Structured products weekly volume tallied at $767 million, tracking $6 billion year to date

Chicago, Feb. 8 – Structured products volume for the Jan. 30 week is currently running at $767 million.

There would be an expectation that the number would be backed by more issuance on Monday and Tuesday as the January calendar cleared; however, currently the bulk of the number comes from deals that priced on Feb. 1. More than half the total, $404 million, priced on Wednesday.

The main pricing date for the end of January tracked so far was Jan. 26. At least 220 deals priced on that Thursday for $1.27 billion.

The Jan. 23 week has already jumped from an initially reported $1.02 billion when the issuance was analyzed last week to what is now tracking at an upwardly revised $2.28 billion, and counting.

This means that nearly $6 billion has been thus far recorded as priced in 2023.

Boosts to issuance

There are a couple of factors that are boosting issuance.

One is obviously the autocallable feature.

Of the deals recorded so far for 2023, 34.54% of them have an autocallable feature.

That 2023 number is nearly identical to data for autocallable notes in 2022, but down from 2021 when those deals represented more than half the market.

However, the tenors of the notes are tightening.

Back in 2018 when the market was a more comfortable and charming $56.77 billion of annual issuance, notes with a two-year tenor were running around 26.67% of issuance. Notes with a three-year tenor were running close to another 20%. And, one-year notes accounted for just one-fifth of the market.

Jumping back to present day, nearly half of the issuance for the first five weeks of the year matures in 2024.

The tenor seems to have tightened on new notes.

Prospect News does not track the volume of notes that have been called, but it does track maturity dates.

Around $60 billion of notes priced in previous years carry a 2023 maturity date.

At the most generous assessment, up to $30 billion of that would be autocallable.

This leaves, at minimum, $30 billion up for potential reinvestment in 2023.

The number is only slightly lower than the $64.48 billion of notes that listed a 2022 maturity date.

Underliers

A recent internal analysis of structured products data undertaken by Prospect News revealed remarkable consistency in the list of most often used underliers.

Looking at three years of data, meaning from February 2020 to the end of January 2023, notes that are tied to only the S&P 500 index accounted for a full one-quarter of the market.

Consistently in the No. 2 spot was one triplet set of indexes that never got reshuffled: the perennial worst-of including each of the Nasdaq-100 index, the Russell 2000 index and the S&P 500 index. That grouping accounted for 6.9% of the market, more than double any other arrangement of three in the common worst-of structures.

The consistent third underlier was a pair: the Russell 2000 index and the S&P 500 index.

Surprisingly, only one single stock as an independent underlier was in the top 10 list and it wasn’t Tesla. It was Apple Inc., accounting as a single underlier in 1.36% of notes.

Protection

On the rise in 12-month trailing deal numbers is protection.

BofA Finance LLC has historically been able to price monster structured products deals with a generous amount of leverage on an underlier, but no downside protection.

Investor appetite for the deals has been consistent, trading a good market beat for no insurance should the underlier end lower.

However, there is a trend in the 12-month trailing number that investors are generally more interested in some protection on the notes.

Full downside protection is nearly 0.9% of deals to price in the last 12 months versus 0.35% in the prior 12 months.

Partial downside protection is much higher, though. Deals with downside protection of some kind and a leveraged return now account for around 17% of the market, more than 4% higher than the year prior.

Notes with a leveraged return, like those BofA notes, are currently off about a percentage point.

So, what is the tradeoff then?

In the period from Feb. 1, 2022 to Jan. 31, 2023 – the average leverage is tracked at 1.4635% for every 1% increase in the underlying.

For the 12 months prior, the average leverage over all the deals priced and tracked is 1.5288% for every 1% increase.

Cummins

Just like the week prior, the largest deal of the week was convertible bond-tilting deal.

Barclays Bank plc priced $83.37 million of 0% synthetic convertible notes due Feb. 12, 2026 linked to the common stock of Cummins Inc.

Barclays was issuer and underwriter for the deal that will have a minimum payout of par, payable in cash or shares at the holder’s option.

The timing of the deal in terms of the underlier makes it interesting.

Cummins just recovered from a downturn that started in May 2021. The stock hit an all-time peak on March 12 of that year, closing at $273.92. It had doubled in one year, from the $130s the year prior.

Then, it slumped after that 2021 peak. It steadily worked lower, dipping below $200 per share several times in mid-2022.

And, then the stock fought its way back.

The engine company reported earnings on Monday, Feb. 6.

The Barclays deal priced on Feb. 2, ahead of earnings.

The investment-grade company is an uncommon underlier in the structured products sphere.

As a standalone entity, the Prospect News archive shows one RBC deal tied to the stock in 2022 and only three times in 2021.

More commonly, it might show up in these huge stock-basket deals with 60, 70 or 80 IG stocks.

S&P 500

Royal Bank of Canada brought the second-largest deal to price during the week, a hefty $64.99 million of 0% digital index-linked notes due Feb. 6, 2025 linked to the S&P 500 index.

RBC Capital Markets, LLC was the agent.

The notes have a 90% buffer level and then a digital payout of 19.8% if the index finishes above the buffer level in two years.

Otherwise, investors lose 1.1111% for every 1% beyond the 10% buffer.

RBC priced a deal with the same idea on Jan. 13, but the terms were different.

The notes matured on Oct. 16, 2024, so a one-year-and-nine-months tenor.

The buffer level was 80% that time, with a 14.84% payout at maturity if the index was better than the buffer level.

And, investors stood to lose 1.25% for every 1% loss beyond the 20% buffer.

That deal was sized at $10.36 million.

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