Structured notes sales $941 million for week amid sell-off; strong volume in past two weeks

By Emma Trincal

New York, April 24 – Sales of structured notes have been fairly strong in the last two weeks, a good surprise given that the first half of each month tends to be weaker than the second one. The tally was $1.4 billion in the first week of the April, followed by $1.58 billion in the following week, according to the most recent update compiled by Prospect News.

Last week’s tally of $941 million in 117 deals will be revised upward when all deals are filed with the Securities and Exchange Commission.

Volatility spike

“We had a pullback last week and the increased volatility allowed us to print deals with more favorable rates and terms,” a sellsider said.

“You kind of had people waiting for that volatility spike and they got it last week.”

The VIX index hit 21.36 on Friday, its highest level since October.

It was a bad week for the stock market, especially for growth and tech stocks. The S&P 500 index dropped 3.1% and the Nasdaq fell by 5.5%. Even small-cap equities suffered with the Russell 2000 index down 2.8% on the week.

“This week’s volatility has gone down so we’re giving back those terms. Clients are not getting the same coupons as last week at least for now,” he said.

The VIX fell to 15.7 on April 23.

Aside from the choppiness of the market, one factor continued to support sales of structured notes.

“There are still a lot of deals getting called and money being rolled over,” he said.

The S&P 500 index is up more than 6% for the year, half of its first-quarter gains, yet it remains positive, he noted.

Year to date, stocks

The year has been healthy for structured notes issuance so far with $32.66 billion sold in 6,158 deals, a 17.6% increase from last year’s $27.78 billion in 8,221 offerings.

One overlooked factor has been the surge in single stock-linked notes issuance, the sellsider said.

Sales in this asset class jumped 163% to $7.32 billion from $2.79 billion last year with a market share rising to 22.4% from 10%.

“What we’ve seen is a pattern. Generally, when the market rallies and volatility drops, people feel more comfortable. They seek better terms with individual stocks. On the other hand, when you have a sell-off, clients become more cautious and retreat toward indices.”

Since volatility increases, indexes offer terms that are still relatively better than when the market is rising and volatility declining.

Worst of

The market share of equity-index notes was greater than average last week – 77% of the total versus 61% for the year-to-date share.

Agents last week sold $725 million of index-linked notes in 55 deals. A break-down between single index underliers, worst-of indexes and baskets of indexes showed the prevalence of the worst-of category representing about half of the index issuance volume or $359 million in 55 deals. Single indexes made for 38% of the index-linked notional and baskets, 12%.

“The appeal of worst-of could simply be because you had more income players. Typically, people who want to play growth use single indices or baskets. If you are an income investor, you’re going to use worst-of to increase the coupon,” he said.

Demand for protection

Last week’s issuance of leveraged notes amounted to $195 million, a 21% share.

More significant was the fact that all leveraged structures offered some kind of downside protection via a barrier or a buffer. None came out with full downside exposure.

This contrasted with weeks in which BofA Securities prices its deals – at the end of each month.

For instance, in the last week of March, unprotected leveraged notes accounted for 10% of the volume.

The last week of February recorded a 17% market share for such structures.

“Notes with no barrier and no buffer are popular with Bank of America. It’s almost a different world,” said the sellsider.

“Certain structures have done so well over the years that advisers are comfortable with them and sell them a lot,” the sellsider said.

“It is not a uniform industry. It operates within different firms. That’s not to say that some structures are better than others. It’s just that a lot of what’s getting done has to do with the level of experience of the advisers over the years.”

Top deals

Two deals dominated last week’s landscape. Both were similar in structure and size – over $30 million – but distributed by different agents. Some common characteristics included worst-of payouts on indexes; double-digit contingent coupons payable each quarter; coupon barrier with daily observation; and discretionary calls.

Citigroup Global Markets Holdings Inc. priced the top one for $33.55 million. The three-year notes linked to the Nasdaq-100 index, Russell 2000 index and S&P 500 index will pay a coupon of 10.12% a year if each underlying index closes at or above its 75% coupon barrier every day that quarter. The securities may be called at par on any quarterly determination date. The barrier at maturity is 65% Morgan Stanley is the distributor.

The second one was JPMorgan Chase Financial Co. LLC’s $33.25 million of callable notes with daily observation coupons linked to the worst of the Euro Stoxx 50 index, the Russell 2000 index and the S&P 500 index. The quarterly contingent coupon is 10.28% per year. The issuer call is quarterly. The principal repayment barrier at maturity is 60%. UBS is the agent.

Daily observations

“These deals are not new. They’ve been around. Some people like it,” the sellsider said.

“Despite the issuer call and the daily observation for the coupon, certain advisers like these kinds of deals because they provide a fairly big protection for your principal. And that’s the key.

“We talk to advisers who don’t mind issuer calls. Whether you’re called or not, if you’re collecting a high annualized coupon what do you care?

“The daily observation can turn some people off. But if you consider a 35% or 40% contingent protection, it might be worth it.”

Another selling point was the double-digit coupon on indexes.

“People tend to look for 10% or more on the coupon. This structure is able to achieve that.

“A large protection, well-known underlying indices, and a coupon above 10%, that’s what advisers are getting in those deals,” he said.

UBS priced another similar deal on the behalf of Barclays Bank plc for $30 million. Linked to the worst of the Nasdaq-100 index, the Russell 2000 index and the S&P 500 index, the three-and-a-half-year tenor was longer and the 9.35% annualized contingent coupon lower while still based on a daily observation. But the notes offered a six-month no-call feature. The final barrier was 60%.

Japan

A Japanese trend is becoming increasingly visible in the structured notes space. Several deals linked to a Japanese equity benchmark have been well received in the past few months.

Canadian Imperial Bank of Commerce priced $30.02 million of five-year step securities linked to the Nikkei Stock Average index.

If the index return is zero or positive, the payout at maturity will be par of $10 plus the greater of the index return and the step return of 70.34%. The barrier at maturity is 75%. UBS is the agent.

“The terms are compelling for investors who need international exposure. They can be used in place of an ETF. The terms are fairly competitive,” the sellsider said.

“Japan is popular and it’s hard to tell if it’s because the options are relatively inexpensive or if it’s driven by an international investment theme around Japan.”

It was a big week for UBS, which priced some of the biggest deals, capturing 39% of the week’s tally in 61 deals totaling $366 million. It was followed by Morgan Stanley and BMO Capital Markets Corp.

The No. 1 issuer was Barclays Bank plc bringing to market 13 offerings totaling $167 million, a 17.7% share.

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