Structured products agents price $653 million notes during week amid historic rebound

By Emma Trincal

New York, April 1 – As seen throughout all last month, volatility has been the friend of structured notes issuance.

Last week’s issuance was slightly less than expected for the close of the month, with $653 million in 72 deals, according to data compiled by Prospect News.

Big mid-week

But it’s nearly certain that those figures will be revised upward as the data was preliminary at press time.

An example of such updates showed that the previous week of March 15 accounted for $976 million as opposed to the $135 million initially reported, an unusually high tally for the middle of the month.

Volatility runs both ways. Last week, the S&P 500 index rebounded 10.3% from its low of March 23 at 2,191.86. At that point, the index had dropped 35.4% from its Feb. 19 all-time-high in just a little over one month.

On Tuesday alone, the Dow Jones industrial average soared 2,113 points, a more than 11% surge in one day and its biggest one-day gain since 1933.

Gaps

With the market roller coaster and most of the “desks” working from home, keeping track of the deal flow has become a challenge.

The delays between pricing and filing may have increased, an industry source said.

“There is such volume and the market is moving so fast... normally deals should be filed prior to settlement to make sure clients receive valuation on time,” he said.

“You want to see the notes marked to market and not zero in your account.

“We hear that it happens though. People need to do a better job at uploading the statements on time,” he said.

Historic one-day surge

In some cases, the market dynamics are evolving so fast, some issuers would rather wait.

“Some may be printing outside of the range offered. They just want to make sure the range can be held,” he said.

Last week’s rally may have also played a role in the totals.

“We were up 10% in a week. It was a week of calm, and calm is good. The market was stabilized as a result of the Fed and its monetary policy, shoring up liquidity across many segments of the market. The Congress’ $2.2 trillion stimulus package was also very bullish for the stock market,” said Matt Rosenberg, head of trading and strategic initiatives at Halo Investing.

The Dow Jones industrial average rose 12.8% on the week.

“With such a huge rally, the terms suffered,” he added.

“Also, people may be expecting another pullback. It could have put volume a little bit on hold.”

The weaker month-end issuance volume, at least based on current available data, did not entirely surprise him.

“You’ll see more calendar deals on a one-week or two-week basis. Volatility is moving daily and fast. It’s very opportunistic. Many investors want to take advantage of that rather than waiting for the end of the month.

“We’ve seen a significant pickup in custom deals in March, especially at the beginning of the month. Volumes were historically elevated,” he said.

Volatility

This may explain that the first two weeks of March with $1.70 billion and $1.73 billion, respectively, were the third and fourth best ones of the year. Such top ranking usually goes automatically to the final week of the month.

With $3.91 billion sold during the last week of February, the No. 1 week of the year, February so far surpassed March with $6.19 billion versus $4.74 billion, respectively. Again, the gap is likely to be considerably narrow, if not revert upon the next update.

“Volatility is the fuel of structured notes,” said Steven Foldes, vice-chairman at Evensky & Katz / Foldes Financial Wealth Management.

“Structured notes are attractive in this environment.”

His outlook was relatively optimistic.

“The market will probably recover in the next 12 to 18 months.

“It’s likely that by then, all of this will be behind us. This is not an economic crisis. This is a health crisis. Once this specific issue will be dealt with, through pharmaceutics and vaccination, this whole crisis will turn around and the market will surge,” he said.

Concerns about banks and their credit spreads widening are overblown in his view.

“In this crisis I don’t see the banks under tremendous pressure. The government has made very clear that they’re providing liquidity. Banks are much stronger than they were before. Banks will do well.

“I’m very positive about structured notes,” he said.

The month-to-date issuance volume is up 117% from $2.18 billion sold a year ago through March 27, 2019.

For the year to date, volume soared to $19 billion from $9.24 billion, a 106% increase.

Call for action

“We just had a historic first quarter drop in the market. This surge in volatility creates unprecedented opportunities for structured notes,” said Rosenberg.

“When you have a 10% move in one day, that’s a call for action. People want to take advantage of that.”

