Structured notes issuance $380 million for week; December sales up 11% from November

By Emma Trincal

New York, Dec. 16 – Structured products agents priced $380 million in 131 deals in the second week of December, following an exceptionally strong week one week earlier when $1.06 billion in 354 deals priced, according to updated figures compiled by Prospect News.

Last week’s data will be revised upward as not all deals were filed with the Securities and Exchange Commission at press time.

Updated figures revealed a $5.22 billion tally for the entire month of November. This notional placed volume for this month at the bottom of the second quartile for the year, only ahead of July, April and May. The best months (each exceeding $7 billion) were in the first quarter. The incomplete tally for December is so far $1.09 billion in 321 deals through Dec. 11.

It is impossible to predict at this point how strong the flow will be for the month by year-end. But compared to the same period in November, volume so far is up 10.7% from $982 million.

Months

“Pricing in March was the best I’ve ever seen. It was a record month,” said Brady Beals, director, sales and product origination at Luma Financial Technologies.

“Later when the market rallied, there were a lot of things that got autocalled.”

He attributed the slowdown in the spring to the fact that investors and sellsiders were adjusting to changing market conditions and looking for new ideas.

“April, May, June, July...there were not a lot of things going on then,” he said.

These months were in between the March bear market and a September sell-off during which the S&P 500 index experienced an exceptional recovery rally, gaining 44%.

“It takes some time for folks to see what kinds of stories are going to resonate. You have to price up new ideas. You play on what’s in the news. But you also have to figure out the right pricing associated with these concepts.”

Year-to-date sales are up 33.5% to $65 billion from $48.7 billion through Dec. 11. The deal count has increased significantly as well, to 20,331 deals from 15,621 deals, a 30.1% jump.

Part of the growth was supported by single-stock issuance, which rose 83%. Even though this asset class only accounts for less than 18% of the market, its penetration rate is higher than what it was last year at 12.8%.

Equity indexes have continued to grow but at a much slower pace, up 18% to 42.7 billion from $36.1 billion.

The industry remains dominated by indexes. But the asset class now represents a smaller segment of the market, down to two-thirds versus nearly three-quarters last year.

Taking a step back

The stock market was choppy last week. The S&P 500 index finished down 1% despite posting a new record high on Wednesday.

Investors vacillated between good and bad news. On the one hand, the news about vaccines boosted sentiment; but, at the same time, investors grew more concerned about stimulus talks dragging, rising cases of Covid-19 and more weekly jobless claims than anticipated. The uncertainty around Brexit with no deal in sight between the U.K. and the European Union was another wildcard.

Big autocalls

In last week’s structured notes market, autocalls recorded a 90% penetration rate, $343 million in 109 deals. The average market share for this structure type is 55% year to date.

The strong push in autocall issuance last week was due to two factors. First 83% of the number of the deals fell into this category, which includes all autocalls with either contingent coupon or cumulative call premium.

Second, issuers priced autocallable offerings in larger sizes than usual. The top three deals when combined amounted to $115 million.

UBS handled distribution on those top three deals.

Citigroup Global Markets Holdings Inc. priced the first one, a callable issue on indexes with an American coupon barrier (daily coupon observation). The $56.91 million three-year issue is linked to the least performing of the S&P 500 index, the Russell 2000 index and the Nasdaq-100 index.

The contingent coupon of 9.5% a year is based on a 70% American barrier and is payable quarterly. The notes are callable on any quarterly coupon payment date.

The barrier at maturity is at 60%.

Coming next was BofA Finance LLC’s $32.28 million of three-year autocallables tied to the worst of two exchange-traded funds – the Technology Select Sector SPDR fund and the iShares Russell 2000 ETF.

The notes will pay a contingent quarterly coupon at an annual rate of 7.62% if each fund closes at or above its coupon barrier, 70% of its initial level, on the observation date for that quarter.

The notes are automatically called on a quarterly basis after six months if both funds are at or above their initial level. The barrier at maturity is 70%.

GS Finance Corp. issued the third largest offering, another issue of three-year callable contingent yield notes on tech stocks, for $26.5 million.

The stocks are Amazon.com, Inc., Apple Inc., Alibaba Group Holding Ltd., Alphabet Inc. and Facebook, Inc.

The contingent coupon of 25.9% depends on the non-breach of a 70% coupon barrier.

All deals had a three-year tenor, noted a market participant.

“Three year is pretty standard for autocalls. In general, you’re looking at two to three years,” he said.

Leverage drops

Leveraged notes issuance was particularly subdued last week. Only $14 million of leveraged products with no downside protection sold in six deals. Another $14 million – this time with barrier or buffer – in eight deals was issued. Overall, leveraged notes accounted for only slightly more than 7% of total volume against 26% on average for the year to date.

“A lot of leveraged notes are not pricing that well,” said Beals.

“When they price, they price on shorter tenors because issuers are not willing to go that long. It makes uncapped growth notes more challenging to do.

“When you cap the notes, you don’t have enough volatility to make the upside attractive.”

The decline of growth products has been observed throughout the year.

“We’ll see leveraged notes again, but right now, the market conditions aren’t there,” a sellsider said.

“Rates and volatility are too low.

“The stock market is at record highs, so people are not inclined to make bullish bets. They lack conviction.”

There are a series of factors that are putting the brakes on growth products.

Stocks

The distribution between stocks and equity indexes was balanced last week, each accounting for about 35% of the total.

The choice of underlying stocks reflected the two different market themes investors are making bets on – a continued interest in growth and technology on the one hand and normalization in a post-Covid world.

Some of the most popular names in the first category included salesforce.com, Inc., Alibaba Group Holding Ltd. and Tesla, Inc.

One the recovery side, the stocks of Boeing Co., Royal Caribbean Cruises Ltd., Pfizer Inc. and Wells Fargo & Co. were also in demand.

The top agent last week was UBS with $286 million in 107 deals, or 75.3% of the total.

It was followed by CIBC World Markets Corp. and Citigroup.

The No. 1 issuer was Citigroup Global Markets Holdings Inc. with eight deals totaling $147 million.

Citigroup was also the top issuer the week before.

For the year, Barclays Bank plc continued to lead with $9 billion in 1,829 offerings, a 13.84% share.

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