Structured products issuance at $3.84 billion for May; bid on Nasdaq, AI craze dominates action

By Emma Trincal

New York, May 31 – Structured products agents priced $3.84 billion in 826 deals this month through May 26, a 19% decrease from the same period in April, according to data compiled by Prospect News.

The numbers are preliminary as the figures for last week were incomplete.

The previous week of May 14 was strong, showing $1.35 billion in 313 deals.

Tech bull

So far this year, equity markets have been in full rally mode, especially the Nasdaq, which has gained 31% on the year. The S&P 500 index has increased more moderately by nearly 9%. But the trend is definitely bullish compared to last year’s bear market, which saw the Nasdaq lose a third of its value and the S&P fall by 20%.

Yet issuance volume of autocalls is in decline this year, down 22% to $13.2 billion from $17 billion a year ago.

Calls

The discrepancy of performance between the two benchmarks may be one of the factors slowing down the call volume, a sellsider said.

“You should see deals getting called and volume of autocall issuance go up. And to some extent it is happening. We’ve seen call activity pick up again but not as much as you would expect in a bullish cycle,” this sellsider said.

“I think it’s a function of when deals were issued. It also depends on what the note is linked to. The S&P is pretty flat on a one-year basis. But if you look six or nine months back, yes definitely, we’re seeing more call activity. So, it’s underlying-dependent.”

Debt ceiling

Last week’s headlines up until now have been dominated by negotiations on the debt ceiling in Washington. A tentative deal between president Joe Biden and House speaker Kevin McCarthy was only reached over the weekend.

“I’m not sure investors were focused on the debt ceiling. No one believes a default would even be a possibility. They would just pass something,” said the sellsider.

The attention was more centered on earnings, he noted. Some of the market movers included semiconductor Nvidia Corp. and Marvell Technology, Inc.

Madness of crowds

The strong results of those companies reflected the growth in the artificial intelligence segment of the tech market.

While some of those names are extremely volatile given how fast they are rising, the VIX overall remains in a range below 20 except in March when the regional bank crisis pushed it briefly above 30.

“I can’t explain the range bound,” said hedge fund manager James White, president of Skye Capital Markets, a volatility trading firm.

“The mega-cap stocks have been on a tear.

“There is a lot of complacency. But risk assets are very volatile. You just don’t see it.

“The only reason the market is up right now is because of the AI buzz.”

Nasdaq deals

This trend has led to an increasing use of the Nasdaq-100 index in deals as well as its ETF, the Invesco QQQ Trust Series 1.

Together, those underlying make for $1.062 billion in 146 deals year to date, compared to $541 million in 100 deals last year, according to data compiled by Prospect News.

The figures do not include worst-of structures.

Confidence boost

Another possible development would be a return to notes tied to single stocks, a category of product that has endured a steep decline this year. But if more investors elect to buy single-stock-linked notes, the number of selected stocks may become narrower due to the AI “craze” amplified by media headlines.

“We definitely see interest in AI. Deals linked to the chip space have picked up as a result of the focus on AI,” the sellsider said.

“The trend could bring back more stock underlying, especially names like Nvidia or other players in the AI field. It’s possible that we may see issuance of single stocks being lifted as a result.”

But the extraordinary growth of those stocks may be a caveat if the tech bull market ends up pushing investors to take long positions rather than buying structured notes.

Off the charts

“Nvidia is up so much, I’m not sure how much interest you will see in those names. There is still plenty of volatility in those stocks, so deals will still price with very good terms. There is no problem issuing them. It’s more a function of: is there a good entry point here? Nvidia has shot straight up from $150 in January to $420. It has almost tripled in five months,” he said.

The stock posted an all-time high at $419.38 on Tuesday.

“The chart looks a little bit scary.

“If you’re really bullish, maybe you just buy the stock.

“If you’re concerned about the downside, then maybe the way to do it is through these structured notes,” he said.

The “AI hype” is reminiscent of the dot.com era, according to some.

“The market is so overvalued right now. A lot of people are jumping on the AI bandwagon, chasing the Microsoft and the Nvidia. It’s the madness of crowds,” said White.

Marvell, Microsoft

Some names may become very popular, but the volume they can generate may not be enough to boost the asset class, said the sellsider.

“Back in the last couple of years, it was Tesla or Apple that got a lot of coverage. Now it’s Nvidia,” he said.

By the same token, some AI stocks, which are very popular among equity investors, may not be widely used in the structuring of notes.

Chipmaker Marvell Technology, Inc. is an example. As a leading AI stock, Marvell offers plenty of volatility. After releasing blowout earnings last Thursday, the stock jumped by 20% the next day.

Yet this name is not commonly employed in notes.

So far this year, Marvell has been used as sole underlier in only eight deals totaling $19 million versus $197 million for Nvidia in 57 deals, according to data compiled by Prospect News.

Tech behemoth Microsoft Corp., which is positioning itself as a leader in AI with its new AI-powered Bing search engine, is also not as widely used as an underlier. Only 29 Microsoft deals totaling $121 million have priced this year.

The bids on specific names are not just a function of the headlines, said the sellsider.

“Microsoft doesn’t have the same levels of volatility that you will find in stocks like Nvidia. The terms are not quite the same,” the sellsider said.

Fixed rates

Another recent trend has been the pricing of double-digit fixed coupons over short maturities, the data showed.

One recent example includes BofA Finance LLC’s $1 million of one-year 13% fixed income autocalls linked to the worst performing of the Russell 2000 index, the Nasdaq-100 index and the S&P 500 index. The notes are autocallable monthly after six months. Interest is payable monthly. Protection at maturity is delivered via a 70% barrier.

“There is a lot of volatility on the short end of the curve due to the uncertainty around the debt ceiling as we’re so close to the deadline. When you structure a note with a synthetic zero coupon, higher rates leave you with more money to buy the options,” the sellsider said.

Top deals

Two larger deals priced during the week of May 14. Both settled last week.

The first one was Citigroup Global Markets Holdings Inc.’s $68 million of autocalls linked to the Nasdaq-100 index.

The securities will be called automatically at par plus 13% if the index closes at or above its initial level on May 20, 2024.

If the index gains, the payout at maturity will be par plus 1.3 times the return. Investors will lose 1% for every 1% that the index declines if it finishes below its barrier.

Additionally, Morgan Stanley Finance LLC priced $32.39 million of five-year autocalls on the S&P 500 index.

The securities will be called automatically starting in one year at par plus 9.5% per year if the index closes at or above its call threshold, 90% of its initial level, on any quarterly call date.

At maturity the payout will be par plus 47.5% if the index finishes above 90% of its initial level. Investors will get par between 90% and 85%. The protection consists of a 15% geared buffer.

“The only way to get a return is to get called,” the sellsider said commenting on this deal.

“By lowering the call threshold to 90% instead of 100%, you’re increasing the probability of getting called. You pay for that with a lower call premium compared to what you would have if the call strike was at initial level.”

The top agent this month through May 19 was Morgan Stanley with $862 million in 162 deals, or 22.7% of the total.

It was followed by JPMorgan and UBS.

The No. 1 issuer was JPMorgan Chase Financial Co. LLC with $729 million in 151 deals, a 19% share.

© 2015 Prospect News.
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