Structured products weekly tally at $579 million as stock market recovers from four-week losses

By Emma Trincal

New York, Dec. 15 – The first full week of December saw the pricing of $579 million of structured products in 139 deals, according to preliminary data compiled by Prospect News. Issuance volume was relatively strong for the beginning of a month. Meanwhile the stock market rallied to new highs despite a concerning inflation report as it recouped from a four-week losing streak.

The issuance tally will be revised upward as more deals get filed with the Securities and Exchange Commission. Updated data for the previous week (post-Thanksgiving) revealed $813 million in 240 offerings.

The Dow Jones industrial average gained 4% on the week, its biggest weekly performance since March.

Volatility trended lower throughout the week despite an inflation report released by the Labor Department on Friday showing a CPI increase of 6.8% year over year in November.

Investors most of the week underreacted to negative news, including the CPI report. Some of the concerns about the Omicron Covid-19 variant were attenuated after Pfizer revealed the effectiveness of its vaccine’s third dose against the variant.

Nowhere else to go

“It may seem a little bit odd that we had this big rally last week despite the hot inflation data,” a structurer said.

“But it’s not going to stop people from pricing and buying deals.

“If you have money to invest, inflation or not, you still have to put it somewhere.

“If you buy bonds and rates go up, bond prices will go down. So, you avoid bonds.

“But you’re still going to buy stocks. The idea that inflation is bad for stocks is misleading. You need to hedge against inflation somehow. Commodities can help but they are not for everyone.

“As always the stock market is the only way to go, and people will continue to seek equity exposure through structured notes.”

Blowup year

Year to date, the tally of structured products issuance is $85.1 billion in 22,817 deals through Dec. 10. It compared to $66.581 billion in 20,779 offerings last year, a 27.8% rise by dollar amount.

The year 2021 saw the highest issuance volume ever in the United States, according to Prospect News, which began collecting data in 2004.

“I expect the same pace in December,” the structurer said.

“The 25%-30% volume growth number has been pretty consistent over the fourth quarter. It suggests a growth that’s almost systematic, structural. There’s no reason to believe the trend will change in the last two weeks of the year.”

He added that part of this year’s expansion can be explained in the way distribution has evolved.

“The trend is toward looking at structured products almost as ETFs. It’s to make it easier for people to buy,” he said.

Autocallable market

Autocallable notes have driven this year’s growth, accounting for more than 63% of total sales, the data showed.

The tally for those products is up 38.5% this year to $54 billion from $39 billion a year ago.

“We’ve seen a lot of volume flow in general,” said a market participant.

“A majority of the notes are autocalls. If you look back five years ago, sales of autocalls were much smaller compared to growth notes. Now it’s the opposite.”

Autocallable notes issuance indeed represented only 30% of total notional in 2016 versus 40% for leveraged products, according to data compiled by Prospect News. Leverage this year made for a little bit more than 20% of total sales.

Last week, autocalls’ market share was even higher than average. Agents sold $395 million of such products, a 68.2% portion of the total.

Big deal on decrement index

The largest autocall offering and the second top deal of the week had two particularities: a long duration for an autocall and the exposure to a so-called “decrement” index.

Morgan Stanley Finance LLC priced $33.45 million of 10-year trigger autocallable contingent yield notes linked to the iStoxx Global Fintech 30 NR Decrement 5% index.

The notes will pay a contingent quarterly coupon at an annualized rate of 7.17% based on a 70% coupon barrier. The notes will be called quarterly after one year if the index is above initial level. The barrier at maturity is set at 60%. UBS Financial Services Inc. is acting as dealer.

A decrement index deducts from the index total return a fixed percentage (5% in this case), which it uses in place of the dividend yield to finance the structure, explained the structurer. As a result, investors get the total return minus the decrement instead of the price return exposure.

Leveraged notes issuance was muted last week.

Only $80 million fell into this category, or 14% of total sales in 12 offerings.

The top one was Morgan Stanley Finance’s $31 million of 13-month notes tied to the S&P 500 index. The payout at maturity is 1.5 times the index gain, up to a 9.82% cap. On the downside, the structure provided for a 10% geared buffer with a 1.11 multiple.

CIBC’s $45 million

The largest deal of the week was surprisingly complex, sources said. The structure has been seen before.

The underlying seen in past deals is always the same, according to data compiled by Prospect News.

Canadian Imperial Bank of Commerce issued the latest version of this structure in a $45 million deal.

The capped leveraged buffered notes due April 15, 2026 linked to the Dow Jones industrial average featured a series of different payout tranches.

If the final index level is greater than or equal to 135%, the payout at maturity will be par plus 51.6% plus 1.19 times the gain of the index above 35%, up to a maximum payout of par plus 63.5%.

If the final index level is less than 135% of the initial level but at least 115% of the initial level, the payout will be par plus 15% plus 1.83 times the gain beyond 15%.

If the final index level is between 105% and 115% of the initial level, the payout will be par plus 15%.

if the final index level is between 90% and 105% of the initial level, the payout will be par plus the product of (the percentage change plus 10%).

Investors will lose 1% for each 1% decline beyond 10%.

Frankenstein

“We occasionally see stuff like that, which we never do. It would be impossible to explain to a client. It’s just too complicated,” said the market participant.

“They’re trying to show a note that pays out in different scenarios. But it’s unnecessarily complex. When you’re trying to be too cute and put everything in there, you create a monster. It’s like a Frankenstein.

“I don’t see any RIA doing this. It’s probably more of a wirehouse deal.”

CIBC World Markets Corp. was listed as the agent in the prospectus.

“To be fair, the fee is reasonable,” he said, commenting on the 0.125% commission disclosed in the prospectus.

The structurer said it would be difficult to give a name to the product, although it remained “an accelerated” note.

“There’s a little bit of everything. From a structural standpoint it’s comparable to a reverse convertible. It’s almost like a jigsaw puzzle in which they threw a bunch of call spreads,” he said.

Two ETF-linked notes

Citigroup Global Markets Holdings Inc. issued two sizable autocallable deals on exchange-traded funds, each with a one-year maturity. Morgan Stanley was the agent on both.

The first one tied to the SPDR S&P 500 ETF Trust priced for $30 million. The 10.8% annualized contingent coupon paid monthly was based on an 85% barrier set at the same strike as the downside threshold. The notes are automatically callable monthly.

The second offering at $20 million referenced the Invesco QQQ Trust, series 1. The structure was the same, but the coupon was 13.5%.

“QQQ has always been popular as a structured product reference instead of the Nasdaq index. Using the SPDR S&P instead of the S&P 500 index is not as common, but definitely not rare,” said the structurer.

“We live in an ETF world. People are so accustomed to using ETFs as reference.”

Single stocks

Finally, Citigroup priced the largest stock deal for $20 million on Microsoft Corp. The one-year notes pay a monthly contingent coupon at an annual rate of 10.1%. The 80% barrier level is applied to both the coupon payment and principal repayment.

Other single stocks offerings included GS Finance Corp.’s $6.27 million on Nvidia Corp. and JPMorgan Chase Financial Co. LLC’s $6.26 million on Boeing Co.

The top agent last week was Morgan Stanley with $144 million sold in 16 deals, or 24.9% of the total.

It was followed by UBS and JPMorgan.

Morgan Stanley Finance was the No. 1 issuer, bringing to market 15 deals totaling $112 million, or 19.3% of the total.

Barclays Bank plc was the top issuer for the year to date with $11.57 billion in 1,959 offerings, a 13.6% share.

© 2015 Prospect News.
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