Structured products tally $621 million for week; Barclays returns; big digitals eyed

By Emma Trincal

New York, Aug. 10 – It was a busy week for the start of the month, with agents pricing $621 million of structured products in 89 deals, according to preliminary data compiled by Prospect News.

Barclays issued its first notes on Tuesday after five months out of the market. The issuer had pulled out of the market after mistakenly selling more products than its registration permitted, a situation that forced it to suspend issuance and sales of notes until filing for a rescission offer, which was done on Aug. 1.

Finally, the week was characterized by a sharp drop in the volume of autocallable issuance and by a surge of large buffered digital trades from a variety of issuers.

The top deal however was on the rate side with Royal Bank of Canada’s $77.25 million of floating-rate notes on the two-year U.S. dollar SOFR ICE swap rate.

Barclays

As soon as its rescission offer was filed on Monday, Barclays Bank plc began to issue notes. The bank brought to market at least 20 offerings nearing $30 million, according to the preliminary data.

The trades on average were under the $2 million mark except for an $8 million issue of three-year autocallable notes on the least performing of the Russell 2000 index and the S&P 500 index.

Most notes were autocallable contingent coupon offerings tied to the worst of two or three U.S. equity indexes. Barclays also priced stock-linked notes deals, one tied to Meta Platforms, Inc., and others on the worst of several stocks.

“They have a big business unit in the U.S., a lot of staff, they were on top of the league tables. If they maintain competitive pricing, I don’t see why they can’t regain their momentum,” a sellsider said.

“While there are still a lot of questions about this over-issuance error and what happened, it doesn’t impact their credit or their ability to move on.”

Digital appeal

Digital notes last week superseded autocallable issuance. A total of $276 million in 12 digital note offerings made for 44% of total sales. Callable products in contrast accounted for only 17% of the tally in 35 deals totaling $105 million.

Last week was not a fluke.

Issuance volume of callable notes is down 45.6% this year through July 5 to $20.77 billion from $38.18 billion.

The number of deals plummeted to 5,705 this year versus 11,993 a year ago, a 52.4% drop.

Shorter durations

The bear market in the first half of the year was a large contributor to this decline as deals did not get called.

“The average autocall buyer buys autocalls by rolling over. The average broker is probably investing with the mindset that the estimated life of the notes is shorter than the maturity,” the sellsider said.

Without the calls, advisers and their investors seeking short-term plays may be inclined to look for alternatives unless issuers can shorten the terms of autocalls, he explained.

“We do see an uptick in shorter durations for autocalls. We see more autocalls in the one- to two-year range as opposed to two to five years,” the sellsider said.

But this is not the only solution.

The demise of autocalls this year has revealed the vulnerability of those products in a bear market. Both advisers and brokers have looked for alternatives, he said.

“You want to have diversification of payoff, not selling the same thing over and over again.”

Those factors help explain the surging demand for digitals as a new way to deploy capital, he said.

“The goal has been to figure out more bullet-oriented strategies with short-term durations. And you can do that with a digital. That’s why you’re seeing rising demand for these products.

“For brokers, it’s a breeze to explain a digital payout compared to an autocall. For issuers, higher interest rates make the pricing of digitals much easier. And for advisers, your payout doesn’t require the index to be up, which is also the beauty of Phoenix autocalls.”

Digital festival

All of last week’s top equity trades were digitals. The products came with a geared buffer.

The sellsider said that buffered digital notes may be well-positioned to compete with autocalls.

“Rates are higher. You can price those digitals with buffers,” he said.

The top offering was Credit Suisse AG, London Branch’s $63.91 million two-year digital buffered notes linked to the S&P 500 index.

If the index finishes at or above 90% of its initial level, the payout at maturity will be par plus 21.15%.

Otherwise, investors will lose 1.1111% for each 1% decline beyond the 10% buffer.

Credit Suisse Securities (USA) LLC is the agent.

JPMorgan Chase Financial Co. LLC priced another buffered digital on the S&P for $49.62 million with an 18-month tenor. The digital payout is 16.05% if the index finishes at or above 90% of its initial level. The downside shows a 10% geared buffer with a 1.11 multiple.

Among the rare sector plays last week, Bank of Nova Scotia priced $35.87 million of 15-month digital notes on the Energy Select Sector index.

If the index finishes at or above its 80% threshold level, the payout at maturity will be 17%.

Otherwise, investors will lose 1.25% for each 1% decline beyond 20%.

Scotia Capital (USA) Inc. is the agent. Simon Markets LLC is acting as dealer.

Royal Bank of Canada and JPMorgan each priced big S&P-linked digital offerings for $33.07 million and $31.78 million, respectively. RBC’s 21-month note has a 20% geared buffer. The digital payout is 14.25%.

JPMorgan priced a 14-month deal on the S&P 500 index for $31.78 million with a 15% geared buffer and a 10.7% digital.

JPMorgan priced another digital for $31.25 million on the Energy Select Sector index.

Year, best months

Issuance volume dropped 17.8% year to date to $49.31 billion from $59.96 billion while the number of deals fell to 10,273 from 17,674.

The best months of the year were March with $8.74 billion and June with $7.39 billion. A solid equity rally took place in the second half of each of those months. The trend for August is young. So far it is also mixed. The S&P 500 index was flat last week while the Nasdaq Composite finished up 2.2%.

The stock market continued to rebound last week with the S&P 500 index jumping 9.1% and the Nasdaq, 12.4%.

Sources point to the natural tendency of structured notes sales to rise when the market rebounds due to autocall rollovers and a boost in confidence on the part of investors.

The first week of August showed a mixed picture with the release on Friday of a much stronger July job report, leading some to worry about a Federal Reserve compelled to hike interest rates more aggressively while disappointing those betting that a recession would lead to rate cuts.

“July is usually a great month. August is not such a good month and September is the worst month. I’m not expecting the rally to be much higher in the next couple of months,” said Herb Blank, senior quantitative analyst at ValuEngine.

Last week’s top agent was JPMorgan with $172 million in 16 deals, or 27.75% of the total. It was followed by Royal Bank of Canada and UBS.

JPMorgan Chase Financial was the top issuer with $172 million in 16 deals as well.

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