First half’s structured products issuance volume up nearly 10% as market posts new highs

By Emma Trincal

New York, July 7 – Structured products agents priced $41.21 billion in the first half of this year, a 9.14% increase from $37.76 billion during the same period a year ago, according to preliminary data compiled by Prospect News.

Meanwhile the deal count has unexpectedly remained relatively flat with 11,281 deals in 2021 versus 11,249 a year ago. The number of deals sized $20 million and bigger has increased from 282 million last year to 386 this year so far.

Total sales for the trailing 12 months rose 14.1% to $76.15 billion from $66.76 billion.

Week, month

Last week unfolded with another impressive equity rally with the market hitting new highs heading into the long holiday weekend. The S&P 500 index rose 1.7% while the appetite for tech stocks pushed the Nasdaq 1.9% higher on the week.

Agents priced $414 million in 144 deals last week, but figures will be revised upward as not all deals were filed with the Securities and Exchange Commission by press time.

Monthly tallies indicate a stronger volume earlier this year with January and March posting $8.11 billion and $7.96 billion, respectively. A total of $6.9 billion was issued in March.

Totals for the second quarter, which are still preliminary, point to monthly volumes more or less around $6 billion.

“We are slowing down a little bit. Still, we’re up from last year, which is good. There may be a pause because the stock market keeps going higher,” a sellsider said.

“In a way it’s a challenge because people don’t think. They keep on buying stocks. They buy at high prices not worried about pullbacks because you can always buy the dips anyway. So far, this bullishness has paid off.”

Stocks are leading

The volume of notes linked to single stocks has jumped 71% this year to $9.21 billion from $5.39 billion a year ago. The market share of this category of products has also increased to 22% of total volume from 14%%.

“This is the supporting evidence that people more than ever are searching for yield. Using more volatile underliers like single stocks is the easiest way to come up with higher returns,” the sellsider said.

Some of the single stock underliers seen last week included Pinterest, Inc., Advanced Micro Devices, Inc., Amazon.com, Inc., Airbnb, Inc. and Schlumberger Ltd.

Some investors do not hesitate to use lesser-known or recent names to get additional upside.

UBS AG, London Branch for instance priced $10.1 million of three-year autocallables linked to Palantir Technologies Inc. last week.

Palantir began trading on the New York Stock Exchange on Sept. 30. The first note tied to the stock was issued in March. The UBS deal was the 10th one to be priced on this stock since the first one in March, according to the data.

The notes will pay a quarterly coupon at the rate of 11.35% per year if the stock closes at or above its coupon barrier, 50% of its initial level, on any related observation date. The notes are autocallable each quarter after six months if the stock is at or above initial price. The barrier at maturity is 50%.

Equity indexes

Meanwhile equity-index-linked notes have seen their volume drop more than 13% from last year, to $22.6 billion from $26.12 billion. The number of deals has fallen by 30%, according to the preliminary data.

“Correlations are more compressed. This is why it’s more difficult to do deals on indices than before,” the sellsider said.

Using three indexes in a worst-of is not sufficient anymore to generate attractive coupons, according to the data. Depending on the issuer, barrier size and maturity, it has become more common to see contingent coupon in the 5% to 7% range while they were about 200 basis points higher only a few months ago.

Issuers have to use structural features to boost the coupon. The most common one is the issuer call. Some have also reduced barrier sizes. The use of American options is another yield enhancement tool although not as commonly employed.

Barclays Bank plc’s $38.19 million callable notes used two of those features with a discretionary call and a daily coupon observation at a 70% barrier for an 8.76% contingent coupon. The 33-month notes offer exposure to the worst of the Nasdaq-100 index, the Russell 2000 index and the S&P 500 index. UBS is the agent.

ETFs on the rise

Volume of notes tied to exchange-traded funds have more than doubled this year to $4.59 billion from $2.18 billion last year. In market shares those deals now make for 11.1% of the total compared to 5.8% a year ago.

This has been the result of increasing demand for sector plays. In some instances, ETF underliers may offer an easier albeit indirect access to a broader asset class. Commodity bets for instance are almost always played out with energy stocks or miners stocks ETFs.

