December kicks off with robust structured products issuance at $545 million for week

By Emma Trincal

New York, Dec. 9 – Structured products agents priced $545 million in 185 deals in the first week of December following a historic November for equity markets, according to preliminary data compiled by Prospect News.

It was a relatively high tally for the beginning of a month, confirming a trend of distribution over shorter, even weekly cycles versus the traditional monthly calendar.

Stock prices continued to rise last week. The anticipation of a stimulus plan added a new catalyst to the hopes generated by the roll out of Covid vaccines. The uptrend followed a November rally, which saw the Dow Jones industrial average posting its best monthly return since January 1987.

All three U.S. indexes closed the week at all-time highs with the Dow up 1%, the S&P 500 index gaining 1.7% and the Nasdaq Composite, up more than 2% on the week.

Hedging needed

“The market is up every day. How do you counterbalance the risk of a correction? Investors want to insert a little bit of protection in their portfolio,” said Matt Rosenberg, director at Halo Investing.

And while the market is bullish, the economic environment remains uncertain.

Last Friday saw a weaker-than-expected jobs report with 245,000 jobs in November instead of 475,000 anticipated gains while Covid-19 cases, hospitalizations and death continued to rise, he noted.

Market versus economy

“Even the stimulus package is not so much of a good news. $900 billion compared to the $2.5 trillion pre-elections, that’s a drastic reduction,” he said, commenting on a $900 billion stimulus plan discussed in Congress last week.

“Meanwhile, businesses are still closing, people are still losing their jobs.

“It’s really confusing to see the market hitting new highs while there’s still so much we don’t know. The vaccine for instance. We don’t know how quickly it will reach everyone, who’s going to get it first and when.

“There’s just a huge dichotomy between the economy and the market. It’s as if bad economic news were good news for investors. I’m not saying the market is going to pull back, but people definitely are looking to hedge their bets with structured notes.”

Year, month

Issuance volume for the year continued to be robust as 2020 is already the record year since Prospect News began collecting data in 2004.

Agents priced $63.83 billion in 19,886 deals through Dec. 4, a 33.6% increase from last year’s $47.78 billion in 15,361 offerings.

November remained in flux as not all deals have been added to Prospect News’ database. So far, the tally is not impressive with $4.73 billion in 1,243 deals, which puts the month at the bottom of the list of sales by month for the year with March, February and January on top.

“November turned out to be less chaotic than anticipated. The outcome of the elections was quickly visible. A sense of relief followed the anxiety leading to the elections. The market seemed more stable. Volatility went down,” Rosenberg said.

The return to the status quo along with the development of new vaccines sparked a rally.

“The next couple of weeks are going to be very busy for us,” he said.

“We’ve had tremendous volume last week. The holidays are coming but people are not going to go anywhere. They’ll be looking at ways to add protection to their core portfolio. We just had one of the best Novembers on record. People are willing to cap their returns for some protection. This rally is a call for action.”

Autocallable surge

As always, the preferred product is the autocallable with either contingent coupon or memory call premium. Last week was no exception with two-thirds of the issued volume falling into that category.

“We may not be getting the best terms with volatility lower, but the rationale for barriers and capped upside is there.

“Income notes are selling very well because people want yield and they don’t expect the market to keep on going up forever,” he said.

A sellsider agreed.

“Income notes have been with us for some time. It has become an asset class in itself. You have bonds, equity and contingent autocallable notes as people get more accustomed to them,” this sellsider said.

“People like them because when the market drops, you get good terms. When the market goes up, you get a stated return. Autocalls give you a number of opportunities to get your return.”

ETFs in top deal

Exchange-traded funds gained some traction last week with $119 million in 14 deals, a 22% market share and well above the 7% annual average.

It was in part due to a top deal linked to the worst of two ETFs, which priced for $50 million.

Citigroup Global Markets Holdings Inc. priced $49.99 million of five-year autocallable contingent coupon notes linked to the iShares MSCI Emerging Markets ETF and the iShares Russell 2000 ETF.

Each quarter, the notes will pay a contingent coupon at an annualized rate of 7.15% if each underlier closes at or above its coupon barrier, 70% of its initial value, on the observation date for that quarter.

The notes will be automatically called at par plus the coupon after six months if both ETFs close at or above their initial values on any quarterly observation date.

The barrier at maturity is 70%.

Stocks for premium

Products tied to stocks continued to be popular with $187 million in 128 deals, or nearly a quarter of total volume. When adding to single stocks four deals totaling $21 million of baskets of baskets of stocks (worst-of), the tally for stocks as an underlying asset class rose to $208 million, or 38% of the total, in 132 offerings.

When markets rise as much as they recently did, issuers look for more premium in single stocks to make up for the collapsing volatility. Ultimately, the goal is to offer competitive coupons to investors.

“The search for yield is one of the dominant investment themes right now and will continue to be,” said Edward Moya, senior analyst at Oanda Global Corp., a digital multi-asset trading service.

Big trade on Amex

The biggest single stock deal came from UBS AG London Branch, which issued $40.31 million of three-year contingent income autocallable securities linked to American Express Co. The 10% annual contingent coupon paid quarterly is based on a 75% coupon barrier, set at the same level as the barrier at maturity. The notes are automatically callable quarterly. Morgan Stanley is the dealer.

Unstoppable Tesla

Morgan Stanley Finance LLC priced the second big stock deal for $34.01 million in another three-year contingent income autocallable security linked to Tesla, Inc. The barriers are set at 50%, and the quarterly contingent coupon pays an annual rate of 19.1%.

“Tesla is already a popular underlying, but now with the stock joining the S&P, a lot of passive investing is coming into it. People expect that potentially volatility will decline,” said Rosenberg.

S&P Dow Jones Indices announced last month that Tesla will be added to the S&P 500 index on Dec. 21, fueling an anticipatory rally as the stock will be bought to realize its inclusion in the market.

The astronomical growth of Tesla’s share price, up 652% for the year, has not deterred investors from piling onto notes using it as underlier.

The total notional of “Tesla notes” with the name used as a single stock represents $408 million this year in 115 deals. And that’s not counting all the offerings including Tesla in a worst-of payout.

Equity indexes

Equity indexes made for 46% of total sales last week with 37 deals totaling $250 million. The top offering was Morgan Stanley Finance’s $35.14 million of two-year trigger callable contingent yield notes with daily coupon observation tied to the worst performing of the Dow Jones industrial average, the Russell 2000 index and the Nasdaq-100 index.

The American coupon barrier of 70% and the three underliers provide a 9.55% contingent coupon payable quarterly. The issuer call can be exercised on any quarterly observation date. UBS is acting as dealer.

The top agent last week was UBS with $207 million in 128 deals, or 38% of the total. It was followed by Morgan Stanley and Citigroup.

The No. 1 agent was Citigroup Global Markets Holdings Inc. with 15 offering totaling $134 million, a 25.6% share.

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