Structured products tally $1.02 billion for final week of June; $92 million BofA deal tops

By Emma Trincal

New York, July 5 – The final week of the first half of the year ended quietly ahead of the Fourth of July holiday weekend with $1.02 billion sold in 94 deals, according to preliminary data compiled by Prospect News.

BofA Securities grabbed 57% of the total notional sales, or $577 million in 26 deals, including a $91.72 million block trade.

With this year’s strong rally driven by mega cap tech stocks comes depressed volatility levels. The VIX index last week traded in a tight range between 13 and 14, which is at multi-year lows. If low volatility does not help yield enhancement, at least the strong rise in interest rates this year has been beneficial, a structurer said.

Single indexes

Equity indexes accounted for two-thirds of total issuance volume last week with $739 million in 54 deals. About 85% of the total notional for equity-index-linked notes came from notes tied to a single index, the rest being distributed between worst-of and weighted baskets of indexes.

The strong presence of notes tied to a single index can be attributed to BofA’s footprints in the market last week. This agent routinely prices plain-vanilla “accelerated return” notes on a single benchmark.

Year to date

Total issuance volume dropped 12.7% for the first half of the year to $42.75 billion from $48.98 billion in the same period a year ago, according to the preliminary data. The deal count decreased to 9,614 from 15,109.

Leverage and autocalls, the two best-selling structure types, represent the bulk of the notional decline.

Autocall issuance dropped 12.4% this year to $19.16 billion from $21.86 billion, including Phoenix autocalls and snowballs. Leverage issuance fell even more to $9.18 billion from $12.98 billion, a 29.3% decline.

Yield alternatives

When agents sell more autocalls in a bull market, the typical and logical explanation is that deals are getting called. The reasoning does not seem to apply this year either because few deals were set to be called in the first half of this year or because call proceeds are not being reinvested. A more commonly accepted reason behind the decline of autocall issuance is the competitive yields found in fixed-income, especially on the short end of a deeply inverted curve. As an example, the one-year Treasury now yields 5.42% versus 2.68% a year ago.

“Yes, it’s more attractive than before to buy Treasuries now. That’s part of it,” said the structurer.

“Some people are risk-averse, and for them, it makes sense to invest in risk-free instruments like Treasuries yielding 5.5%. At the same time, because rates are higher all across the board, you can now get structured notes with amazing coupons. I’m sure the appeal of Treasuries or money market yields has a role to play. But you also have the risk-takers who get really excited by 20% coupons on structured notes. So, it’s really hard to tell.”

Selling options to bring out higher coupons is not as lucrative this year with the current muted volatility. But firms have used other means such as linking notes to more volatile stocks or indexes and worst-of.

Higher interest rates have also helped, this structurer said.

“Structured products work as an add-on to a normal bond. If you start off with bonds yielding 1%, it’s hard to make the structure very interesting. When you start at 5%, you’re obviously getting more attractive terms,” he said.

It’s too early to tell if sales of both autocalls and leveraged products are really going to decline this year, he added. “We’ve just wrapped out the first half of the year. We don’t know what’s going to happen in the second half.”

While there will always be demand for growth, principal-protection and yield enhancement, future market conditions and investors’ sentiment remain unknown, he said.

Bull run

A market participant invoked the current rally to justify the drop in leveraged notes issuance.

“We’re in a very strong bull market,” he said noting that Apple has just reached a market value of $3 trillion.

“The market seems a bit toppish. Leverage is more appropriate if you anticipate growth.”

“Other structures like digitals may be doing a little bit better. When you don’t expect much upside, you’re comfortable with a fixed return.”

At the same time, the stock market’s strong performance may appeal to investors eager to score short-term gains.

Most of the market growth was driven by Nasdaq stocks such as Apple Inc., up 54% for the year, or Alphabet Inc., which jumped by 38%. Meanwhile AI-heavy winner, Nvidia Corp. has more than tripled in price year to date.

“You need the market to go up to take advantage of leverage. And certainly, the market has made strong gains this year,” said the structurer.

The S&P 500 index closed the first half of the year with a 16% gain while the Nasdaq surged twice as much with a 32% return.

It is possible that market conditions may deter investments in leveraged notes, at least for those with a cap.

Also, some investors may be reluctant to lock their money up in structured notes while they can place tactical bets on equity.

“Maybe in part people want to be long the market because this bull run is tempting. Others though are waiting for a drop to get in at a more reasonable entry price,” the structurer said.

“I’m not sure the stock market is competing with our business. It’s a possibility but it’s not certain. For instance, why do people continue to invest in long-term bonds when interest rates are higher on the short end of the curve? There’s a reason. Maybe they expect rates to go down. I can’t say why people are doing less leverage. It’s anybody’s guess. Maybe it’s pricing. Maybe it’s the rally. You can’t argue with the market. People do things for many different reasons.”

PPNs

Principal-protection has been the beneficiary of higher rates. But it tends to be more visible in different wrappers.

“We’re seeing growth of principal-protection among various structured investments. There’s a growing demand for structured CDs right now,” he said.

“We’re also seeing structured UITs doing principal-protection. It goes to show that pricing conditions have really improved with higher rates,” he said.

UITs share some similarities with structured notes. Unlike ETFs, they are not actively traded and have an expiration date.

“They’re nimble. It’s easier with UITs to come up with new things,” he said.

Fixed-to-floating

Full principal-protection this year has been delivered mostly through rates, rather than equity. The issuance of fixed-to-floating rate notes for instance has exploded, amounting to $3.13 billion this year versus $241 million a year ago.

Those issues are relatively large in size. Only 60 deals have priced this year, which brings the average offering size to $52 million.

Last week’s latest was Bank of Montreal’s $62.5 million of three-year fixed-to-floating rate notes. Paying 6.5% on the first year, the note then offers a variable rate of two-year U.S. Dollar SOFR ICE swap rate plus 95 basis points. The payout at maturity is par.

Top equity deals

On the equity side, BofA priced the eighth largest equity deal of the year on the behalf of Toronto-Dominion Bank with $91.72 million of 14-month Accelerated Return Notes linked to the S&P 500 index. The payout is triple any index gain, up to a 14.21% cap with no downside protection.

HSBC Bank plc issued $60.34 billion in three-year autocallable Strategic Accelerated Redemption Securities linked to the S&P 500 index. BofA distributed the notes as well as 16 among the top 20 offerings.

The No.1 agent last week after BofA Securities was UBS with 19 deals totaling $135 million, or 13.3% of the total.

It was followed by BMO Capital Markets Corp. and Morgan Stanley.

The top issuer was Canadian Imperial Bank of Commerce with $136 million in five deals, a 13.4% share.

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