August structured products tally $8.28 billion, third best-selling month for year

By Emma Trincal

New York, Sept. 13 – Structured products agents priced $8.28 billion in August in 1,497 deals, making it the third best month of the year in issuance volume despite or perhaps thanks to an equity market slump, according to updated data compiled by Prospect News.

Turning point

The top month this year was March with $8.76 million followed by February with $8.45 billion.

The tally for the year to date (through Aug. 31) revealed that issuance is now flat from last year with a year-over-year growth of less than 1% from $62.611 billion to $63.106 billion.

But as small as it is, this percentage increase is significant as it contrasts with a strong downtrend observed earlier this year.

Sales for instance were down 24% from 2022 at the end of the first quarter. At the end of June, the year-over-year gap had already shrunk to 13%.

Barclays, Credit Suisse

“We may be taking advantage of the lows of last year due to the Barclays storm when they exited the market. They were out for a good part of the year,” a market participant said.

Barclays stopped issuing notes from March 8, 2022 until Aug. 1, 2022 due to an accidental excess of note issuance over its U.S. registered shelf going back to June 2019. The bank resumed issuance on Aug. 1 last year when initiating a six-week rescission offer.

It’s not as if this year went smoothly for issuers, this market participant noted.

“Last year we had the Barclays freeze, but this year, we had a big scare with the shock of Credit Suisse.

It took a lot of players off line in the spring, especially big institutional players like us. I know that we didn’t do any notes in April, May and June. We were totally out of the market for any kind of note. So, we may now see a little bit of catching up.”

Credit Suisse collapsed in the first quarter and was bought out in March by UBS.

September outlook

Growth may look promising for this second half of the year, said Brady Beals, director, sales and product origination at Luma Financial Technologies.

“I would expect September to be in the top three if not the best month this year,” he said.

“For us, it’s definitely our best month so far and that’s true for a lot of issuers also. The last couple of months picked up. I would expect September to be really good.”

He explained why.

“You had this rally, especially in May, June and July, bringing additional call rolls. Then you had a pullback for most of August and certainly in the first week of September, which made pricing attractive,” he said.

“We might also be in a higher rate environment longer than expected. That helps too.”

Those factors facilitate the optics for income products, he added.

“You may lock in compelling coupons in Phoenix autocalls or digitals as the equity market is pulling back. People who expect a directionless market are getting good returns by locking in their money in those notes,” he said.

No cap for bulls

With yields rising, including on the long end, issuers have also been able to improve return enhancement notes by removing caps.

“There’s a heavy bias toward uncapped leverage. We’re seeing more longer-dated equity replacement notes on broad-based indices giving you that uncapped leveraged exposure investors are so eager to get,” he said.

“You can now do it over five years, point to point. People are more bullish, and they believe that over five years, the market will have recovered.”

Until recently, uncapped bullet notes with leveraged exposure required at least six-year terms and sometimes more. But that length has shortened with rising interest rates giving more buying power to issuers, he said.

“With these growth notes you buy calls and you sell traditional puts or knock-in puts. Higher rates give you more funding. It’s a funding trade,” he said.

Magnificent Seven

This year’s equity rally was driven in large part by a few high-flying large-cap stocks with exposure to the hype around artificial intelligence. The Nasdaq-100 index is well into a bull market having jumped 36.5% from its October low. The top seven holdings of this index have been dubbed the “Magnificent Seven” by Wall Street as they drove most of the rally due to their exposure to the AI technology.

Buyers of structured notes followed suit apparently.

The “Magnificent Seven” made for 44% of the issuance volume of single-stock notes and 30% of the number of offerings in this asset class, closely reflecting the index’s composition whose top “Magnificent Seven” account for 43.6% of the benchmark’s weight, the data showed.

Total issuance for single-stock deals is $8.02 billion through Aug. 31 in 2,769 deals.

The “Magnificent” are Apple Inc. Microsoft Corp., Nvidia Corp., Amazon.com Inc., Alphabet Inc., Tesla Inc. and Meta Platforms Inc. They constitute the seven top holdings of the tech-heavy Nasdaq-100 and make 43.7% of its weight.

Strength and weakness

“These are strong, high-growth names, not financial stocks or beaten-up companies,” the market participant said.

“People play strength on stocks and weakness on sectors ETFs.

“You’re not going to see an autocall or digital on a stock that just hit a 52-week low. Instead, you’ll see one of those top outperformers.

“Not sure it makes sense since you get much better yields and barriers with beaten-up names. But retail can be greedy. They follow the crowd,” the market participant said.

This pattern, he said, helps in understanding why these six outperforming stocks represent almost half of the single-stock flow.

Big deals of August

Issuance volume last month was propped up by a few larger deals, including six fixed-to-floating rate notes linked to the one-year U.S. dollar SOFR ICE swap rate. Each of the three issuers for those deals – Citigroup Global Markets Holdings Inc., GS Finance Corp. and JPMorgan Chase Financial Co. LLC – priced two $50 million trades selling together a $300 million notional.

Separately Barclays Bank plc brought to market a jumbo synthetic convertible note offering linked to Alphabet Inc. sized at $490 million. This issue increased the market share of single-stock issuance volume for the month to 17% versus 13% for the year to date.

The hybrid offering was by far last month’s top deal followed by Citigroup Global Markets Holdings’ $99.78 million of 9.52% one-year callable securities linked to the Nasdaq-100 index, Russell 2000 index and S&P 500 index priced with a 70% barrier at maturity.

The third largest deal was a $97.025 million issue of two-year digital notes on the S&P 500 index issued by GS Finance and paying 19.72% in digital payout if the index finished above a geared buffer threshold of 90%.

UBS was the top agent last month with $1.37 billion in 336 deals, or 16.5% of the total.

It was followed by JPMorgan and Morgan Stanley.

Barclays Bank plc took the top issuer spot with $1.35 billion in 170 offerings, a 16.24% share.

It was followed by JPMorgan and Citigroup.

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