A rotation out of the Nasdaq began a couple of weeks ago including last week. But the benchmark has already gained nearly 2% this week.

“The Nasdaq keeps on going up. If this irrational trading keeps on going it’s going to be pretty ugly,” a market participant said.

“We haven’t seen many worst-of with four underlying indices. But we’ve had fairly good success with three. Once people are used to two indices, rather than giving up some coupon they’ll go for more. It doesn’t seem too much of an additional risk when you go from two to three indices,” said the sellsider.

“I suppose the same would apply to four. Once you’re comfortable with three, especially three domestic indices it makes sense to add another one if that’s how you can get a pickup in the coupon.”

Two 13-month

Last week’s higher share in leveraged notes was partly due to two top deals.

Both were 13-month leveraged capped notes distributed by Wells Fargo Securities.

GS Finance Corp. priced the first one for $41.2 million based on the S&P 500 index.

The payout at maturity will be par plus 300% of any index gain, capped at par plus 13%.

Otherwise, investors will lose 1% for every 1% decline of the index from its initial level.

A quasi identical offering was brought to market by Royal Bank of Canada. The only differences were the $25 million amount and the underlying index, which was the MSCI EAFE.

Nasdaq autocall

Next Canadian Imperial Bank of Commerce priced $23.81 million of two-year 0% autocallable leveraged buffered notes tied to the Nasdaq-100 index. The structure combines an autocall and upside participation at maturity. As such it is categorized by Prospect News as a leveraged product.

The notes will be called at par plus a call premium of 10.75% if the index closes above 90% of its initial level on July 30, 2021.

The payout at maturity will be par plus 1.5 times any index gain.

Investors will receive par if the index falls by up to 10% and will lose 1.1111% for each 1% decline beyond 10%.

CIBC World Markets is the underwriter.

Typical worst-of

In a more classic format, Barclays Bank priced $22.01 million of three-year autocallable contingent yield notes linked to the Dow Jones industrial average and the Russell 2000 index.

The notes will pay a contingent quarterly coupon at an annual rate of 9.7% if each underlier closes at or above its coupon barrier, 70% of its initial level, on the observation date for that period.

After six months the notes are automatically callable above initial price on a quarterly observation date. The barrier at maturity will be 70% of the initial price.

Barclays and UBS Financial Services Inc. are the agents.

“Notes are getting called, and when it happens, investors feel comfortable with having the proceeds they can reinvest. They’re not looking for upsized return. Rather they want single digit returns but with a higher degree of certainty,” the sellsider said.

Digitals in demand

What investors find increasingly attractive, according to this sellsider, are bullet digital notes.

“When you don’t expect the market to surge, getting returns in the form of digitals that pay if the index is flat or slightly up is attractive. That way you don’t need the market to rise at all. Even a highly leveraged note like 3x require the index to go up. But not with a digital,” he said.

An even more appealing version of this payout structure comes in the so-called “in-the-money” digitals, he added.

“People like them because you can get paid even if the index is negative as long as it’s above the barrier.”

The top agent last week was UBS with 68 deals totaling $79 million, or 26.2% of the total.

It was followed by Wells Fargo and Morgan Stanley.

UBS AG, London Branch was the No. 1 issuer with $59 million in 65 deals, a 19.6% share.

For the year, Barclays Bank plc is the top issuer with $6.168 billion in 1,219 deals, or 15.8% of the total.

© 2015 Prospect News.
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