Issuance of structured notes continues to advance, up 8.4% year to date

By Emma Trincal

New York, June 9 – As news stories vary from inflation resurgence to fears of Fed tapering, moving the market in a choppy fashion, investors continue consistently to buy structured notes for income or protection – often for both.

Agents priced $34.14 billion in 9,384 deals this year through June 4, an 8.4% volume increase from $31.49 billion in 9,456 deals during the same time last year, according to data compiled by Prospect News.

Updated data for the final week of May revealed $1.375 billion sold in 220 deals. Data for last week was not finalized at press time.

Monthly trends

Most months this year have seen higher notional sales than their year-ago counterparts.

January’s tally, the best so far, was $8.09 billion versus $7.03 billion a year before. March with $7.88 billion was also stronger than March of last year, which recorded $7.29 billion.

April sales in particular jumped 40% to $6.61 billion this year from $4.72 billion a year before. Only February was softer with $6.9 billion versus $7.23 billion.

“That’s good news. We want to see strength consistently over the course of the year, not just for one month,” said Matt Rosenberg, director at Halo Investing.

December, March, February and January were the biggest months on record last year volume wise. The advance this year in the absence of a major market event, may be prolonged in the months ahead, as last year’s weakness transpired in the second half with the exception of December.

On an even more encouraging note, totals for the trailing 12 months through June 4 are up 16.5% to $74.87 billion from $64.29 billion. The deal count increased by 14% to 22,466 from 19,690.

Stocks, big winners

For the first five months of this year, stock underliers made for 28% of total sales. This number contrasts with the 17% share of last year and 14% seen in 2019. This figure includes single stocks and baskets of stocks.

Agents have priced $9.6 billion of such notes this year versus $5.7 billion last year through May 31, a 68% increase.

Last year’s $5.7 billion in stock deals was already nearly twice as much as the $2.88 billion sold during that same period in 2019.

“It’s not so much that structured products have become a stock-picking market,” said Rosenberg.

“But the huge growth of income-products has led investors to explore stocks.

“Once they understood that the underlying assets do not have to be limited to indices and that you can get higher yields from single stocks or groups of stocks, this appetite for stocks has been growing. Since investors are starving for yield, autocalls on stocks serve a need. I would trace the natural expansion to stocks as it relates to income products back to a couple of years.”

Meanwhile, equity indexes underlying have dropped 15% this year to $19.3 billion from $22.6 billion.

Part of the decline is due to the decrease of so-called growth products (traditional leveraged notes), which have lost market share to stocks. Growth notes use indexes almost exclusively while autocalls tap into both asset classes – stocks and indexes.

Go autocalls!

Autocallables make for 64% of this year’s total sales compared to 49% last year.

In volume, these products have jumped 41% to $21.8 billion from $15.5 billion.

“It’s been the trend. It continues and should continue to be the trend,” said Rosenberg.

“Even if fixed-income yields are gradually getting higher, people will continue to be drawn to income products.”

The expansion of autocalls has other causes than investors’ yield-seeking behavior.

“Growth-oriented products, traditional leveraged notes just don’t look as good,” he said.

“New products like buffered ETFs can compete with growth-like exposure. They tend to cannibalize the growth-oriented issuance.”

Autocallable structures offer another appeal: the repeated opportunities to exit early.

“The autocall is like a snapshot at the stock,” a trader said.

“You stand at a street corner. You take a photograph of what happens. A lot can happen in three months. What will the photograph look like? Rather than observing what happens in between call dates, you’re only concerned about this snapshot. It’s not a bad thing.”

Commodities blues

Commodities remain the forgotten asset class with only 16 deals this year totaling $245 million, not even 1% of total issuance volume.

For Rosenberg, at issue is liquidity.

“The payoff for commodities notes doesn’t look as great as with equity. It doesn’t price well,” he said.

“The indices track futures contracts on commodities and the options on these indices are not as liquid as those on equity.”

Hedging futures contracts that expire and need to be rolled can be challenging, he added.

“In general deals are light.

“It’s not for lack of demand though. As prices are rising, people are looking for inflation hedges. We know that commodities are typically used for that as evidenced by the current rally in commodities.”

Two recent offerings however were noteworthy for their size.

In May, GS Finance Corp. priced $70 million of 13-month notes linked to the Bloomberg Commodity index. The payout was one-to-one.

In April, GS Finance priced a nearly similar deal on the same index for $58.44 million.

Choppy market

On the equity front the averages were close to new highs last week although trading was choppy as investors remained torn between conflicting trends and headlines.

The S&P 500 index finished the week up nearly 1% while the Nasdaq rose 1.5%.

Inflation fears temporarily faded on Friday as a May job report was below the consensus. But behind the concerns over inflation, investors are now increasingly worried about the Federal Reserve putting an end to its bond purchases. Some signals are emerging. Last week, the Fed announced it would sell off the corporate bonds and ETFs it purchased last year to contain the negative impact of the Covid-19 crisis.

All over the map

High inflation numbers have crushed the technology sector and pushed up the price of so-called recovery stocks in the travel, energy and entertainment industries. When yields settle or signs of a more muted recovery emerge, the Nasdaq rebounds.

This has led to a variety of underlying stocks that may have little in common or not enough to draw conclusions on a main market theme. Some of last week’s underlying include:

Carnival Corp., Las Vegas Sands Corp., Boeing Co., Freeport-McMoRan Copper & Gold Inc., Royal Caribbean Cruises Ltd., United Airlines Holdings, Inc. or Alcoa Corp. on the reflation trade side. On the growth/tech side, Amazon.com, Inc., Facebook, Inc., Nvidia Corp. and Tesla, Inc. were the most visible plays.

“As there have been captivating news stories in a variety of sectors, it’s not centralized the way tech was the main exposure in the recent past,” said Rosenberg.

“You can look at a variety of different industries and find reasonable deals in all of them.”

Over $30 million

A few larger trades not mentioned earlier came to market in the final week of May.

GS Finance priced $35.97 million of three year autocallable notes linked to Citigroup Inc. The securities will pay a contingent coupon at an annualized rate of 10% based on a 75% coupon barrier at an identical level as the downside threshold.

Morgan Stanley Wealth Management is the dealer.

Barclays Bank plc priced three other deals all above the $30 million mark.

One, a two-year autocallable worst-of on SPDR S&P Regional Banking ETF, the Nasdaq-100 index and the Russell 2000 index, sold for $33.38 million. Both the coupon and final barrier are set at 75% of initial price. The quarterly coupon offers an annual rate of 11.1%.

The second offering is a single asset three-year market-linked step-up on the S&P 500 index. It priced for $31.09 million.

The notes will be called at par plus an annual call premium of 7.3% if the index closes at or above its initial level on any annual observation date.

If the index finishes above the step-up level – 126% 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 26%.

Investors will be exposed to any index decline.

BofA Securities, Inc. is the agent.

Finally, Barclays Bank priced $30.82 million of three-year of autocallables linked to ViacomCBS Inc., with Morgan Stanley as the agent.

The 12% annual coupon rate is based on a 60% coupon barrier, which is set at the same level as the downside threshold.

© 2015 Prospect News.
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