Structured notes tally $309 million for week, but March surprises with more than $8 billion

By Emma Trincal

New York, April 13 – Structured products agents last week priced $309 million in 91 deals, according to preliminary data compiled by Prospect News. The previous week, which closed March, showed a revised tally of $1.65 billion in 431 offerings, pushing March to be the best month this year in terms of sales with $8.73 billion, a tally close to the $8.78 million recorded during last year’s best month – which happened to be March as well.

“It’s interesting especially given that Barclays was not in the market for most of last month,” a distributor said.

Barclays Bank plc has stopped issuing notes since March 7 due to issuance exceeding its registered shelf capacity, according to a public announcement the bank made on March 28.

Big March

“You had a negative performance on bonds. People are skittish about the stock market. So they want to deploy cash in assets that are going to perform well in this environment, and I think structured notes fit the bill,” he said.

The stock market has been volatile since the start of the year. The S&P 500 index has dropped 7% year to date and the Nasdaq Composite index, down 13%, remained in correction territory.

Last week the equity market was negative with the Nasdaq down nearly 4%.

“Inflation is the biggest driver behind the current uncertainty,” said the distributor.

“The Ukraine situation has been going on for more than six weeks. But what consumers are feeling right now is the pain of paying more at the pump or at the supermarket. An inflation rate of 8.5% is high,” the distributor said.

Inflation jumped 8.5% at the end of March, the largest annual gain in more than 40 years, as a result of spiking energy prices, the Labor Department said on Tuesday.

A market participant explained the strong volume in March as a result of a turbulent market.

“Stocks dropped a lot in the first half of March, the Nasdaq especially,” this market participant said.

“Anytime stocks go down and volatility goes up, advisers are busy calling the desks to strike new deals. They get very active during those pullbacks and make a lot of phone calls to the banks. So, the banks immediately start structuring more notes. Anytime the VIX is 30 or higher, these guys get busy. It’s like clockwork.”

Mining mania

Last week saw an unusual amount of single-stock issuance, this asset class making for 27% of the total, while equity indexes represented 60% of it. On a year-to-date average, stocks and indexes account for 20% and 68% of total sales, respectively.

“People’s preferences differ from a week to the other. But overall, we’re seeing a greater push into index products.

“Index-linked notes are pricing better. Rates are up and it helps,” the distributor said.

Nearly all stock deals were linked to a single rather than the worst of several names.

A consistent bid on gold miners’ stocks was seen with the pricing of five different one-year autocallable deals each tied to a mining company stock.

UBS and JPMorgan were the issuers and agents of four of them. Morgan Stanley priced the fifth one.

A clear buying pattern emerged: each note priced for $10 million and offered a 10% quarterly contingent coupon. Only the barrier levels and underlying varied.

The single underlying stocks used in those deals were Pan American Silver Corp., Agnico Eagle Mines Ltd., Barrick Gold Corp., Wheaton Precious Metals Corp. and Franco-Nevada Corp., all precious metals mining companies.

Even more precious

But the gold rush did not end here as several issuers priced smaller deals on mining stocks ETFs.

A week prior, JPMorgan priced $4.14 million of 18-month autocallable notes on the worst of the VanEck Gold Miners ETF and the VanEck Junior Gold Miners ETF. The contingent coupon was 10% based on a 70% barrier. The principal barrier at maturity was 60%.

At the same time, BofA Finance LLC priced $2.46 million of two year autocallable on the iShares Silver Trust and the VanEck Vectors Gold Miners ETF with a 12% contingent yield.

Last week, JPMorgan priced $1.58 million of autocallables on the VanEck Gold Miners ETF with a monthly contingent coupon of 11.5%, a 70% coupon barrier and a 65% trigger level at maturity.

“It’s a heavy-metal festival!” said the distributor.

“I get that gold, silver and miners are an inflation hedge. Commodities are hot right now and I would have thought we would see more notes on broadly diversified commodities. I don’t know if the miners are the right play.”

Commodities-linked PPN

As it turned out, Citigroup Global Markets Holdings Inc. priced a sizable deal on commodities with $15 million of market-linked notes due Aug. 9, 2024 linked to an equally weighted basket.

The basket consists of the West Texas Intermediate light sweet crude oil futures, Brent crude oil futures, natural gas futures, corn futures, soybeans futures, wheat futures, the grade A copper spot price and the special high-grade zinc spot price, each with a 12.5% weight.

The payout at maturity will be par plus any basket gain. Otherwise, investors will receive par.

Citigroup Global Markets Inc. and UBS Financial Services Inc. are the underwriters.

“I like it. You have exposure to spot and futures, which is good. That they priced it with full protection is pretty interesting,” the distributor said.

The size of the offering was intriguing, the market participant said.

“It sounds like a great deal. It’s also a decent size for this asset class. It’s pushing the trend of inflation-linked products,” he said.

“They were able to do a PPN because it’s easier now,” he added. The term PPN designates principal-protected notes.

“Back in 2020, the 10-year Treasury was yielding 50 basis points. Now it’s at 2.67%, almost 3%.

“It’s much more cost-efficient now to structure principal protection with the discount on the zero.”

Rates and protection

Principal-protected notes combine a zero-coupon bond, which will mature at par, with the purchase of a call option. When rates are high, the discount on the zero is greater, which means more money available to buy the call options.

“At the same time, these zero-coupon notes are now down in market value. Even if the underlying equity is up, the duration and higher rates have been a drag on the performance,” he added.

“If your note pays 1.5x leverage and the S&P is up 50% for instance – this is just an example – but instead of getting 75%, you might only get 60%. The market value is trailing behind. You do have some duration risk, and this is more of a problem with growth products than autocalls given that their duration is longer.”

The missing underlier

With inflation being one of the dominant themes among consumers and investors alike, sources said they are surprised not to see more Consumer Price Index-linked notes.

The last one to price was Morgan Stanley’s $3 million of fixed-to-floating rate notes due June 19, 2030 linked to the CPI with a 4% fixed rate for the first year followed by a rate equal to the year-over-year change in the index and payable monthly. The notes, which offered full principal protection, priced in June 2020.

“I have to say it’s a little bit strange. We’ve seen more in the past. Maybe it’s hedge funds or other institutions that are doing those CPI-linked notes and not advisers,” the market participant said.

Hedges are coming

But the distributor said the market may be at a turning point.

“Issuers have to figure out ways to provide inflation exposure. Conceptually, it makes sense to use the CPI. But it hasn’t really happened yet. I think it’s coming though. Banks want more inflation-linked products. But I know it’s tough right now. They’re working on it. We’ll see more especially with inflation at those levels,” he said.

Morgan Stanley will issue a fixed-to-floating inflation-linked note offering on April 28, according to a filing with the Securities and Exchange Commission. The first year’s rate will be 7% followed by a variable rate equal to the year-over-year change in the CPI and capped at 7%.

Issuance volume for the year is down 15.5% to $22.16 billion through April 8 from $26.23 billion last year, according to the preliminary data.

The deal count dropped to 4,399 from 7,894, a 44% decline.

UBS was the top agent last week with $98 million in 29 deals, or 31.7% of the total.

It was followed by JPMorgan and Citigroup.

The No. 1 issuer was UBS AG, London Branch with $101 million in 32 offerings, a 32.8% share.

© 2015 Prospect News.
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