February structured products tally surpasses January’s, but year-to-date sales drop 30%

By Emma Trincal

New York, Feb. 16 – While the issuance volume of structured products has improved in February compared to last month, the year-to-date tally is not encouraging, according to preliminary data compiled by Prospect News.

Volume this month through Feb. 11 was $1.9 billion, a nearly 80% increase from $1.06 billion last month.

But available data for this year compared to 2021 are disappointing.

The full month of January showed $5.93 billion, a 27% decline from $8.11 billion in January 2021.

Sales this month through Feb. 11 amounted to $1.9 billion, or 37% less than last year.

The result is a weak year-to-date tally –$7.83 billion through Feb. 11, a 30% drop from the same point on the calendar in 2021.

The deal count for the year is also less at 1,707 compared to 3,190.

One mitigating factor could be the time lag between the pricing of deals and their filing with the Securities and Exchange Commission, which could significantly underestimate the most recent data.

Struggling market

But the stock market may also be a factor for the lackluster volume.

Since the start of the year, volatility climbed, pushing the benchmarks into correction territory. Pullbacks may reduce the amount of proceeds getting called, one likely explanation for the declining tally. On the other hand, the new market conditions are more favorable for pricing.

“It’s hard to interpret issuance volume based on what the market does from one month to the next,” a sellsider said.

“Sometimes when volatility is too high, people back away. And for sure the market began to be very choppy in the second half of January.”

February’s improved sales may have to do with pricing, he noted.

“It’s not clear when it started, but terms are looking better now. When you have higher interest rates and higher volatility, you get two pretty strong components of pricing. That could explain the uptick in February versus January.”

On Thursday, high inflation numbers sent the 10-year Treasury yield above 2% for the first time since July 2019.

“Higher rates definitely help price better terms,” he said.

The stock market began to recover at the end of January but remained in negative territory. The S&P 500 index is down more than 6% for the year. Continued headwinds, such as the Federal Reserve’s plans to hike rates next month, persisting inflation and rising long-term rates hurting the valuation of growth and tech stocks have contributed to the turmoil in equities. Higher bond yields in particular hit the Nasdaq particularly hard. The tech-heavy benchmark is 13% off its November high.

News of a possible Russian invasion in Ukraine propelled the VIX above 30 on Friday.

The call factor

During the stock market sell-off, a number of deals did not get called, the sellsider noted. This factor may have weighed on January’s tally. The picture is less clear for February, which showed more of a choppy trend than a bearish momentum with intraday sell-offs followed by short-term rallies.

“The impact of calls really depends on when the notes are callable and if there is a no-call period. Most of our notes have a six to one-year no-call,” the sellsider said.

“But I definitely hear from other places that the amount of calls in January and February has been lower than in the past couple of years.

“It makes sense. In the past six months, one year and even the past few years really, the market has been up, and everything was getting called away.

“We still have a pretty consistent flow. But some other places are down.”

Single underliers

One possible consequence of the tumultuous stock market recently is the decreasing reliance on worst-of payoffs.

Last week, for instance, 70% of all index-linked notes issuance volume originated from single underliers.

“I think this is a factor of this new combination of higher volatility and higher rates. Not so long ago, you had to put together worst-of to generate enough yield. You couldn’t really do much on one index. But volatility has jumped. Something that didn’t work before might work now,” he said.

This single-asset trend was seen across various structure types last week, including autocalls, digital and leveraged notes.

One example of a single index digital offering was GS Finance Corp.’s $27.29 million of 13-month notes linked to the S&P 500 index paying 14% if the index return is greater than or equal to negative 15%. Investors will lose 1.1765% for every 1% that the index declines beyond 15%.

On the autocallable front where worst-of deals typically abound, Citigroup Global Markets Holdings Inc. priced $22.8 million of five-year autocallables tied to the S&P 500 index alone. If the index closes at or above its initial level on any quarterly valuation date after one year, the notes will be called at par plus a premium of 8.9% a year. The premium is cumulative. There is a 20% geared buffer at maturity.

Moving parts

An unusual product seen over the past few months resurfaced last week. Always tied to one index, usually the Dow Jones, the note with its various strikes and payout formula is so complex that even some sellsiders have called the structure “odd.”

Yet several issuers have offered the product, and a variety of firms, including Morgan Stanley, UBS and Goldman Sachs, have been involved in its distribution.

A sample of this structure came from Bank of Nova Scotia, which priced $22 million of 0% capped buffered index-linked notes due June 17, 2027 tied to the Dow Jones industrial average. The dealer was Goldman Sachs & Co. LLC.

If the final index level is at least 141% of the initial index level, the payout at maturity will be 44.625% plus (ii) the product of (a) 3.2063 times (b) the index return minus 41%, subject to the maximum payment amount of $1,831.006 for each $1,000 principal amount.

If the final index level is between 91% and 141% of the initial index level, the payout will be par plus the product of 0.8925 times the sum of the index return plus 9%.

Investors will lose 1% per 1% drop beyond the 9% buffer.

Goldman Sachs via its GS Finance affiliate issued a similar note for the same amount and distributed it.

Digital bid

Digital notes continued to be in fashion, making for 13% of last week’s total issuance volume.

“Digitals are like income notes without the callability. They’re popular for their tax efficiency compared to your average contingent coupon note,” a market participant said.

“You see more indices in digitals than in income products. You don’t have the call, so it’s a better fit for your asset allocation. Unlike autocalls, digitals are not much of a tactical play.”

About $122 million of index-linked notes priced as worst-of products. BofA Finance LLC for instance issued $15.27 million of three-year callable notes paying an annualized fixed interest rate of 5.15%. Investors are exposed to the least performing of the Euro Stoxx 50 index, the Russell 2000 index and the S&P 500 index. The issuer call can be exercised quarterly. The barrier at maturity is 50%. UBS is the agent.

Big Blue

Deals tied to stocks accounted for about 20% of last week’s tally, in line with the average.

The top single stock deal was a short-term bullet note from Toronto-Dominion Bank distributed by BofA Securities Inc. The $15.61 million issue of one-year 9.5% STEP Income Securities is tied to International Business Machines Corp. Above initial price, investors receive par if the stock price is below the step level – 109.5%. Above the step level, a 2.1% step payment is offered. Investors will be exposed to any losses.

Single underliers always prevail in the pricing of stock-linked notes. Worst-of deals on stocks made for only 7% of last week notional.

Citigroup offered $15 million of one-year 7.6% autocallable linked to Walgreens Boots Alliance, Inc. with monthly interest payment and quarterly automatic call. 5%. UBS is the agent.

Last week’s most frequently used single stocks included Advanced Micro Devices, Inc., Apple Inc., Cisco Systems, Inc., Ford Motor Co., Meta Platforms, Inc., PayPal Holdings, Inc. and Tesla, Inc.

Seasonal red flags

With the earning season over, issuers may have more leeway to price stock-linked note deals, the sellsider said.

“For us, when we put together new deals, it’s always tricky to do it when so many companies are reporting,” he said.

“You can’t have a deal straddling with earnings announcements. After the earnings, volatility can change significantly. We try to avoid linking to stocks that are going to report, especially during the marketing period. You don’t want to show terms and be forced to change them later.”

The market participant agreed.

“Issuers are wary of post-earnings price swings. They can be tough or too risky to hedge,” he said.

He brought the example of Tesla Inc., whose shares dropped 11.3% intraday after the company reported its fourth-quarter earnings last month.

The top agent last week was UBS with 85 deals totaling $118 million.

It was followed by Goldman Sachs and Morgan Stanley.

The No. 1 issuer was GS Finance, which brought to market $107 million in 14 offerings.

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