Structured products agents price $625 million for week; stock underliers, callable deals prevail

By Emma Trincal

New York, Feb. 7 – As two months overlapped, structured products issuance volume hit $625 million in 130 deals last week, according to preliminary data compiled by Prospect News.

BofA completed its monthly calendar pricing on the previous week with $1 billion in 54 deals, according to the most recent update. Overall, the previous week’s tally amounted to $1.82 billion, which exceeded the $1.25 billion average week over the past 10 years, according to the data.

Contrary to the previous week when digital and leveraged products dominated the flow, last week saw a robust comeback of callable products, which made for 58% of sales in 83 offerings totaling $363 million.

Bull market

January’s tally was strong with $7.6 billion in 1,583 deals.

The bull market was one key factor driving the solid numbers. The S&P 500 index in January was up for the third consecutive month. Moreover, the benchmark posted several record highs since the beginning of the year.

The latest one was an intraday high of 4,998.65 on Wednesday’s early afternoon.

“We just had a massive recall of notes,” said a market participant.

“I’m having so many notes being called away. Volatility has dropped. Coupons that paid 11% are now paying 9%.

“And with the market up and rates lower, banks are calling notes aggressively.”

Vol., rates down

Last week was a busy week for the equity market with the Federal Reserve Board keeping rates unchanged, which was expected, but suggesting that a rate cut in March was not in the cards, precipitating a sell-off on Wednesday. The market rebounded later in the week with strong earnings from two big tech stocks, which pushed the S&P 500 index, the Dow Jones industrial average and the Nasdaq to new record highs.

Meanwhile rates continued to fall. From Jan. 25 to Feb. 2, the 10-year Treasury yield dropped 38 basis points to 3.817% from 4.195%.

Lower interest rates combined with low volatility are not the best recipe for pricing compelling terms, sources said.

Bid on single stocks

One of the ways to increase returns will always remain the use of worst-of payouts. But when the dispersion premium is not sufficient, issuers will link notes to single stocks. This trend was clearly visible last week with $158 million issued in single-stock products, or more than 25% of the total. The year-to-date market share has been 17% for this asset class. Equity indexes represented 59% of the total last week versus 72% for the year.

“When the market is very bullish, more single-stock notes are getting printed,” the market participant said.

“We’re seeing a jubilant overall sentiment in the marketplace. People are more confident.”

And stocks deliver better terms such as higher yields and lower barriers or even geared buffers, he added.

“Single stocks always carry more volatility. When vol. is low, people shift away from indices to stocks to keep coupons higher,” he added.

“Lower rates definitely hurt the terms. But they’re not a huge factor. Most of the negative impact comes from low vol.”

The structurer agreed.

“People may be focusing more on big stocks because terms on indices are not particularly conducive even with worst-of,” he said.

Earnings blowout

Three of the Magnificent Seven companies (Amazon.com, Inc., Apple Inc. and Meta Platforms, Inc.) reported earnings that beat expectations last week. These results or positive expectations may have contributed to the strong demand for single-stock notes, the structurer added.

“Stock deals are usually driven by stories. People talk about Tesla or other Magnificent Seven all the time. There’s a constant chatter. But earnings get people’s attention. When you have several big tech companies reporting earnings on the same week and beating expectations, that’s a lot of news, a lot of good news. People want to jump in and strike deals.”

Some of those single-stock issues were sizable for this asset class type. Not all of those notes were tied to tech stocks although the top two were.

Stock deals

UBS AG, London Branch priced the largest one with $20 million of two-year autocallables on Tesla, Inc. The notes pay a quarterly coupon at the rate of 16% per year based on a 52.5% coupon barrier. The autocall is quarterly. The principal repayment barrier at maturity is also 52.5%.

Royal Bank of Canada sold $17.15 million of three-year autocallables on Intel Corp. with both barriers set at 53%. The quarterly contingent coupon was at 9.95% a year and the quarterly autocall started after six months.

UBS was the agent.

Some ETFs

Agents used ETF underliers scarcely last week with only $20 million sold in four deals, or 3.25% of the total, well below the 10.4% share seen the previous week.

On top was JPMorgan Chase Financial Co. LLC’s $14.87 million of 13-month digital notes linked to the Energy Select Sector SPDR fund, paying 12.02% based on an 87.5% geared buffer level.

The market participant said he uses sector ETFs in his worst-of as a way to boost coupons.

Utilities have been his sector of choice.

“As rates shot up last year, utilities have been beaten up. It’s a very defensive sector, with less risk than small-caps,” he said.

“When I put utilities in a worst-of, I get greater dispersion, which gives me yields jumping into the 10’s.”

Novel digitals

The tally for rate-linked notes was $30 million in two deals last week.

The top one was a $25 million five-year floating-rate note brought to market by Bank of Nova Scotia with the return linked to the two-year U.S. dollar SOFR ICE swap rate plus 91 basis points.

More notable, even though smaller in size, was the use of a digital format for a rate-linked product.

JPMorgan Chase Financial priced $5 million of one-year digital notes on the two-year U.S. dollar SOFR ICE swap rate.

If the swap rate finishes at or above 64.15% of its initial value, the payout at maturity will be par plus the digital return of 15%.

Otherwise, investors will lose 1.55885% for every 1% that the rate declines beyond 35.85%.

JPMorgan in the past few weeks has offered a series of similar notes tied to the one- or the two-year SOFR ICE swap rate, using the digital format.

“First time I see non-equity digitals,” the market participant said.

“That’s really unique.”

JPMorgan’s series

For instance, on Jan. 24, JPMorgan priced $3 million of one-year digital notes linked to the two-year U.S. dollar SOFR ICE swap rate with a 50% strike, a 10.2% digital payout and a 50% geared buffer.

“I like that one, especially the 50% buffer,” the market participant said.

“These notes carry recession risk. If we have a recession, the Fed will quickly cut the rates in half.

“The risk is unlikely to happen, but if it does, you’re losing a big chunk of money. It’s a tail risk.”

Similarly, JPMorgan sold $1.6 million of one-year digital notes tied to one-year SOFR ICE Swap rate on the behalf of Barclays Bank plc on Jan. 30. The coupon was 15%, the strike, 56.75% leaving room for a geared buffer of 43.25%.

Finally, JPMorgan on the same day issued $5 million of one-year digital linked to the two-year swap with a digital threshold of 64.15% and a 15% digital payout.

Flattish year to date

Issuance volume on a year-to-date basis is $7.6 billion in 1,584 deals, a less than 1% decline from $7.66 billion in 2,179 offerings a year ago.

The tally for this year will be revised upward.

The top agent last week was UBS with $125 million in 11 offerings, or 20% of the total.

It was followed by JPMorgan and CIBC.

The No. 1 issuer was Royal Bank of Canada with 23 deals totaling $97 million, a 15.5% share.

© 2015 Prospect News.
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