Structured products weekly tally $294 million amid banking sector turmoil, two bank failures

By Emma Trincal

New York, March 15 – Structured products agents priced $294 million in 118 deals last week, according to preliminary data compiled by Prospect News.

And what a week!

A run on two regional banks was averted this weekend after the Federal Deposit Insurance Corp. took over Silicon Valley Bank on Friday. It was the second biggest bank failure in U.S. history after the fall of Washington Mutual in 2008.

On Sunday, it was the turn of Signature Bank to collapse after New York state regulators closed the bank. They took control of it the next day. The collapse was the third largest one ever.

Also on Sunday, the Treasury, the Federal Reserve and the FDIC jointly announced that all SVB depositors would have access to their money. Both banks were hit by an outflow of deposits.

On Monday, the share prices of major regional banks plunged in reaction to the news, but the stock market was able to regroup at the close.

“It was kind of busy the last few days I would say. Things are getting interesting,” said Mark Dueholm, chief fixed-income trader at Landolt Securities.

Keep calm and carry on

It’s too soon to tell what the implications of the volatile banking sector may be on structured products.

“Ultimately, buyers of structured notes are retail investors who make buy-and-hold decisions on notes,” a sellsider said.

“Some are nervous. But advisers are telling their clients to stay the course. The notes have built-in downside protection and ultimately the market will rebound.

“By and large, I wouldn’t call it a panic in our space.”

Single exposure to other regional banks is limited because those, for the most part, are the constituents of indexes or stock baskets, he said.

The swift reaction of the regulators helped contain the contagion and calm investors’ nerves, he noted.

“It was limited to the regional banks, not the big banks that issue the notes. Even the equity market seemed to take it in stride. Tuesday, we had a rebound. Regional banks are a drop in the bucket compared to the rest of the market,” he said.

Direct exposures

Only three deals directly tied to the failed banks were spotted this year.

Two offerings linked to SVB priced in February, according to the data.

HSBC USA Inc. sold one for $1.13 million. It was a three-year autocall reverse convertible paying a fixed coupon of 11.15% with a 50% trigger at maturity.

Royal Bank of Canada’s $440,000 was the other one. The three-year autocallable with memory coupon offered an 11.5% contingent yield based on a 55% coupon barrier with the same barrier strike at maturity.

Earlier this year, Bank of Montreal priced $2.13 million of two-year callable barrier notes on Signature Bank. The notes pay a contingent coupon of 15% per year based on a 50% coupon barrier. The same barrier level applies to the trigger at maturity.

Unknown consequences

“We saw those deals,” said Dueholm.

“I don’t think noteholders are going to be wiped out right away. They have to wait and see what the value of the bank is going to be,” he said about Signature Bank.

The FDIC as the receiver has transferred all the deposits and substantially all of the assets of Signature Bank to Signature Bridge Bank, NA, a full-service bank that will be operated by the FDIC to market the bank to potential bidders, according to a news release on Signature Bank’s website.

“The stock is not trading but it doesn’t mean it’s worthless,” he said.

The sellsider said the outcome remained uncertain.

“I think it’s unfortunate for noteholders,” he said.

“The only backstop they have is the barrier protection built into the notes. If Signature goes bankrupt, it’s the equivalent of the stock going to zero. I think they’re trying to figure it out. If there is any kind of recovery for the equity holders, noteholders may be represented,” he said.

Sector ETF

Another underlying asset directly impacted by the regional bank tumult is the SPDR S&P Regional Banking ETF, which is listed under the ticker “KRE.”

The bulk of the notional using this ETF as underlier has been worst-of paper, according to data compiled by Prospect News.

Since the open on Friday to the closing price on Wednesday, the fund’s share price has dropped 11.3%.

“I think there might be some clients willing to buy notes on the ETF. It depends on who they are and on the coupon. A lot of people think that regional banks are going to rebound. But the coupon will have to be very enticing,” said Dueholm.

