Weekly structured notes tally at $988 million; BofA tops two weeks in a row

By Emma Trincal

New York, March 8 – Structured products agents priced $988 million in 181 deals in a week stretching from the end of February to the beginning of March, according to preliminary data compiled by Prospect News. Revised figures for the previous week revealed the sale of $1.34 billion in 199 deals.

During both periods, BofA Securities led, capturing about 30% and 34%, respectively of the tally, a sign that the agent may have spread its monthly calendar over two weeks due to the Presidents Day weekend on Feb. 20.

Leverage

Last week’s tally was dominated by two large S&P-linked leveraged trades, each of which in excess of $50 million. The pair was distributed by BofA and issued by Canadian banks.

While Canadian issuers priced the top deals last week, BofA Finance LLC issued most of its own paper during the previous week ending the month of February.

“It’s hard to tell if BofA extended its pricing over the course of the two weeks. They may have wanted to price in the shortened holiday week. It’s probably not market-driven, probably more operational,” said Brady Beals, director, sales and product origination at Luma Financial Technologies.

Bank of Nova Scotia priced last week’s top deal with $66.14 million of two-year capped leveraged notes on the S&P 500 index paying double the index gain, up to a 23.71% cap with a 10% buffer on the downside. This issuer also brought to market a 14-month leveraged offering on the S&P for $44.37 million.

Canadian Imperial Bank of Commerce issued $52.97 million of 14-month leveraged notes on the S&P 500 index. The payout was 3x the index’ positive return capped at 17.86% with no downside protection.

BofA Securities, Inc. distributed those deals.

Two fixed-to-floaters

Five percent of last week’s issuance volume came from two large fixed-to-floating rate issues from Citigroup Global Markets Holdings Inc. totaling $100 million, each of which sized at $50 million.

Each note was tied to the one-year U.S. dollar SOFR ICE swap rate. The interest for the first one is 5.75% for the first six months, followed by a 20 basis points spread over the swap rate with a floor of 3%. In the other one, the fixed coupon was set at 6% but with a lower spread of 10 bps and no floor.

“We’re certainly seeing more interest in rate deals,” said Beals.

“Having higher rates on the short end allows you to do more of those offerings and to price them better.”

Rate volatility played a role, but not exclusively.

“The higher the volatility, the higher the coupon. But it’s the level of where the rates are that’s going to have the biggest impact on pricing,” he said.

The 6/50 rule

Rate products have indeed regained traction in an increasingly volatile bond market. The Federal Reserve’s hike of short-term rates has led to one- to two-year tenors on those fixed-to-floating rate notes. But some analysts predict more rate volatility across the yield curve.

Ed Easterling, president of Crestmont Research, conducted some research, which he coined the “6/50 Rule.”

“For more than 50 years with some limited exceptions there has not been a six-month period during which interest rates did not move at least 50 bps either up or down. Let’s just say it has been happening 96% of the time,” he said.

The market is focusing on Fed-induced short-term interest rates. But long-term fluctuations could have unpredictable implications on the economy, he added.

Farewell to soft landing

“We don’t know the direction of those moves or if it’s on the short or long end of the curve. But if it hits the long end, it could be significant for the market,” he said.

Despite last week’s rally, the stock market trend is currently bearish.

The market sold off this week on Tuesday after the Fed chair told the Senate it was determined to raise rates longer and faster because of a persisting inflation, he said.

“With valuations that remain high and a sticky inflation along with a Fed committed to continue to raise rates aggressively, the market is vulnerable to corrections,” he noted.

“Just weeks ago, people thought the Fed might pause and maneuver a soft landing. Those hopes are gone right now.

“Interest rates are much more volatile than most people realize.”

January, February

Last month was not good for stocks, which helped issuance of structured notes.

The S&P 500 index dropped 5.4% in February. The downtrend gave issuers an opportunity to price deals more aggressively leading to $6.63 billion in 1,198 offerings.

Rate products accounted for 17% of February’s tally while equity-linked products prevailed. Stocks, indexes and ETFs made for 78% of the total.

January’s issuance was lower with $5.85 billion sold in 1,214 deals.

Despite those figures, issuance this year through the end of February continued to lag last year’s, down 23% to $12.48 billion from $16.26 billion.

But last year’s first half set a high hurdle with the average monthly notional amount at $8 billion. During that time, the S&P 500 index fell into bear market territory posting a 22.5% decline.

“I’m surprised. We’ve seen some strength this year especially in the last couple of weeks. January was not as attractive, but February has been really good. There’s been a shift towards rate deals from equity. But the rise in interest rates also helped equity structures especially in deepening the barriers. When rates are high, moving a barrier from 60% to 50% is not that big a deal,” said Beals.

“So, you can get more conservative structures and sometimes with more volatile underliers like single stocks.”

Structures

The breakdown for last week’s structures showed 38% in leveraged notes, 28% in autocallables, 10% in fixed-to-floating rates, 9% in absolute return products and 4% in digitals for the main categories, according to the data.

Fewer snowballs

Fewer snowballs have been seen over the past few weeks. Those notes pay a cumulative call premium upon the early redemption. The call is triggered at initial level.

“With the market being so choppy, investors are not that confident that it will be up and that they’ll get called,” said Beals.

“The autocall + leverage products somehow have taken some of their market shares.”

He was referring to deals offering a one-time autocall with premium. In the absence of a call, investors at maturity get uncapped upside participation, which often comes with leverage.

Slight pickup in stocks

For asset classes, equity indexes accounted for 70% of the total last week. Single stocks represented 11% of the total.

The top single stock deals were tied to tech stocks.

HSBC USA Inc. priced $18.11 million of trigger jump securities on Amazon.com, Inc. The notes pay a 37.85% digital return over a two-year term if the stock finishes at or above its initial price. The downside trigger level is 87%.

BofA Securities priced on the behalf of Canadian Imperial Bank of Commerce $16.93 million of one-year 10% STEP Income Securities linked to International Business Machines Corp. Interest is payable quarterly.

If the stock finishes at or above the step level – 110% of the initial price – the payout at maturity will be par plus a step payment of 5.32%.

If it finishes between initial price and step level, the payout is par.

Investors are fully exposed to any stock decline.

“We’re seeing more single stocks than before. In tech, especially, you can find stocks that have been hit pretty hard,” said Beals.

“There’s more conviction on names that are down 50%. People are more comfortable.”

Amazon, whose share priced dropped 53% from a year ago high to a recent January low, is an example.

The top agent last week was BofA Securities with $336 million in 22 deals, or 34% of the total.

It was followed by Morgan Stanley and Citigroup.

The No. 1 issuer was Bank of Nova Scotia with 15 offerings totaling $234 million, a 24% share.

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