Structured notes issuance $227 million for week as market remains under pressure

By Emma Trincal

New York, Oct. 19 – It was somewhat of a lukewarm week for structured notes issuance as the equity market whipsawed in reaction to high inflation data reviving concerns over an extended period of Fed tightening.

After three days of a sell-off followed by a huge turnaround on Thursday, the S&P 500 index lost 2.37% on the week and the Nasdaq slipped 3.08%.

Agents priced $227 million in 40 deals in the second week of the month, according to preliminary data compiled by Prospect News. By the end of the week, both the S&P 500 index and the Nasdaq-100 were in bear market territory.

Early in the month

The modest tally last week was in line with monthly sales cycles.

“Most banks market their deals throughout the month and price them at the end of the month. It’s not just BofA. BofA’s volume is so big, they stand out. But many other banks do the same thing and work on a monthly calendar,” a structurer said.

Earnings season may have also been at play.

JPMorgan Chase, Morgan Stanley, Wells Fargo and Citigroup reported results last week.

“Banks have a blackout period which prevents them from offering securities ahead of their earnings. The period varies from bank to bank. Usually, it’s two days before but it could be shorter or longer. It could definitely have an impact on volume,” a sellsider said.

Volatility, sentiment

Volatility as measured by the CBOE VIX index has increased this year but still remains range bound, making short-term spikes followed by short-term declines. Last week ended with the VIX trading at around 30, a resistance level since the spring of 2020. However, the 30 level looks subdued compared with the distressed levels of the March 2020 bear market, which saw the VIX climbing as high as 80.

Still, volatility is above average, remarked a structurer.

“The VIX is above 30. It’s fairly elevated. We’ve seen a number of spikes at 30 over the past couple of years. This translates into products priced at more attractive levels,” he said.

But market sentiment among buyers of structured notes is mixed.

“I don’t know if investors have a strong opinion right now one way or the other although I think people expect further pullbacks,” he said.

This structurer said that risk aversion has gained traction among investors.

“Each day we’re collecting data on clients’ indication of interest. We’re talking about deals not printed yet. Interest is now building up as we approach the end of the month. But there is less interest than in the last two months if we compare apples to apples,” he said.

“It could just be that people are adopting a wait-and-see attitude. The market keeps on sending mixed signals. It’s not an easy market to navigate. So, I think people are just trying to make up their mind.”

Love of the bullets

The top structure last week remained autocallable notes with 53% of the total notional. However, digital products were next with a 34% share.

“Autocalls are not less popular. They’re always going to be the most common type of income product. With autocalls, success breeds success. You get called, you have money, you roll over. The challenge now that the market is down is that deals are not getting called. People are still collecting their coupons. Billions are not getting called and not getting rolled,” the structurer said.

Meanwhile, digital notes are gaining momentum, he noted.

“People like the simplicity of digitals. They also like the favorable tax treatment,” he said.

“Those bullets are principal at risk securities, and as such, you don’t have to pay a phantom income like you do with principal-protected notes. If they’re longer than one year, they get treated as long-term capital gain. That’s a plus compared to autocalls, which get the less favorable ordinary income tax treatment.”

Some agents or dealers appear to offer a greater number of digitals than others.

For instance, J.P. Morgan Securities LLC has sold the greatest number of digital note offerings this year.

But others, such as Goldman Sachs & Co. LLC and Citigroup Global Markets Inc., are also doing a fair share. Many of those products are structured “in-the-money” with the digital strike set below the initial price. An example last week was JPMorgan Chase Financial Co. LLC’s $26.47 million of notes due Feb. 15, 2024 linked to the S&P 500 index. If the index finishes at or above 80% of its initial level, the payout at maturity will be par plus 13.48%. Otherwise, investors will lose 1.25% for every 1% decline beyond 20%.

Callable daily observation

Among income products, some of the structures spotted last week were trigger callable contingent yield notes with daily coupon observation.

Most agents have priced such structures this year so far, including BofA, UBS, Morgan Stanley, JPMorgan and Citigroup.

BofA Finance LLC issued the top one in August in a $59.9 million trade. The agents were UBS and BofA Securities.

An example from last week, although not a representative one due to its long tenor, was BofA Finance’s $15.75 million of seven-year trigger callable contingent yield notes with daily coupon observation linked to the least performing of the S&P 500 index, the Euro Stoxx 50 index and the Russell 2000 index.

The notes will pay a contingent quarterly coupon at an annual rate of 11.59% if each index closes at or above its coupon barrier, 70% of its initial level, on the observation date that period.

The notes may be called at the option of the issuer on any quarterly observation date.

The downside barrier at maturity is 50% of the initial price.

“The daily observation coupon can make a big difference in yield. You can get one percentage point more from it,” the sellsider said.

“The market is already down so much. All you’re risking is losing a coupon for that period. For some investors, it seems like a fair tradeoff.”

Guaranteed coupon

The discretionary call (or issuer call) also gives issuers a chance to use more conservative underliers without sacrificing too much yield.

“It’s all client-driven. We do single indices but issuer callable,” the sellsider said.

Issuer calls have also facilitated the pricing of fixed interest rates, an increasingly popular structure, he said.

Canadian Imperial Bank of Commerce priced last week $18 million of 11.45% trigger callable yield notes due Jan. 19, 2024 linked to the Nasdaq-100 index with monthly payments.

The notes are callable monthly after three months. The barrier at maturity is 70% of the initial level. UBS Financial Services Inc. is the agent.

Bid on stocks

The asset class break-down last week as a percentage of the total volume was 80% in equity indexes and 20% in stocks.

“I still see a lot of interest for single stocks. There’s always an appetite for it,” the sellsider said.

“Volatility is high, especially for single stocks, so you get higher coupons than indices. If you’re more conservative, you can get very deep barriers with yields that are still attractive.”

A large part of last week’s relatively high notional in stock deals came from four $10.2 million offerings.

Those were one-year phoenix autocallable buffer notes with memory interest, each deal tied to one stock. UBS AG, London Branch issued the notes with JPMorgan acting as the agent. The underliers (one stock per deal) were Amazon.com, Inc., Wynn Resorts, Ltd., Netflix, Inc. and Boeing Co.

The Barclays factor

Issuance volume and deal count remained negative compared to last year.

Sales diminished by $10.63 billion this year through Oct. 14 to $66.7 billion from $77.33 billion, a 13.7% decline.

On the deal side, this year saw 8,373 fewer deals than last year. The number fell by 36% to 14,934 from 23,307.

Barclays’ long pause this year contributed to a decline in the number of deals. But the impact of this issuer’s temporary exit is much stronger on the volume, according to the data.

Barclays Bank plc stopped issuing notes from March 7 to Aug. 2. During the same time in 2021, the issuer priced $5.7 billion in 1,103 offerings.

A quick projection assuming Barclays numbers would have remained identical this year shows that the bank’s contribution to the drop in the number of deals represents only 13% of the 8,373 gap. On the other hand, its exit this year contributed to nearly 54% of the $10.63 billion in volume decline, a much more significant driver behind this year’s lackluster numbers.

Last week’s top agent was UBS with $77 million in 17 deals, or 33.7% of the total.

It was followed by JPMorgan and Goldman Sachs.

The No. 1 issuer was GS Finance Corp. with seven deals totaling $51 million, a 21.9% share.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.