More contagious

More concerning was negative news about Credit Suisse facing a new setback in its restructuring efforts, which broke on Wednesday. The Swiss bank is an issuer of U.S. structured notes with 58 deals totaling $118.5 million year to date. The trigger for the stock plunging on Wednesday was the announcement by Saudi National Bank, its biggest shareholder, that it will not invest more money into the bank.

“It just happened. The Saudi made it clear they won’t invest anymore in the bank. The stock plunged and the CDS spreads blew up,” said Dueholm.

The five-year CDS swap rates widened 150 basis points to 567 bps on Wednesday from 417 bps on Friday, according to S&P Global Market Intelligence.

“I think people on the desks worry about a contagion hitting other European banks,” he added.

“The Euro Stoxx Banks index is very volatile right now. It’s a popular index because it did so well. Coupons got a little bit lower because volatility came down. Now that volatility is up you may see higher coupons and more deals on it,” he said.

The bank benchmark is close to bear market territory year to date. From a 119.28 high last week to Wednesday’s low at 95.86, the index has declined by 19.6%.

More hedging

Another ramification of last week’s banking shock was the historical bond rally as investors flew to risk-free Treasuries.

“Bond yields literally plummeted,” said Dueholm.

“When you think that the two-year was at 5.08% on Thursday. It’s now at 3.77%. Despite the government’s rescuing efforts, people are not totally convinced that things are under control,” said Dueholm.

The collapse on the short end of the yield curve may signal a shift toward “de-inversion,” he added.

This would represent a significant change after a historically inverted yield curve (between the two- and 10-year).

Rates dropped so fast, the move could add another risk or item for risk control to the issuers’ structuring desks, he said.

“It may become tougher for issuers to hedge their risk – tougher and more expensive. I can see that it could have caught many people off guard because rates are all over the place right now,” he said.

The Fed may counter this new trend by raising rates when the FOMC meets next Wednesday. But expectations for this type of decision are now lower.

“You’ll have to see what the Fed is going to do. So far, the guess was 25 bps or no hike. Now it’s more like no hike or rate cut. If they cut, there will be a panic because people will think that things are really bad,” he said.

While he did not expect such scenario, he said that a steeper curve would change the types of notes being issued although the impact would be mostly felt on rate products.

The sellsider also saw potential changes, including for equity notes.

“We may see a shift toward longer-dated notes if rates continue to be compressed on the short end. So far this year, higher short-term rates have made short-term deals more attractive. If the extra incentive of keeping terms very short is not as strong, you may see a push toward longer notes at least for growth products. I don’t think it matters for income though,” he said.

$50 million rate deal

The biggest deal last week was another fixed-to-floating rate note tied to the one-year U.S. Dollar SOFR Ice swap rate brought to market by JPMorgan Chase Financial Co. LLC.

Twelve other similar deals of the same size have also already priced this year as well as much bigger ones such as Royal Bank of Canada’s $381.725 million sold in February.

Overall, 26 offerings linked to the U.S. Dollar SOFR ICE swap rate have priced year to date totaling $1.9 billion, according to the data.

Last week’s JPMorgan deal consisted of 13-month notes paying a monthly fixed coupon at 6% per year for the first four months then accruing at an annual rate of one-Year U.S. Dollar SOFR ICE swap rate plus 27.5 bps, subject to a floor of 0% per annum. The payout at maturity will be par plus any accrued interest.

“If you think the Fed will continue to raise rates, I guess it makes sense. At the same time, I’m not sure the floating rate is that great,” said the sellsider.

The one-year swap rate is at 4.4%, which represents a 4.675% floating rate.

“You can get a one-year JPMorgan CD close to 5.5% with no credit risk,” he said.

“Obviously there is a big demand for this type of paper. It’s institutional. It’s a good match for their short-term liabilities.”

The top agent last week was JPMorgan with $74 million in 13 deals, or 25.3% of the total.

It was followed by Morgan Stanley and UBS.

JPMorgan Chase Financial was the No. 1 issuer with its single $50 million fixed-to-floating notes deal.

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