Agents price $302 million of structured notes amid second big sell-off week of the year

By Emma Trincal

New York, March 28 – Last week was the worst in the equity markets since the February sell-off. Whether it was or not a direct consequence of that, structured notes issuance volume was thin.

The bid for income notes was strong as investors tapped into the rising volatility seeking opportunities to obtain higher coupons. Single-stock underliers were in vogue again, and for the most part, these were used within those yield-enhancement products.

Stock retreat

Agents sold $302 million in 145 deals in the week ended Friday, according to preliminary data compiled by Prospect News. Figures are subject to upward revision.

For the second week in a row, stocks fell sharply with investors bombarded by negative news. It started with the technology sector hit by a scandal involving privacy issues at Facebook. Also, the Trump Administration’s announcement of trade tariffs raised fears of a trade war while personnel turnover at the White House did not ease the anxiety.

The S&P 500 index dropped 6% for the week, its largest weekly percentage drop in more than two years.

Facebook

After news reports that 50 million Facebook users saw their data mined by U.K. firm Cambridge Analytica, the share price of the social media stock plummeted 7% to start the week. Fears around the potential regulation of the information technology sector sent the share price of other tech stocks lower, triggering a sell-off in the broader market seen so far as a strong driver of the bull market.

“I would blame the volatility caused by Facebook’s whistleblowers,” a market participant said about the slow action last week.

“Market had one of its worst days and one of its best days in the same week.”

Income bid

The bid for income products was unusually high, according to preliminary data. There were 108 autocallable or callable contingent coupon deals totaling $220 million, or 73% of the total. The average for this structure type on a year-to-date basis is a third.

Concomitantly leverage was weak with only $39 million of notes offering a buffer or barrier done through 11 offerings. Additionally, leverage with full downside exposure amounted to only $291,000 in two deals, an unusually small level.

“It doesn’t surprise me. People know we’ve been in a fairly long bull market and that we may have reached the top,” a sellsider said.

“They’re also looking for higher coupons. High-yield bonds are not that attractive. With structured notes, coupons to a large degree are driven by volatility.

“In general people like yield products, and in this toppish market it makes even more sense. You have the opportunity to get some return even in a bearish market.”

Single-stocks

Stock-pickers were back in the market jumping in sectors at risk such as technology. Last week’s sell-off in this sector has extended this week.

Single-stock deals were essentially small income-generating notes except for notes issued by Morgan Stanley and Barclays, which priced in larger sizes.

UBS priced 11 tiny deals on Facebook for a $1.72 million total.

“Yikes. Not the best trade for March 2018,” the market participant said.

Many other technology stock deals were stuck last week as the technology consolidation continues this week expanding on a global level.

Amazon.com, Inc., Micron Technology, Inc., Netflix, Inc., Twitter, Inc., Microsoft Corp. and Apple, Inc. were among the most commonly used names.

Bank stocks were also in favor.

The use of stocks versus indexes may be a sign of worst-of fatigue, the sellsider said, although it has yet to be proven.

“Even though the markets are more volatile, you still need to put together two or three indices to get a decent coupon,” he said.

“Some people may be more comfortable with a single stock. They get a high coupon with the stock volatility and it’s not a worst-of.”

Volume for month, year

Volume for the month to date is showing signs of weakening, based on current available data.

Sales are down nearly 50% to $2.31 billion from March 1 through March 23 compared to $4.6 billion during the same time in February.

The year-to-date figures remain strong however with volume up 28% to $13.9 billion in 3,614 deals from $10.86 billion in 2,829 offerings last year.

It is too soon to tell if the market turbulence has anything to do with signs of a potential sales slowdown, the sellsider said.

“It’s hard to tell what the impact of a sell-off will be for sales,” he said.

“If the market gets beaten down, people will become risk-averse. That could take a lot of investors out of the market.

“But if it’s just a temporary correction, people may find opportunities.

“A small pullback is probably positive for the industry.”

Top deal

As with prior weeks, a block trade contributed to a large portion of total notional last week. After that, deal sizes were modest at less than $15 million.

Barclays Bank plc’s $50 million of three-year callable contingent coupon notes linked to the least performing of the S&P 500 index, the Russell 2000 index and the Euro Stoxx 50 index topped the list of deals last week.

The notes pay a contingent coupon at an annualized rate of 18.5% if each index closes at or above its coupon barrier level, 80% of its initial level, on every trading day that quarter.

The notes will be callable in whole at par on any quarterly redemption date after six months.

If each index finishes at or above its barrier level, 80% of its initial level, the payout at maturity will be par.

Otherwise, investors will be fully exposed to the decline of the least-performing index.

Top stock deal

The second deal in size dropped to below $15 million. Also brought to market by Barclays Bank plc, it was the largest single-stock deal. The three-year $14.82 million of contingent income autocallable securities linked to Netflix will pay a contingent quarterly coupon at an annual rate of 13% if the stock closes at or above its 60% coupon barrier on the determination date that quarter.

The notes will be called at par if the stock closes at or above its initial level on any determination date other than the final date.

The payout at maturity will be par unless the stock finishes below its 60% downside threshold, in which case investors will be fully exposed to any losses.

Barclays is the agent with distribution through Morgan Stanley Wealth Management.

The top agent last week was Barclays with $85 million sold in 11 offerings, or 28% of the total. It was followed by Morgan Stanley and UBS.

Barclays Bank plc was the No. 1 issuer bringing to market $108 million in 13 deals, which represents nearly 36% of the market.

Morgan Stanley Finance LLC was the top issuer last week.

JPMorgan Chase Financial Co. leads for the year to date.

“Even though the markets are more volatile, you still need to put together two or three indices to get a decent coupon.” – A market participant

“A small pullback is probably positive for the industry.” – A sellsider

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