Month-to-date structured products tally at $1.76 billion, up 23.4% from October

By Emma Trincal

New York, Nov. 17 – Structured products issuance volume is off to a good start for the first half of November with $1.76 billion sold in 285 deals, a 23.4% jump from October’s $1.42 billion in 366 offerings, according to preliminary data through Nov. 12 compiled by Prospect News. Issuance volume so far this month us up 53.1% from $1.15 billion a year ago.

Not all deals were filed with the Securities and Exchange Commission by press time, which will prompt upward revisions of the data.

The second week of the month saw the pricing of 40 offerings totaling $211 million. On average, the $5.27 million size surpassed the year-to-date average of $3 million.

A big push in index-linked notes and growth products issuance may explain the relatively higher average size seen last week. Eighty percent of total sales were based on equity indexes.

“Depending on the market situation, you can always find something attractive,” said Matt Rosenberg, director at Halo Investing.

“It could be getting higher yields via income products, or it could be buying call options for growth.

“Advisers have their year-end client meetings. People know the market is up 25% with indices. They’re willing to get that enhanced upside using indices and leverage.”

Big tech play

The top index deals were not linked to the usual U.S. broad based indexes. Theme investing and international exposure played a greater role last week.

Case in point: Morgan Stanley Finance LLC priced the top deal in $40 million of three-year leveraged notes linked to the PHLX Semiconductor Sector index, the MSCI ACWI IMI Fintech index and the MSCI ACWI IMI Cybersecurity index.

The payout at maturity is 1.54 times the gain of the least performing index if all underliers finish above their initial levels.

Investors will be exposed to any losses of the least performing index.

“This deal speaks for the growing interest people have for digital technology advancements,” said Rosenberg.

“We can see it with Facebook, now Meta, pushing into the metaverse or Microsoft Team’s avatars. These new technologies whether used for digital payments, finance or cybersecurity are the new face of the internet.”

What some call Web 3.0 is progressively becoming more mainstream, he added.

“People expect growth in this sector, and they want to get exposure to those themes,” he said.

Leverage, digital

This larger trade contributed to the higher percentage of leveraged notes, which made for 26% of the total while the share of autocallable products was 39%. In contrast, autocallables this year have accounted for 62% of total sales and leverage, 21%.

Enhanced return notes have been more visible of late, a trend that may reflect investors’ appetite for growth even at the late stages of the bull market and despite rising warnings about the risk of a bubble on the part of analysts.

Another characteristic of Morgan Stanley’s $40 million trade was the fact that the leverage was delivered without a cap over a relatively short period of time.

“Investors are very keen on not capping their upside when they buy return enhancement products,” said Rosenberg. “We’ve seen more uncapped notes or notes with higher caps.

“In part it’s because they’re more and more open to the idea of using worst-of as a way to enhance returns.”

“Investors see more growth ahead. With growing inflation concerns, leveraged notes allow you to participate in the market while still taking a defensive position.”

Other upcoming notes with relatively short tenors and uncapped leveraged upside have been spotted this month. For instance, JPMorgan Chase Financial Co. LLC plans to price a two-and-a-half year leveraged notes offering linked to the worst of the iShares MSCI EAFE ETF and the Euro Stoxx 50 index at the end of the month. The structure will lever up the upside by at least 1.3 times with no cap. A 10% buffer on the downside includes an absolute return feature.

“You couldn’t do this with the S&P and the Dow,” a sellsider said.

“It’s more difficult, if not impossible to provide uncapped leveraged notes on U.S. underliers. But pricing is coming back with European and international indexes.

“And it’s a good thing because demand for non-U.S. exposure is increasing as well. The fact that Europe is doing well this year is getting investors’ attention.”

Other structures seen last week included absolute return and digitals.

Royal Bank of Canada offered the example of a decent size digital trade with $19.4 million of 13-month notes linked to the Euro Stoxx 50 index. If the final index level is at least 90% of the initial price, investors will get 6.22%. Otherwise, they will lose 1.1111% for every 1% that the index declines beyond a 10% buffer.

Focus on inflation

Inflation as a market theme was center stage last week after the Labor Department reported a 6.2% year-over-year increase in the Consumer Price Index for October, a 31-year high.

This precipitated a bond sell-off with the 10-year Treasury yield rising to 1.58% on Friday from 1.41% on Tuesday. Yields continued to rise this week with the 10-year yielding 1.64% on Wednesday afternoon, moving closer to its highs of late March.

The bond market was volatile and so was the stock market but up to a point. By Friday, equities had recovered some of their losses.

The S&P 500 index finished the week flat, but the Nasdaq-100 dropped 0.7% and the Russell 2000 index shed 1%.

Bond yields

“To me rates are still range bound,” said Rosenberg.

“The 10-year has been more or less trading between 1.4% and 1.65% over the past weeks. It’s hard to tell how much more of an increase you would need to see before bonds start to compete with the yields offered by equity derivatives. I think we’re too far to entertain that conversation even though the market expects future rate hikes, especially after last week’s inflation headlines.”

Rosenberg is confident that autocallable notes and income-generating products will remain the dominant force in the market at least for some time.

“Right now, real interest rate yields are negative. People are grappling with the idea that there is a cost of carrying bonds. Income-generating structured notes provide a great alternative. What else can you buy to increase your real income?”

New hedges

Commodities ETFs were the best performers in the stock market last week especially precious metals and energy.

Even though no deal priced on this asset class last week, a persisting inflation may bring those trades back to life soon.

Only half of a percent of this year’s issuance volume is commodities-based, according to the data.

“Commodity from a demand side is certainly something people are looking at. I’m open to that. They haven’t been in vogue for some time, but inflation concerns could change that because advisers need to find solutions to hedge against rising prices. It’ a matter of finding an underlying that works,” said Rosenberg.

China and Boeing

The market for ETF-linked notes was relatively quiet last week. One small deal caught the sellsider’s attention.

Credit Suisse AG, London Branch’s $2 million of three-year autocalls linked to the performance of Boeing Co., the iShares China Large-Cap ETF and the iShares MSCI China ETF pay an annualized call premium of 12.2%. The barrier at maturity is 70%. Morgan Stanley Smith Barney LLC is the distributor.

“It’s a funky one. Very interesting,” the sellsider said.

“To begin with, the combo ETFs and single stock is not that common. Also, I’m not sure why they paired those two almost identical Chinese equity funds. What’s driving the yield here is really Boeing versus China. Boeing is a single stock but it’s also like a super stock, a proxy for the airlines. So, in a way, it’s almost like an ETF.”

Year to date

This year saw the sales of $78.35 billion in 20,719 deals through Nov. 12, a nearly 30% increase from last year’s $60.37 billion in 18,855 offerings, according to the preliminary data collected by Prospect News.

“We’re going into year number two of back-to-back strong growth,” said Rosenberg.

Issuance volume in 2021 has now surpassed last year’s tally, which was the record since 2004, according to the data.

The top agent last week was Morgan Stanley with four deals totaling $59 million, or 27.7% of the total.

It was followed by UBS and JPMorgan.

The number one issuer was Morgan Stanley Finance with $54 million in two deals.

For the year, Barclays Bank plc is the top issuer with $10.6 billion in 1,818 offerings, a 13.5% share.

© 2015 Prospect News.
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