Structured notes issuance surges with over $1 billion in one week; last week sees $275 million

By Emma Trincal

New York, May 27 – Structured products issuance volume is starting to catch up in May with $275 million sold last week in 119 deals, according to preliminary data compiled by Prospect News.

The previous week ended May 15 saw an unusual surge in sales for a mid-month period with $1.01 billion issued in 399 deals, according to revised figures.

During that week, the S&P 500 index dropped 2.25%.

Last week’s figures appear muted, but figures will be revised upward, possibly significantly. Without the expected upgrade, the flow for May is down by just less than 3% through May 22 versus April. Compared to a year ago, the month’s tally is already up 6.5%.

So far, 2020 continues to be solidly higher than last year.

The year-to-date totals amounts to $28.59 billion, a two-thirds jump from last year’s $17.24 billion.

There have been 8,452 deals this year, a 50% increase from 5,643 last year.

Bull market

“I think the prevailing sentiment right now is FOMO,” said Brady Beals, director sales and product origination at Luma Financial Technologies. The acronym, which stands for “Fear of Missing Out,” designates the urge investors have to get into the stock market when the trend is up for fear of missing the positive outcome.

“Most of our clients are pretty optimistic. As soon as they see a pullback, they see an opportunity for better terms and lower entry points. People tend to be overwhelmingly bullish and those one- or two-week pullbacks are usually a call for action.

“I wouldn’t be surprised if we get another pullback to get more deals done.”

April

Meanwhile, April, so strong for equities, suffered a decline in issuance. Volume was down to $4.72 billion or about two-thirds less than the average monthly size of the three previous months.

“April was quite possibly the worst month I’ve seen in a long time,” said Beals.

“People were locked down. It wasn’t during the sell-off that things slowed down. March was a good month. You always have a month lag.”

In spurts

Stocks rallied sharply last month. From its March 23 low, the S&P 500 index finished April 34% higher.

The structured notes market did not follow suit.

“Clients are all over the place. People are scattered. They don’t know what to do. It comes in spurts,” a sellsider said.

“During pullbacks, you get more volatility but also less liquidity. Things tend to slow.

“In the fixed-income space with those sharp market moves, especially with the volatility in rates, people don’t buy and sell. There are not many new issues, so you get a lot of activity in the secondary market.

“Liquidity providers like myself thrive in this environment.”

Volatility and worst-of

Big market moves make is challenging to put deals on hold, said Beals.

“Pricing is getting so finnicky. It’s hard to hold levels. Usually to get commitments it’s at least a day. Now it’s got to be done intraday,” he said.

“When you had the broad-based sell-off, the spike in volatility let you put bigger cushions in the deals and that’s good.

“But when volatility is up, you almost always see a spike in correlations, which lessens the benefit of worst-of.”

“So as a result, with higher correlations, the benefit of increased volatility is somewhat muted,” he said.

“That’s why you see more underliers: not just two but three, or even four.”

Big Mac

Stock-linked notes were popular last week. The volume of notes tied to single stocks reached 38% of the total. In addition, worst-of on stocks amounted to 12%. In comparison, index-linked notes made for only 32% of the flow.

The large volume of single-stock deals was skewed by the pricing of a big deal topping the list. It was a convertible note, which was not the typical equity-linked structured product.

Credit Suisse AG, London Branch priced $72 million of seven-year notes linked to the stock of McDonald’s Corp.

The payout at maturity will be the reference value, which is the product of the final level multiplied by a 4.26803 conversion ratio.

If the reference value is less than $1,000, meaning the final level of the stock is less than a 27.5% increase in the stock price, investors will receive par at maturity.

Autocalls

Autocallables remained the structure of choice; So far this year, autocallable deals including Phoenix and snowballs made for 47% of total sales versus a 27% share for leverage.

The sellsider, who considers autocalls as a “simple” structure, attributed their success to the market.

“When volatility is high, you don’t need complex structures,” he said.

“When you look at a Phoenix autocall, there’s a lot of simplicity in it.

“Whether it’s on a single stock or index, they’re all range notes. Either you’re in the range and you get the coupon, or you’re not in the range and you don’t get the coupon.

“When volatility is high and interest rates are historically low, you’re able to create fantastic alternatives to fixed-income products.”

The declining volume of leveraged notes was also a result of current market conditions with a continued bullish trend since the low of March.

“When the market is on a tear you don’t see as many performance-oriented notes, and it makes sense. The market is doing well. You don’t have to search for means to enhance alpha as much as means to enhance income,” he said.

Shiny gold

As a sign that investors in structured notes do not necessarily use those products to make bullish bets, last week’s second deal was a large leveraged play on gold. The trend has been seen recently.

GS Finance Corp. priced $32.79 million of 0% capped gears due July 23, 2021 linked to the SPDR Gold Trust.

If the ETF return is positive, the payout at maturity will be par plus 3 times the ETF gain, capped at 26.62%.

Otherwise, investors will be fully exposed to the ETF decline. The agent is UBS.

“Gold is a safe haven. If you’re bullish on gold, usually you’re a little bit more bearish on the equity market,” said Beals.

A month ago, BofA Securities sold two block offerings on gold using the same 14-month, accelerated notes structure with 3x leverage, capped upside and full downside exposure.

Bank of Nova Scotia priced the largest one with $76.43 million of notes linked to the SPDR Gold Shares fund. The cap was set a 23.85%.

Canadian Imperial Bank of Commerce did another one for $32.28 million linked to the VanEck Vectors Gold Miners ETF and capped at 54.9%.

Stock deals

Worst-of structures continued to be popular last week with stocks making a push.

JPMorgan Chase Financial Co. LLC priced a couple of those with an above-average size for this category.

One was a three-year note offering for $10 million linked to the least performing of JD.com, Inc. and Alibaba Group Holding Ltd. The second, also a three-year product, was $9.48 million of autocallable notes tied to the least performing of Lowe’s Cos., Inc., Microsoft Corp. and Yum! Brands, Inc.

Reverse convertibles are making a comeback.

JPMorgan issued two of those, one, a 15-month autocallable on Netflix, Inc. paying a fixed rate of 10.5% for $6.77 million.

The other was $5.08 million paying a 10% fixed coupon over a 15-month tenor. The underlier was Nvidia Corp.

Both issues had a six-month no call and a barrier of approximately 63%.

“I’m not surprised that there would be a resurgence of reverse convertibles,” said Beals.

“People typically do it because they want to hold the stock and get the premium. Sometimes they don’t even get any principal protection. They just want to be long the stock and they can use the premium as a cushion or for income.”

Playing it safe

Another form of autocallable gaining traction are shark bear notes offering full principal protection.

An example was GS Finance’s $14.16 million of one-year bearish autocallable absolute return notes linked to the S&P 500 index.

An 85% American barrier will trigger a call at any time. At maturity investors also get par if the market finishes up. The gains are made on a one-to-one basis with the absolute return between the 85% barrier and the initial price.

The top agent last week was Credit Suisse with $73 million in two deals, or 26.4% of the total. It was followed by UBS and JPMorgan.

The No. 1 issuer was Credit Suisse AG, London Branch with the same volume and deal count as Credit Suisse Securities (USA) LLC.

The top issuer for the year is Barclays Bank plc, which brought to market 832 deals totaling $4.09 billion, or 14.3% of the total.

Coming next is GS Finance Corp. with 1,010 offerings totaling $3.47 billion, a 12.1% share.

© 2015 Prospect News.
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