Structured notes tally modest for week; 2021 third consecutive year of double-digit equity gains

By Emma Trincal

New York, Jan. 5 – As investors were wrapping up a great year for stocks, last week’s trading was thin both in equities and structured notes issuance.

Agents priced $295 million in 76 deals during the last week of the year, according to preliminary data compiled by Prospect News. These figures will be revised upward.

The S&P 500 index finished the year with a 26.9% gain, a third winning year in a row.

The Dow Jones industrial average gained 18.73% while the Nasdaq rose 21.4%.

Most analysts and market participants cheered the year’s performance while doubting that 2022 will provide similar bullish results given a series of headwinds that have the potential to weigh on equity performance.

“Happy volatile New Year,” said Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments.

“Expect a choppy 2022 with pullbacks being more frequent than rallies, uptrends tending to be sharp and brief, and the first half experiencing more frequent and more noticeable declines than the second half.”

Banner year

The structured notes market scored a record year. Agents sold $92.24 billion of notes in 2021, a 27.5% jump from the previous year’s $72.7 billion. Those numbers remain preliminary too and will be revised upward as more deals get filed with the Securities and Exchange Commission website. A total of 24,400 offerings were priced, close to 2,000 more than the year before.

“The Dow was up 8,000 points last year. We’re headed for a bubble in the stock market. We had an amazing year in structured products. Are we going to see the same growth? More? It’s impossible to predict anything right now because there is too much going on in this market,” a sellsider said.

The year 2022 will face a lot of unknowns, he added.

Headwinds

“We’re entering this year with Omicron spreading very rapidly, causing a slowdown in the economy. We still have supply issues. Inflation is running rampant. The Fed said they will raise rates at least three times.

“And we’re in a conundrum. Look at the yield curve, the 2’s minus 10’s [spread] is getting flatter. Flatter yield curves portend recessions,” he said.

“The curve is going to get flatter because the Fed is raising rates. They’re forced to react to rein in inflation, but the timing is not good given all the issues we’re facing from Covid to supply chain constraints and job shortages.

“And that’s just as we’re entering the New Year. What’s going to happen in the summertime? We’ll have the mid-term Elections.

“You just can’t make any predictions. There are just too many moving parts. We’ve never seen anything like this.

“How can you raise rates when you’re heading to a recession?”

TINA bid

But a volatile stock market could be good news for the structured products industry, he said.

The high valuations in stocks and rising bond yields could lead to the so-called “TINA” trade, or “There Is No Alternative.”

“I’m fairly confident that people will continue to buy structured notes in 2022. Investors are going to need alternatives to stocks and bonds.

“Rates rising is not good for bonds. Inflation is going to eat up whatever coupon you have left. People are over-allocating to equities. The bubble will burst; it’s just a matter of when. And yet, money has to go somewhere.”

This sellsider said the structured notes market was likely to remain robust.

“I think we’ll see a lot of new issues. The whole idea of structured products is to keep the exposure to stocks without taking on all the downside risk,” he said.

Autocalls, stocks

One structure fit this description best.

“Autocallables will continue to be very popular. They still give you the potential for equity returns but with the protection,” he said.

Autocallable notes totaled $58 billion last year, or 63% of total sales, with $52.6 billion in autocallable contingent coupon notes and $5.4 billion in snowballs.

Leveraged notes however made for only 21% of total sales.

The year saw a strong increase in stock underliers. Notes tied to single stocks and baskets of stocks totaled $26 billion last year, a 46.5% increase from the previous year. Equity indexes remained the top underlying asset class with 57% of the market. ETF-linked notes volume surged by 72% to $8.6 billion from $5.2 billion.

Santa offerings

The largest trades in December were seen during the week ended Friday Dec. 24 when the market closed for the Christmas holiday. A total of $1.71 billion was issued during that week in 269 deals, five transactions of which exceeded the $50 million mark.

BofA sold 43% of this weekly tally in 37 deals totaling $739 million, according to preliminary figures. More issues are expected to be filed later.

The largest deal for that week was Royal Bank of Canada’s $84 million of 14-month leveraged notes tied to the S&P 500 index paying triple any index gain, capped at 13.07% with no downside protection. BofA Securities was the agent.

BofA also priced Bank of Nova Scotia’s $80.44 million of three-year autocallable market-linked step-up notes linked to the S&P 500 index. The snowball structure provides a 9.2% annual call premium. At maturity, the step-up value is 118% of the initial price, which only represents two years of cumulative call premia. Investors receive the step return if the market is flat or up and get the index return above 118%. The product does not provide any downside protection.

On Dec. 23, UBS AG, London Branch priced $52.72 million of three-year autocallable notes tied to Tesla, Inc. The notes pay a contingent quarterly coupon of 18.55% a year based on a 55% barrier. The principal repayment barrier is also set at 55%. Morgan Stanley Wealth Management is the dealer.

“This Tesla note makes sense to me. If you like Tesla, you may want to be exposed to the stock while limiting your downside risk,” the sellsider said. Even for a stock as volatile as Tesla, a 45% contingent protection was attractive, he added.

New Year’s toasts

Offerings were smaller last week except for a few block trades.

Canadian Imperial Bank of Commerce’s $58.66 million of autocallables linked to the worst of the Nasdaq-100 index and the Russell 2000 index was the top one. The quarterly coupon of 6.89% is earned based on a 70% coupon barrier. The downside threshold is also equal to 70%. The autocall is triggered quarterly after six months. UBS Financial Services Inc. is the agent.

Another notable sizable trade was Citigroup Global Markets Holdings Inc.’s $45.66 million of two-year callable contingent coupon note linked to the least performing of the S&P 500 index and the MSCI Emerging Markets index.

The contingent quarterly coupon was only at 5.21% per annum but the barriers (coupon and final) are set at 55% of the initial level, a relatively low strike for index exposure.

UBS was the top agent last week with $180 million in 69 offerings.

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