Second quarter debuts with $411 million of structured notes sales following bonanza week

By Emma Trincal

New York, April 10 – The first week of April kicked off on solid ground with $411 million in 95 structured products deals with income notes pushing up the structured note issuance volume again, according to preliminary data compiled by Prospect News. But it was nothing compared to the previous week showing $2.84 billion, which ended the first quarter.

Rough patch, opportunities

Last week’s callable notes (Phoenix and snowballs combined) made for 81% of the total, a big chunk of the notional compared to the 52% market share for the year to date. The tally last week for those products was $333 million sold in 68 deals.

The ups and downs in the stock market may have helped sales of income notes, which are short volatility.

Two sell-offs hit the market on Monday and Thursday prompted by higher oil prices, a strong job report and fears of a delay in Fed rate cuts. The Dow Jones industrial average dropped 1.35% on Thursday, its worst daily decline in more than a year. The VIX index jumped from 13.75 to more than 16 also on Thursday.

Tactical entries

Some advisers take advantage of such volatility spikes to buy callable notes to strike higher yields.

“Volatility jumped on Thursday. We got in. We were able to do a Nasdaq, Russell, and S&P with an 11.2% yield. That was because of the Monday and Thursday sell-offs. Meanwhile the market rose on Wednesday and Friday. It was a pretty choppy week,” said Ken Nuttall, chief investment officer of BlackDiamond Wealth Management.

The average coupon rate for worst-of notes tied to those three indexes was 9.38% last week, the data showed. During the previous week, which was less volatile, the average coupon rate was 8.41%.

Call’N Roll

The week of March 31, which closed the first quarter, saw a surge in structured notes issuance with $2.84 billion in 325 offerings, according to updated data from Prospect News. It was not a big week for income notes, which made for only 40% of the notional. BofA captured a third of total sales.

But the week was noticeably strong. Its $2.84 billion tally ranked 30th over the past 523 weeks (10-year period), according to the data.

“We had a tremendous first quarter. More funds were available. With the rally we just had more roll activity,” said Brady Beals, director, investment solutions at Luma Financial Technologies.

“Also, the more I talk to people, the more I realize that they have a sideways view for the rest of the year. That’s a prime factor for structured notes issuance.”

Issuance volume for the year through April 5 is up 11.1% to $28.34 billion from $25.51 billion. The deal count on the other hand fell by nearly a third to 5,145 from 7,534.

Hot Japan

As usual, last week was dominated by index-linked notes. The asset class represented 70% of the total with $289 million in 32 offerings.

The bulk of these underlying indexes was used in worst-of payouts. Single index notes usually met digital and dual directional structures.

One novelty was the use of Japanese indexes in single asset deals.

Morgan Stanley Finance LLC last week priced $5.79 million of two-year buffered digital notes linked the Topix index.

Separately Canadian Imperial Bank of Commerce announced the pricing next week of five-year trigger step securities on the Nikkei Stock Average while Barclays Bank plc is readying an offering of two-year autocallable notes on the Topix index also for next week.

Even more unusual was the inclusion of a Japanese equity index in a worst-of along with U.S. benchmarks. Citigroup Global Markets Holdings Inc. for instance will price next week an issue of two-year contingent income callable notes linked to the worst performing of the Nikkei 225 index, the Russell 2000 index and the S&P 500 index.

“We see a growing interest in Japan, that’s for sure,” the sellsider said.

Beals agreed.

“It’s in the headlines. Japan made new all-time highs after doing nothing for decades. Investors are probably following the research,” he said.

FX, stocks

Another unusual development last week was the pricing of a currency-linked note offering.

It was the first one seen this year.

JPMorgan Chase Financial Co. LLC issued $2.3 million of two-year notes linked to the performance of the U.S. dollar relative to the Hong Kong dollar.

There were no FX-linked note offerings last year.

And yet, in 2014 currency note issuance accounted for $547 million in 93 deals, the data showed.

In 2008 during the financial crisis, agents sold $3.89 billion of FX-linked notes in 274 offerings, which represented 7.7% of the $50.52 billion issued during that year.

“FX has vanished,” said Beals.

“It’s more of an institutional trade. You have to rely on good models. You have to have strong macro conviction, which a lot of advisers don’t have.”

Single stocks accounted for 18% of last week’s tally in 49 deals totaling $74 million.

Citigroup issued the top two – $12 million and $11 million – on Microsoft Corp. with contingent coupons of 11.6% and 11.1%, respectively. The notes – one-year Phoenix autocalls with memory coupons – carried a 20% geared buffer. Morgan Stanley distributed both.

Put to use

On the structure side, GS Finance showed a relatively new type of absolute return structure, which added leverage to the downside rather than limiting it to the upside.

GS Finance Corp. priced $1.3 million of 18-month notes on the S&P 500 index paying 120% of the index gain and if the index remained within the 15% buffer range, 120% of the absolute return.

“I see that,” said Beals.

“Usually, you get upside leverage and 1-to-1 of the absolute return on the downside. Now with puts so cheap you can change this ratio. For instance, you may have 1.4 on the downside versus 1.45 on the upside.

“It’s also a reflection of people having a more sideways or more bearish view.”

Barclays’ $53.5 million

UBS priced on the behalf of Barclays Bank the top deal last week in $53.5 million of trigger callable contingent yield notes with daily coupon observation due Jan. 7, 2027 linked to the worst performing of the Nasdaq-100 index, the Russell 2000 index and the S&P 500 index.

The notes pay a quarterly contingent coupon of 10.5% per year if each index closes at or above its coupon barrier level, 70% of its initial level, on every scheduling trading day during the observation period. This type of daily observation is known as “American barrier,” as opposed to the predominant “European” type based on a point-to-point observation.

The notes are issuer callable on any quarter. The principal repayment barrier at maturity is 60% point to point.

“That’s a big deal. A 10.25% contingent coupon, an American coupon barrier of 70% and it gets called on the first quarter. I’m surprised they did so much,” the sellsider said.

“I would have wanted a longer no-call period. The American barrier typically should give you a higher return than if you had a European barrier. It was probably led by one big investor.

“It doesn’t seem that exciting to me. But clearly somebody does not think so.”

Morgan Stanley Finance issued a very similar deal for $45.17 million but with the Euro Stoxx 50 index, replacing the Nasdaq-100 index.

The tenor was three months longer and the coupon set at 10%. UBS was also the seller.

UBS tops

Last week’s top agent was UBS with $158 million in 40 deals, or 38% of the total.

It was followed by Morgan Stanley and Goldman Sachs.

The No. 1 issuer was Barclays Bank with $73 million in two deals, an 18.3% share.

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