He looked at one of last week’s top deals as an example.

On March 20, UBS AG, London Branch priced $51.48 million of barrier contingent coupon notes linked to the S&P 500 index. The index strike was at a price 32% lower than its all-time high. The notes pay a contingent quarterly coupon of 13.76% per annum based on a 50% barrier observed from initial price. The notes are automatically called above initial price after six months. The principal repayment barrier at maturity is 50% as well.

The deal was distributed by UBS.

“This is a different market. Two months ago, you would have priced this deal with a 75% barrier and a 6% to 8% coupon,” said Rosenberg.

“It was nowhere near that.”

Washing your fruits

But perhaps the greatest driver behind the surge in issuance over the past two months is fear itself and the need to find protection from the bear market, said Rosenberg. Investors’ reaction in the face of the coronavirus pandemic is modifying buying habits when it comes to selecting products.

“As the market outlook is changing, people are looking more and more at downside protection,” said Rosenberg.

“When I go outside shopping, as soon as I get home, I wash the fruits I just bought. It’s the new normal. Well it’s the same with a portfolio.

“People who didn’t think of protecting their assets only a month ago are now seriously thinking about the downside.

“A barrier or a buffer puts your mind at ease. You’re getting a level of comfort even if there is a tradeoff.

“That’s why I’m bullish on structured notes.”

Last week saw a few large deals spread across different structures, which gave a balanced mix of product types.

Autocallables made for 27% of the total, leverage 21% and leverage with buffer or barrier, 21% as well. A large offering of principal-protected notes gave this structure type a 16% share. Adding the product types, which come with some form of downside protection whether partially (leveraged notes and autocalls) or fully, showed that 64% of last week’s notional was skewed toward defense.

Wels Fargo’s $132 million

Wells Fargo Finance LLC’s $132.31 million issue of five-year Leveraged Index Return Notes linked to the Dow Jones industrial average was the top deal.

The payout at maturity will be par plus 205% of any index gain.

Investors will lose 1% for every 1% decline.

BofA Securities, Inc. is the agent.

Big PPN deal

The second one, a principal-protected notes offering, was brought to market by Credit Suisse AG, London Branch for $104.8 million. The five-year notes are linked to the S&P 500 index, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par of $10 plus 1.0577 times any appreciation of the index. If the index falls or finishes flat, the payout will be par.

UBS Financial Services Inc. is acting as distributor.

UBS also distributed its $51.48 million autocall deal mentioned earlier, the third one in size, based on available data.

BofA’s deals

The next deal priced by BofA Securities Inc. was Toronto-Dominion Bank’s $41.35 million of two-year leveraged notes on the S&P 500 index.

The payout at maturity will be par of $10 plus 2 times any index gain, up to a payout of par plus 25.7% with a 10% buffer on the downside.

Also emanating from the Merrill Lynch platform, Barclays Bank plc priced $46.53 million of six-year autocallable market-linked step-up notes linked to the S&P 500 index.

The notes will be called at par plus an annual call premium of 8.25% if the index closes at or above its initial level on any annual observation date.

If the index finishes above the step-up level – 130% of the initial level – the payout at maturity will be par of $10 plus the index gain.

If the index gains by up to the step-up level, the payout will be par plus the step-up payment of 30%.

The downside provides a 15% buffer.

$33 million rate offering

Also notable was a large rate-linked note offering brought to market by Royal Bank of Canada.

This issuer priced $33 million of five-year fixed-to-floating rate notes linked to the two-year Constant Maturity Swap rate.

The interest rate is 1.5% for the first three years. After that, the interest rate will be equal to the two-year CMS rate, subject to an interest rate floor of 1.5%. Interest is payable quarterly.

The payout at maturity will be par.

The top agent last week was Bank of America with five deals totaling $270 million, or 41.35% of the total.

It was followed by UBS with $203 million in five deals, or 31.1% of the total. Goldman Sachs was third.

The top issuer was Wells Fargo with its $132.3 million deal.

© 2015 Prospect News.
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