Structured products issuance for week tops $1.82 billion, helped by another synthetic convertible

By Emma Trincal

New York, May 2 – Structured products issuance is always higher when the calendar month ends. But last week enjoyed a special lift.

Agents sold $1.82 billion in 233 deals in the week ended Friday courtesy of another block trade linked to Voya Financial, Inc., which alone accounted for a third of the week’s issuance volume, according to preliminary data compiled by Prospect News.

Not the first one

JPMorgan Chase Financial Co. LLC’s $600 million of cash-settled equity-linked notes due 2023 linked to the common stock of Voya Financial is the fourth and the largest cash-settled equity-linked notes tied to this underlying stock to price this year. Unlike the others registered with the Securities and Exchange Commission, last week’s issue was a Rule 144A deal.

So far this year Deutsche Bank AG, London Branch, BofA Finance LLC and JPMorgan Chase, respectively, priced $350 million, $300 million and $250 million in notes tied to Voya.

Voya Financial is a New York-based investment and insurance company.

“It’s intriguing. I’d like to get to the bottom of this,” a market participant said.

Top agents

JPMorgan was the top agent last week with only $89 million sold in 35 other deals, capturing almost 38% of the total with its big trade. BofA Merrill Lynch came as No. 2 with $572 million in 22 offerings, or 31.45% of the total.

Discounting the $600 million Voya trade, volume would have only been $1.22 billion. Merrill Lynch would have been No. 1 with 47%.

To be or not to be

Because those notes linked to Voya are so different in size and structure from what market participants are used to seeing, some are hesitant to consider them as typical structured products. But many sources said that, given that the products are linked to an underlying, by default they are structured products. The notes come with a small coupon (0.25% in last week’s offering) and an initial conversion premium (30% last week). The securities are institutional, sources said, pointing to the minimum denominations of $100,000.

“These are definitely structured products. They have embedded derivative and exchangeable features. It will be a product launched from a structured notes desk,” an industry source said.

Call option

The notes from last week as well as the previous ones carry a five-year maturity. The use of structured notes rather than a direct derivatives play may be a way to lengthen the option strategy, a structurer said.

“It’s a call option basically. The stock is listed, you have listed options but they only go up to November. What you’re seeing here is a long-dated call option in the form of a note.”

ING legacy

But why the consistent bid on notes linked to this particular stock?

Voya was created when ING Groep spun off its U.S. arm after the 2008 financial crisis.

Three years ago, the ING U.S. Inc. rebranded itself as Voya Financial.

Banks issuing the notes are “monetizing the warrants that were distributed after ING Group’s divestment of the company,” a source previously quoted by Prospect News said.

“I’m not familiar with these deals. But it looks like they want to sell the economics of the warrants through structured notes,” the structurer said.

“It is a note and it is a structured note. But it’s not your typical retail market structured note.”

JPMorgan was the top agent last week with $689 million in 36 deals, including the Voya trade. Without it, the bank only issued $89 million.

BofA Merrill Lynch was No. 2 and by far No. 1 if one excludes the atypical $600 million trade.

Canadian mania

One intriguing point was the overwhelming volume of Canadian banks-issued notes distributed by BofA Merrill Lynch (BAML) last week.

BofA Merrill Lynch priced the top seven deals immediately after the JPMorgan jumbo deal. All were brought to market by Canadian banks.

“Canadian issuers are making a big push in the U.S.,” said Matt Rosenberg, sales trader at Halo Investing.

“They’re growing fast in large part because they’re lining up with the likes of BAML.

“BAML has always tried to provide diversified credit risk, something that’s very important for buyers of structured notes. It’s part of the bank’s business model.”

Issuers such as Canadian Imperial Bank of Commerce have seen their issuance volume skyrocket from last year. With $1.03 billion issued this year through April 27, CIBC’s issuance notional has jumped 123%.

Bank of Nova Scotia is also one of the fastest-growing Canadian issuers with a 65% growth to $962 million from $583 million last year. Toronto-Dominion Bank’s notional remains smaller with $277 million this year. But volume is up 217% from $88 million last year.

“They have the distribution power, they have the distribution network and they want to diversify more than anyone for one reason or another,” the structurer said about BofA Merrill Lynch.

“It could be credit risk diversification or it could be to get more competitive pricing.

“I’m sure all Canadian issuers want to work with all U.S. distributors. But BAML is very eager and they’re the top distributor.”

Overall even when including the big Voya deal, Canadian banks last week issued $626 million, or more than a third of total volume. The most common means of distribution was through Merrill Lynch although some such as Royal Bank of Canada or Bank of Montreal used their own network.

Only Royal Bank of Canada’s $12.1 million airbag autocallable yield notes linked to General Mills, Inc. has an external distribution out of the Merrill Lynch network, choosing UBS.

Volume up

Volume year to date is up 21.4% to $20.52 billion from $16.93 billion through April 27, according to the data.

There have been six large hybrid convertible deals similar to the four Voya offerings, which have priced this year for a total of $1.82 billion.

Similar cash-settled equity-linked notes of such size (the smaller this year was at $90.4 million) were not seen last year. If one discounts the convertible trades, this year’s notional drops to $18.7 billion, which represents a 10% increase from last year.

“Growth is good. But those unconventional convertible trades are the main driver. They may or may not come back,” the structurer said.

“They may be priced due to a particular situation, in which case that’s temporary. If you take them out, we’re not up as much as we thought.”

Top deals

The top deals from BofA Merrill Lynch last week were the usual types: leveraged notes with or without a buffer as well as market-linked step ups.

Bank of Nova Scotia priced $128.82 million of 14-month leveraged notes linked to the S&P 500 index. It was the No. 2 deal of the week after JPMorgan’s $600 million trade.

The payout at maturity will be par of $10 plus triple any index gain, up to a maximum return of 12.03%. Investors will be exposed to any index decline.

Next, Canadian Imperial Bank of Commerce priced $50.90 million of two-year capped leveraged notes also on the S&P 500 index. The upside is double any index gain, capped at 15.91%. There is a 10% buffer on the downside.

CIBC continued with $48.32 million of 14-month leveraged notes tied to the Russell 2000 index. It offers triple any index gain, up to a maximum return of 12.99%. Investors will be exposed to any index decline.

Royal Bank of Canada followed with $40.82 million of 14-month notes linked to an equally weighted basket of three bank stocks – Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley. The leverage factor is three and the cap, 19.8%. Investors are fully exposed to the downside.

Nova push

Bank of Nova Scotia priced another leveraged deal for $37.63 million linked to the Dow Jones industrial average.

It was a great week for this issuer, which priced the next two deals for $32.85 million and $32.58 million in two market-linked step-up notes. The first one was tied to the S&P 500 index and the second one, to the Russell 2000 index.

Both deals were three-year notes with an autocallable feature, showing a 130% step-up level.

Bank of Nova Scotia, after JPMorgan Chase Financial LLC, was the top issuer last week with 10 deals totaling $298 million, or 16.4% of the total for the week.

“Canadian issuers are making a big push in the U.S.” – Matt Rosenberg, sales trader at Halo Investing

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