Agents price $158 million of structured products in shortened week; 2019 ends with $52.07 billion

By Emma Trincal

New York, Jan. 8 – Agents priced $158 million in 37 deals in the week ended Friday, according to preliminary data compiled by Prospect News, just at the start of a new month and a New Year. It was a shortened holiday week with New Year’s Day falling on Wednesday. It was also the slow beginning of a new month.

Recently updated data for the past year showed a not-so drastic issuance decline from 2018.

The tally for 2019 was $52.07 billion, an 8.3% drop from $56.77 billion in the previous year.

2018 was the best year on record since 2004, when Prospect News began collecting the data.

Second-best year

Last year’s deal count remained relatively flat, even slightly up at 16,557 from 16,171 in 2018.

As the year progressed, volume caught on with 2018. A negative gap of 25% in volume earlier in the year became less than 10% at the end.

In fact, 2019 ended up being the second-best of the decade. It was nearly a tie with 2017, which saw the pricing of $52 billion. The worst year was in 2012 with $35.2 billion.

Business activity in structured notes sales did not necessarily correlate with market performance.

In 2018, the S&P 500 index was down 6.25%. It rose nearly 29% last year.

“The S&P was up so much, people were long the market,” said a sellsider.

“I’m not sure what we’ll see this year but with the Elections and the emergence of more geopolitical uncertainty, the activity should increase. I’m not saying the market won’t go up like it did at the end of last year but hopefully we’ll get more volatility, especially on the first quarter, the most active period of the year. That was not the case a year ago.”

A market participant agreed. More volatility, as long as the market does not tank, would not hurt.

“Structured notes carry a lot of benefits when you want to reduce risk in your portfolio and take advantage of opportunities tactically,” this market participant said.

Leverage, income

Income deals were the winners last year rising 6% to $21 billion from $19.8 billion.

Sales of leveraged products on the other hand fell to $16.8 billion versus $20 billion in 2018, a 16% drop.

However, plain-vanilla enhanced return notes continued to sell in big block trades and remained popular.

Last year’s top deal for instance was Bank of Nova Scotia’s $145.79 million of 14-month of leveraged notes on the S&P 500 index. Distributed in May by Bank of America, the Scotia notes paid triple the index gain capped at 12% with no downside protection.

But the search for yield is here to stay. Sources expect to see more autocallables this year.

“Structured notes can enhance yields which has been a big seller. As long as the market has been trending up investors have been rewarded,” the market participant said.

Snowballs on the roll

One of the trends observed in autocallable issuance has been the progressive growth of so-called snowballs.

The sellsider said he expects this trend to continue.

Snowballs do not pay a coupon but rather a call premium, which can only be pocketed upon the call.

Missed premium from prior observations are then collected, which enables investors to get cumulated returns thanks to a feature called “memory.”

The traditional “Phoenix” autocalls fall more directly into the income product category as investors may collect the coupon while holding the notes. The call is not required in order to get paid because the coupon barrier is set below the call trigger. As a result, the two outcomes – payment and autocall – operate at two distinct levels. And since the notes get called at the initial strike while the coupon is paid at a lower threshold, the chances of receiving income payments while remaining invested are greater.

“We’ll see more snowballs. It’s going to be the continuation of a trend that picked up last year,” said the sellsider.

“They yield better than the Phoenix autocalls because you get paid at a higher strike.

“And the memory is a great feature. Your return can increase even if you’re not holding the note to maturity.”

For instance, a note with a quarterly automatic call paying a call premium of 10% a year could provide investors with a 5% premium if the notes are called in the second quarter, allowing investors to “catch up” with the first 2.5% missed payment of the first quarter.

“I also expect to see more stepdown components to give a little bit more certainty,” the sellsider said.

Stepdown autocalls set the call trigger at a progressively lower threshold than par, therefore raising the odds of the early redemption. A call trigger set at 95% then stepping down to 90% and 85% will reduce the risk of loss at maturity.

“Since there is a little bit less risk, the premium may be lower. But people like to be called so the stepdown works if you want to cut some of the risk. That’s one of the ways you can set your own risk-adjusted return preference as an investor,” said the sellsider.

Busy December

December turned out to be the third best month of last year with $4.8 billion in 1,339 deals. The best one was November followed by May.

Not surprisingly, notional sales this past December were on a much better footing than a year before when the stock prices briefly touched bear market territory on Christmas Eve. Volume last month was up 42% from a year before.

The week Bank of America chose to close its monthly calendar was the one prior to Christmas. It priced 42% of a big week, which saw the issuance of $2.27 billion in 540 deals.

BofA Merrill Lynch distributed two significantly large trades on that week.

One was Wells Fargo & Co.’s $115 million of 15-month triple leveraged and capped notes with full downside exposure. The other for $95 million was a six-year market-linked step up issued by Bank of Nova Scotia. Both issues were based on the S&P 500 index.

Volume remained relatively strong during the week of Christmas with $686 million. Goldman Sachs was the top agent then, nabbing a 30% market share.

Real debut

People were not back to the office yet last week,” said the sellsider.

“But this week is pretty active. This is the real beginning of the year. Last week was still in-between with New Year’s Day falling in the middle of the work week.

The world however was not on vacation. Friday saw the emergence of a new crisis with Iran as a U.S. airstrike killed Iran military commander Qassem Soleimani in Iraq. The market reaction was contained but the airstrike interrupted a five-week rally. The S&P 500 index was down 0.2% on the week.

“We saw some tactical plays as a result of the new geopolitical developments last week,” said the sellsider.

“As people get settled for this new year, advisers should get more cash available to invest.

“I’m relatively optimistic for January. Typically, first-quarter months are the best.”

Two Goldman deals

GS Finance Corp. issued the top two deals last week, both plain-vanilla leveraged structures on the S&P 500 index with some form of protection on the downside.

One for $21.5 million was a two-year with 1.25 times leverage capped at 18.75% featuring a 15% buffer on the downside.

The other at $19.6 million, was a six-year uncapped note with a 1.28 leverage multiple and a 65% barrier.

Citi’s 10-year autocall

Citigroup Global Markets Holdings Inc. showed a $14.43 million issue of 10-year contingent coupon callable notes on the S&P 500 index with a 6.25% yield and 75% coupon barrier. The repayment barrier at maturity is 60%.

This product showed interesting characteristics, including a long duration and the fact that it was not a worst-of, which is the norm for index-based autocalls.

“These structures are more common than not in the brokerage space,” said the sellsider.

“You’re getting a lower contingent coupon but a greater protection over the longer-term. At the same time, you’re achieving a pretty good yield for a single-index core product.

“Yes, it’s a 10 year, but given the call, the expected duration for these kinds of notes is more like two years. And if for some reason you’re still holding the notes at maturity you have a 60% protection.”

Some commodities

In contrast with those offerings centered on the S&P 500, Morgan Stanley Finance LLC priced $13.86 million of leveraged buffered notes on an equally weighted basket consisting of the Alerian MLP index and the Bloomberg Commodity index.

Last week’s top agent was Morgan Stanley with $99 million in eight deals. It was followed by Goldman Sachs and UBS.

GS Finance was the top issuer with $42 million in three deals.

For last year, the top issuer was Barclays Bank plc with $7.46 billion in 1,779 deals, or 14.3% of the total.

© 2015 Prospect News.
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