Year, month kick off with $1.37 billion of structured notes issuance amid stock market gains

By Emma Trincal

New York, Jan. 20 – In just two weeks, the year-to-date issuance volume for structure products is already up year over year, in line with an unrelenting equity market rally.

Notional sales of U.S. products accounted to $1.366 billion through Jan. 15, a 4.6% increase from $1.306 billion a year ago, according to preliminary data compiled by Prospect News.

A total of 373 deals have been brought to market so far versus 414 during the same period last year.

Volume however is lower than during the first half of December, which saw the issuance of $3.078 billion in 896 offerings.

Two reasons may explain this result.

First, data for last week, showing only $381 million in 150 deals, is preliminary as not all offerings were filed on the Securities and Exchange Commission website by press time. Therefore, upward revised numbers are expected.

Second, December appeared to be a tough month to beat with the sale of $7.33 billion. It was the second-best month after February 2008 ($7.40 billion), according to the Prospect News data.

Strong start

The first week of the year almost hit the $1 billion mark, a sign that the December momentum is still carrying on. Agents sold $985 million in 223 deals in the week ended Jan. 8, according to recently updated data.

“A different year, same story,” said a sellsider.

“That first week was heavy in political headlines. The Georgia elections. The riots on Capitol Hill. There was a lot going on, and as usual, the market shrugged it off,” he said.

“Crazy things can happen, and it has no market effect.”

This sellsider said he sees headwinds in the technology sector, however, pointing to regulatory rather than valuation issues.

ADR delistings

“A lot of deals are on tech stocks, which have been outperforming everything else. A delisting of some ADRs would have a bigger and more dangerous impact than politics in my view, he said, pointing to Tencent Holdings Ltd. or Alibaba Group Holding Ltd.

Last month, Donald Trump signed a bill calling for the delisting of foreign companies on the basis on their lack of conformity with U.S. accounting transparency standards.

“Some regulatory pressures may emerge from China, too,” he added.

The Chinese government launched an antitrust investigation on e-commerce giant Alibaba Group Holding Ltd.

As a structured note underlier, Alibaba is mostly used along with other stocks in worst-of notes. Last year, 170 deals including Alibaba as underlier were priced for a total of $608 million, the data showed.

Market on pause

Stock prices fell last week. The S&P 500 index ended the week 1.5% lower with tech stocks leading the decline.

This was partly the delayed reaction to the political turmoil seen in the previous week, analysts said, as well as concerns over the slow rollout of Covid-19 vaccines.

The economy was also on the radar with the release of jobless claims much higher than expected.

Record level of autocalls

Last week was more than ever dominated by autocallables, with the product type accounting for 87.6% of the total, a record market share, well above last year’s average of 50%.

“There is a rally, but we’re not rallying every day; so, there is still volatility, which helps price these deals,” he said.

Friday for instance saw a rise in the VIX index as investors reacted to disappointing economic data with a decline in consumer sentiment and retail sales falling in December for the third month in a row.

“As we’re going through a transition both politically and from Covid, people are reallocating into big indices, big tech and tactical plays using autocalls,” he said.

“The market is rallying. It seems like there’s going to be a lot of stimulus. And Yellen’s speech last week indicates we may not have the tax hikes right away. The focus right now is in injecting more stimulus.”

There is consensus around the reasons behind the popularity of autocalls.

“It’s giving you some yield – more yield than high-yield bonds,” a market participant said.

“Even if you only get 2% a quarter, you do pretty well.

“Advisers want to reinvest. They make money in reinvesting.”

Aside from the yield, investors have an instrument that gives them discipline, he added.

“You don’t have to do the timing for your exit. When it’s up, you’re called. Problem with structured notes is that it’s hard to take advantage of it when you’re up. If you sell during the life, you won’t get what you would get at maturity. With an autocall, you get out at par plus.”

2020 best year ever

Last year’s $71.71 billion sold in 22,361 deals, according to updated data, reaffirmed the strength of U.S. structured products sales during a dreaded year, which saw the start of the Covid-19 pandemic. Last year was the best year on record for issuance volume.

Reallocating assets

This sellsider has a positive outlook for the year, especially concerning autocallable sales.

“Where else am I going to get yield plus downside protection? People are reframing their portfolios, allocating these autocalls to equity alternative satellite types of buckets,” he said.

“It doesn’t go into pure equity. I don’t go into fixed-income. That 60/40 portfolio doesn’t exist anymore. Now it’s more like a 60/20/20.”

He was referring to the traditional 60% equity, 40% bond allocation model, which no longer works for many investors as bond yields are depressed. The term 60/20/20 would refer to a 20% allocation to bonds, 20% to alternative assets such as structured notes, commodities and real estate and the remaining 20% to bonds.

Yield search

“We’re just seeing a wider adoption of autocalls in general. People are seeking income and are open to it. While there are talks about interest rates going up, I don’t see it happening anytime soon. Retail investors do not see it either. The expectation is that rates are going to stay low for a long time,” he said.

Ten-year Treasury yields rose this year from 0.92% on Jan. 4 to 1.138% on Jan. 12. But the trend has reverted since.

“Don’t get me wrong. If yields did go up, you’d get better terms, especially on market-linked CDs. The lower rates have severely impacted principal-protected products, and it’s too bad because market-linked CDs help retail investors get more involved. There is a sequence. You buy a market-linked CD and you become an autocall buyer.

“Unfortunately, it’s been a while since banks have been able to offer them as a stepping-stone.”

Indexes

Investors returned to indexes last week with 72% of the volume tied to equity indexes ($276 million in 32 deals) versus a 24% share for stocks and 3% for ETFs.

All these equity-index linked notes were autocallable structures except a couple of digital products and one leveraged buffered note. Only $48 million were tied to a single index with the $228 remaining structured as worst-of.

As seen before, the Nasdaq was frequently used as an underlying in these worst-of.

“People want exposure to tech. If they don’t do it via stocks, they do it with the tech benchmark, the sellsider said.

“S&P, Nasdaq. That’s the flavor right now.”

Top deals

Last week’s top deal was a sizable worst-of on three indexes issued by Barclays Bank plc for $66.11 million.

The callable notes due April 17, 2023 featured a daily observation barrier of 70% for a 10.07% annual contingent coupon observed on the worst performing of Nasdaq-100 index, the Russell 2000 index and the S&P 500 index. The barrier at maturity was 55%. UBS was the agent.

“That sounds great,” the sellsider said.

“The issuer call provides you with a pickup so people go for it.”

If the call had been automatic, the coupon may have been lower by approximately one percentage point, or perhaps 1.25%, he said.

“10% looks a lot better. Advisers want to tell their clients they’ve got a double-digit coupon.”

The next deal also distributed by UBS was Morgan Stanley Finance LLC’s $49.99 million of three-year autocallable contingent yield notes linked to the least performing of the Russell 2000 index and the Nasdaq-100 index. The notes pay a 7.09% contingent coupon based on a 70% coupon barrier and can be automatically called quarterly after six months. The principal repayment barrier at maturity is 60%.

Last week’s top agent was UBS pricing more than two-thirds of total sales with $257 million in 108 deals. It was followed by Citigroup and Credit Suisse.

Barclays Bank, which brought to market 11 offerings totaling $124 million, was the top agent last week and also for the first half of the month.

© 2015 Prospect News.
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