Structured notes issuance $1.22 billion for week; election uncertainty, Covid boost volatility

By Emma Trincal

New York, Nov. 4 – Structured products agents priced $1.22 billion in 221 deals in the week wrapping up October amid a surge in volatility ahead of Election Day in the United States, according to data compiled by Prospect News.

“That’s a great number,” said a sellsider.

“Today should be a great day for structured products issuance. And maybe even for a few weeks.

“Nasdaq futures were up this [Wednesday] morning. I think the market is welcoming the first results even though the outcome is unclear and may remain unclear for a few days if not more.

“Historically whether the elected president is a Democrat or a Republican, the market goes up after an election. It’s the known that fuels a rally. The market hates uncertainty.”

Tough week

Last week recorded the worst equity market performance since March with the S&P 500 index falling by 5.6%.

Volatility as measured by the CBOE Volatility index surged to 32. This level was the highest since early September yet remained far lower than the 85-level spotted in March amid the brief Covid 19-induced bear market.

As U.S. stocks tumbled last week, issuers enjoyed a solid week on the heels of $600 million sold the week before ended Oct. 23, according to the latest data update.

“Each time the market drops, you see a call for action,” this sellsider said.

“The theme of 2020 was investors waiting for a pullback. The pullback hasn’t happened since March except for a short September sell-off. People have been waiting for the pullback so they can lock in better terms. Folks had an opportunity to jump in last week.”

Terms such as coupon rates and buffer sizes improve when volatility premium rises. Last week was not short in drama and uncertainty, which helped pricing.

“Market participants were nervous ahead of the elections. You also had a big tech sell-off,” he said.

Facebook, Amazon, Apple and Twitter fell last week due to weak earnings results.

Surging Covid-19 cases and new lockdown measures in European countries dampened sentiment as well starting last month. October was the Dow Jones industrial average’s worst month since March.

Awaiting the outcome

“The longer it takes to count all the votes, the more it will start wearing on the market,” the sellsider said of the U.S. elections.

“Chances are we’ll have a split Congress. Democrats will keep the House and the Republicans the Senate,” he added, as votes continued to be tallied. He was speaking in mid-morning session on Wednesday.

“The challenge will be how to move forward the two top issues: coronavirus and stimulus bill,” he noted.

This sellsider said that rather than suffering an ideological divide, the country is split around two concrete issues.

“The market believes that Trump is better for the economy. But the market also believes that Biden could do a better job at responding to the Covid-19 pandemic. These are the two top issues in a nutshell and I’m not saying one should outweigh the other.”

One factor weighing on the market if Joe Biden is elected would be the rise in corporate tax rates, he said.

“It was the main theme I heard during every bank webinar last week,” he said.

“The biggest issue was a rise in corporate taxes. Investors may welcome a new leadership. But the market jitters ahead of higher taxes. So regardless of the outcome, we’ll see continued volatility playing out at least until the end of the year.”

Year-end outlook

Issuance volume of structured notes for the year is up 37.5% to $56.6 billion from $41.15 billion through Oct. 30. The number of deals rose about a third to 17,577 from 13,334 last year.

For this sellsider, the year is on track to be one of the best mainly because of the resurgence of volatility in the markets.

“It’s been a weird year,” he said.

“It may not be over. Rising cases of Covid, including in Europe and Asia, and the continued uncertainty around the elections could be a drag on the market,” he said.

“I think we’re likely to see a pullback.

“We could have the markets back up and volatility back down, which is not a good thing for issuance. But I don’t think it’s going to happen. It’s more likely that we’ll get a 5% or 10% correction, and people can tolerate that.

“I don’t expect a giant spike in issuance for the remainder of the year, but a steady flow that will continue to be positive as it has been so far.”

Volume so far for October is significantly lower than September’s with $3.45 billion versus $6.09 billion, a 43.3% decline. The deal count dropped as well to 965 from 2,107. When compared to a year ago, sales were down 15% from $4.07 billion.

BofA’s big push

Last week saw BofA Securities, Inc. booking its monthly calendar with large block trades. The agent alone priced half of the volume totaling $604 million in only 21 offerings, including the top five deals.