Investors have a greater appetite for the top performing equity funds, such as energy, financials and communication services. REIT ETFs are less common as underlying assets even though real estate is, after energy, the second best-performing sector this year, according to the Sector SPDRs’ website.

Last week’s top deal offered exposure to the broader index and its top-performing sector.

GS Finance Corp. priced $44.65 million of five-year autocalls linked to the SPDR S&P 500 ETF Trust and Energy Select Sector SPDR Fund.

The notes will pay a contingent quarterly coupon at an annual rate of 6.54% if each ETF closes at or above its coupon barrier level, 70% of its initial level, on the observation date for that quarter.

The notes will be called at par of $10 if each ETF closes at or above its initial level on any observation date after six months. The barrier at maturity drops to 60%. UBS Financial Services Inc. and Goldman Sachs & Co. LLC are the agents.

Month after month

Autocallables remained by far the most popular structure this year, with the trend picking up in speed almost monthly.

For instance, in January and February of this year, the issuance volume of autocallables grew by 44% and 13% from the respective periods 12 months earlier. In March, issuance of autocalls increased by 45% from March 2020, which recorded the bottom of the pandemic crash. In April, it doubled from a year before. May so far shows an 83% spike. These figures, which include both Phoenix autocalls and snowballs, seem to indicate that toppish markets drive the autocall flow as investors are betting on limited upside, which can easily be monetized in yield.

More obvious reasons are the ongoing calls, which free up assets into rollovers.

Leverage

In contrast with the success of autocalls, leveraged notes have been falling in volume. Accounting for $8.1 billion this year, they dropped 21% from last year’s $10.2 billion.

However, leverage with full downside risk has remained constant in volume at about $3.4 billion this year and last. It’s the amount of enhanced return notes with barriers or buffers that has incurred the most severe drop, down 31% to $4.66 billion from $6.76 billion.

Does that mean investors are doing away with upside leverage and downside protection? The sellsider did not think so.

Competitive products

“When it comes to buffers, people have already migrated to buffer ETFs for at least a couple of years now. Now that you can structure not only a buffer ETF but a leveraged buffer ETF, there’s an accelerated migration out of structured notes,” he said.

In October, the SEC gave ETFs more leeway to use derivatives, such as forwards, futures, swaps and written options. The new rule is now allowing funds regulated by the Investment Company Act (mutual funds, ETFs etc.) to enter these transactions if they comply with certain conditions designed to protect investors. These regulatory developments have facilitated the development of derivative-based ETFs using leverage, this sellsider said.

“Part of the rise in autocalls is because those products can’t be replicated by ETF providers. Some of the option combinations used in the autocalls are not listed and the SEC doesn’t allow ETFs to use over-the-counter options,” he noted.

“Regulators move slowly. But if the SEC were to allow ETFs to use OTC options, it would do similar things to what the buffer ETFs are doing to participation notes. There would be a migration. It wouldn’t be the end of structured notes, but it would force the industry to be more competitive or creative. Probably both,” the sellsider said.

Toppish market

Naturally, autocallables have also surged in volume due to investors’ demand, particularly in a market trading at all-time highs, a market participant said.

“Autocalls are a good fit for this market right now,” he said.

“You get market exposure, and you can take a nice profit over a short period of time. It’s nice to be able to get a decent return even if the market is not moving much one way or the other.

“People also like the idea of a call. Investors don’t want to make a two-year bet in this market whereas getting called after three or six months lets you take some profit without tying up your money for too long.”

Big BofA week

The week prior to last week was one of the best weeks this year with $2.13 billion in 381 deals. BofA Securities was the top agent closing 35% of total sales in 41 deals. The agent chose the last full week of the month to close its calendar.

The top deal on that week was JPMorgan Chase Financial Co. LLC’s $68.04 million of 0% cash-settled equity-linked notes due June 29, 2028 linked to the capital stock of International Business Machines Corp.

Bank of Nova Scotia issued $48.16 million of 14-month leveraged notes on the S&P 500 index, and Canadian Imperial Bank of Commerce priced $52.18 million of one-year notes linked to the iShares Silver Trust. BofA Securities was the agent for both deals.

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