Issuance volume reaches $400 million in post-holiday week amid flattish market, earnings

By Emma Trincal

New York, Oct. 23 – Structured products agents priced $400 million in 150 deals in the week following the Columbus Day holiday weekend, according to preliminary data compiled by Prospect News.

Revised figures for the previous week showed a notional of $589 million in 168 deals. With the addition of the first week of the month, October is now on a strong footing with $1.48 billion through Oct. 18 compared to $1.30 billion during the same time last month, a 13.7% increase. There were 464 offerings this month versus 401 last month.

“There’s not enough data to say anything conclusive about October yet. We need the full month to compare,” a sellsider said.

“But if I had to speculate, I’d say that September tends to always be a slow month because of Labor Day.

Also, the market was pretty strong in the early weeks of September. Coupons may have been priced toward the lower end of the range. It can be a little bit of a wet blanket for investors trying to get some yield.”

Volume for the year to date continued to be down from 2018. Sales amounted to $38.19 billion compared to $46.45 billion, a 17.8% decline. The number of deals dropped 5% to 12,445 from 13,109.

Autocalls top

The overwhelming majority of the notes priced last week was designed for income with $190 million sold in 94 autocallable contingent coupon notes in addition to $32 million in snowballs (autocallables paying a call premium with memory). In total, the search for yield was the dominant behavior seen behind investors’ buying decisions with 55.5% of total sales falling into the category of yield-enhancement products.

“It’s an expression of what investors’ general view of the market is,” said the sellsider. “People are looking at strategies generating return without expecting the market to go up.”

Leverage

One hundred million dollars of last week’s volume was done in leveraged notes with buffers or barriers, in 15 deals. Pure leveraged plays with full downside risk were kept to a minimum: $12 million in seven deals, according to the preliminary data, which is subject to upward revisions.

The bid for income notes has been a dominant trend for the year with some caveats. The first one is the monthly calendar. When Bank of America brings its larger trades at the end of each month, the prevailing structure turns to leverage. Another caveat is the market itself.

“As soon as you have a little bit of a rally, people turn more bullish and the appetite will switch back to enhanced participation types of structures,” the sellsider said.

But a sideways market naturally predisposes investors to buy autocallable and other income-generating notes.

Cyclical behaviors

“We’ve been flat since the beginning of the summer,” he said.

The S&P 500 index currently at 3,000 is near its July all-time high of 3,027.98.

“You’ll always see cyclical behavior when investors try to protect their investment as we get near the highs. It’s not just to get downside protection. It’s also to position themselves for gains if the market declines.”

This rationale behind fixed coupon deals excludes bearish views, which would not value barriers as a sufficient source of downside protection.

“These very pessimistic investors, we don’t see them. They do something else with their cash or do nothing,” he said about bears.

“We’re talking about people with a certain risk appetite. Those will continue to buy structured notes. They just have a certain preference for one type of risk versus another.”

Flat market

Investors continued to be sensitive to headlines about the U.S.-China trade negotiations and plans for a Brexit deal but strong earnings kept the market up for most of the week.

Stock prices however pulled back on Friday over negative corporate news related to Boeing Co. and Johnson & Johnson Inc., leaving the S&P 500 index nearly flat, up only 0.5% for the week.

This environment has investors seek autocallables.

“If you can get an 8% return without needing the market to go up while getting a 20% protection on the downside, those terms are pretty compelling,” he said.

Single-stocks wanted

Asset class distribution showed $109 million linked to single-stocks versus $255 million on equity indexes, a 27% to 63% split.

The high proportion of single-stock underliers could be the result of corporate earnings, a trend also observed last week.

Single-stocks or baskets of stocks are exclusively used in autocallable deals, and 51% of those deals were either linked to single-stocks or baskets of stocks, the rest being based on indexes.

“There’s an appetite for these products. There’s an appetite for income and there’s an appetite for risk,” a market participant said.

“There are quite a lot of autocalls because they’re mainly brokered deals, not so much advisers’ products.

“On a somewhat volatile stock, autocalls can give you more than 10% a year in contingent coupon. If you believe in a stock, the opportunity to get that type of return over a short period of time may be really tempting.”

Big CIBC deal

The week saw the pricing of two CIBC deals topping the market in notional size.

First, Canadian Imperial Bank of Commerce priced $30.01 million of two-year and five-month leveraged buffered notes linked to the S&P 500 index.

The payout at maturity is par plus 1.8 times any index gain, capped at par plus 27.18%. If the index declines by up to 15%, investors will lose 1.1765% for each 1% decline beyond the buffer.

CIBC has brought to market large trades such as this one before. But they were typically sold through BofA Merrill Lynch distribution channel, as CIBC is commonly used as part of Bank of America’s open architecture platform. The prospectus listed CIBC World Markets Corp. as the agent. It also mentioned a 0% fee.

“I couldn’t comment on who distributed the deal. Typically, the agent will also be the hedge provider who provides the liquidity on the secondary market. They tend to put their name on the docs but not always,” the sellsider said.

“It’s obviously a retail deal given the structure. It doesn’t look like a deal an institution would do. And since there is no underwriting commission, it was probably for a fee-based account,” he added.

Second big CIBC trade

Next, CIBC priced $29.21 million of two-year leveraged buffered notes also linked to the S&P 500 index.

If the index return is positive, the payout at maturity will be par plus 1.5 times the index gain, capped at 19.8%. Investors will receive par if the index declines by up to 10% and will lose 1.1111% for each 1% decline beyond the buffer.

CIBC World Markets Corp. is the agent as well. The fee is 2%.

“This is interesting. Unlike the other, this one has a commission. So, it’s for a brokerage account,” the sellsider said.

“Those two are pretty much the same deal with one slightly shorter than the other. If you aggregate them, it’s $60 million. Pretty impressive.”

Both issues priced on Oct. 14.

Wells Fargo’s digital

The third deal in notional size was Wells Fargo Finance LLC’s $16.2 million of digital securities on the S&P 500 index with buffered downside. The tenor is one year and 10 months.

If the index return is greater than or equal to negative 12.5%, the payout at maturity will be 12.6%. If the index return is less than negative 12.5%, investors will lose 1.1429% for every 1% that the index declines beyond 12.5%.

“This is an example of how you can make money even if the market is flat or down. If it’s down a lot, you’re still protected by the buffer amount,” said the sellsider.

“There is no fee. It’s presumably done for a fee-based account.”

The top agent last week was Morgan Stanley with $106 million in 15 deals or 26.5% of the total. It was followed by UBS and CIBC.

The No. 1 issuer was CIBC, which brought to market five deals totaling $69 million, or 17.2% of the notional.

The top issuer for the year is Barclays Bank plc with $5.39 billion in 1,344 deals, or 14.1% of the total, closely tied to JPMorgan Chase Financial Co. LLC with $5.35 billion in 2.043 deals.

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