Those top deals, which were all linked to the S&P 500 index, defined the prevailing structures and underlying asset classes.

Unlike previous weeks, leveraged issuance, with a 42% market share, surpassed income-oriented autocallables, which accounted for 37% of total sales.

The use of equity indexes was higher than usual, making for 83% of the issued volume against 8% for stocks.

RBC’s $112 million deal

The top two deals – both, large in size – were leveraged products.

Royal Bank of Canada priced $112.37 million of 14-month ARNs linked to the S&P 500 index.

The payout at maturity will be par plus triple any index gain, capped at par plus 16.71%. Investors will be exposed to any index decline.

While popular among retail clients serviced by the bank’s brokers, independent advisers may not always be willing to buy those products.

“It’s very short term and so it’s got more risk,” a registered investment adviser said.

“I’m not interested in big leverage. I’m interested in big downside protection. I don’t think it’s the kind of note we would do.”

Some of those BofA-distributed leveraged notes come with a buffer. But when the tenor is as short as 13 or 14 months and when the leverage is 3 times, the structures tend to come without any downside protection.

Bank of America will add a buffer for notes of at least two years and for participation rates of 200% or less.

An example was the second top deal. Bank of Nova Scotia priced $81.13 million of two-year notes on the S&P 500 index with par plus 2x on the upside subject to a 15.7% cap and a 10% buffer on the downside.

Short, levered

In between, this agent will offer a tiny buffer to keep the duration short.

Canadian Imperial Bank of Commerce for instance priced the fourth largest deal, also a leveraged note, featuring a 5% buffer over a 14-month tenor. The $66.27 million issue linked to the S&P 500 index will pay 2x the index return up to 13.66%.

All those leveraged notes offerings come with a cap. But given their sizes, investors apparently are not put off by the limited upside return.

“Anytime you put a cap on a growth note, you increase the other terms. You get more leverage or a better protection,” a structurer said.

“We’re not seeing as many uncapped leveraged notes right now because there’s just very little demand for it. The market is so near its September all-time high. It’s far easier to convince people to go for downside protection than for unlimited upside. That’s just what people want right now.”

Another best-seller

A special category of autocalls sold by Bank of America under the label autocallable market-linked step-up accounted for 17% of the notional. When those notes are not called, they allow for unlimited upside participation above a certain strike called “step-up value.”

Investors get paid an annual call premium with memory on an annual observation date if the index closes at or above its initial level.

If the notes are not called and the index finishes positive but below the step-up, investors get the step-up return, which is the equivalent of a digital payout. If the index is above the step level, investors fully participate in the upside. The downside may or may not include a buffer.

Bank of Nova Scotia and CIBC priced the two largest structures falling into that category, which ranked as the third and fifth largest deals.

Scotia priced $77.16 million over a six-year term on the S&P 500 index.

The call premium is 7.21%; the step-up value, 135%; and the buffer, 15%.

Separately, CIBC issued $64.15 million with a three-year tenor linked to the S&P 500 index paying on an annual observation date a call premium of 11.82% per year and at maturity, a step-up value of 126%. The downside was fully exposed to market risk.

Large autocalls

Going back to the more common income products and slightly further down the list, Morgan Stanley Finance LLC priced the sixth top deal with $42.43 million of three-year autocallable contingent coupon notes linked to the least performing of the Russell 2000 index and the Nasdaq-100 index. The note will pay a contingent quarterly coupon at an annualized rate of 8.29% based on a 70% coupon barrier level. The barrier at maturity is 60%. Morgan Stanley distributed the notes.

UBS AG, London Branch issued the next offering, $41.6 million of two-year autocallables on the S&P 500 index. The contingent yield is 11%. The coupon barrier and barrier at maturity are both set at 75%.

UBS distributed it internally.

UBS was the second top agent last week after BofA Securities with 117 deals totaling $378 million, or 31% of the total. CIBC World Markets Corp. was third with $53 million in three deals.

The No. 1 issuer was Bank of Nova Scotia with $244 million in eight offerings, a 20.1% share.

For the year, Barclays Bank plc is the top issuer, having brought to market $8.03 billion in 1,667 offerings, or 14.2% of the total.

© 2015 Prospect News.
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