Structured products issuance $195 million for week; September best month ever

By Emma Trincal

New York, Nov. 16 – Structured products agents priced $195 million in 55 deals last week, according to preliminary data compiled by Prospect News, which will be revised upward once all deals are filed with the Securities and Exchange Commission.

Prospect News continuously updates the live data. The latest update revealed that September, with the sale of $9.6 billion, was the strongest month ever since Prospect News began collecting data in 2004. The two next largest months were November 2021 and March 2022 with $9.3 billion and $9 billion, respectively.

Best month ever

“I think it’s all Barclays,” a sellsider said.

“I don’t think it’s market-related. We always see market moves. But you don’t see a big pick up like that.

“Barclays bought back billions of dollars. People were flush with cash. They got paid and they needed to reinvest.”

Barclays began to buy back as much as $17.6 billion of structured notes from Aug. 1 to Sept. 12 in the context of a rescission the issuer had to offer investors because it had issued billions more in notes than its shelf registration allowed.

“When you drop $17 billion in the market a lot of people will look to reinvest in the notes. It’s certainly a factor. But the market helped as well,” said Matt Rosenberg, director at Halo Investing.

But September was also the end of a vigorous summer rally which started mid-June to end in the middle of September.

“With so much volatility and uncertainty, people wanted downside protection. With the sudden drop in the market, structured notes were the logical place to go to,” he said.

The strong volume, which is likely to extend beyond September, has reduced the gap between this year’s tally and last year’s.

Agents have sold $74.74 billion in 17,320 deals through Nov. 11 versus $84.94 billion in 25,618 offerings last year, a 12% drop in volume.

Barclays was absent from the market from the beginning of March to Aug. 1.

Rates, FX

One large rate deal dwarfed all others last week. It was Citigroup Global Markets Holdings Inc.’s $50 million of 13-month fixed-to-floating rate notes linked to the two-year U.S. Dollar SOFR ICE swap rate.

The interest rate is 5.5% for the first six months, then converts to the underlying rate plus 40 basis points, subject to a floor of zero. Interest is payable quarterly. The payout at maturity will be par.

Rate-linked notes issuance has more than doubled this year to $2.16 billion from $1.07 billion.

Still, with higher rates, issuance should be stronger, the sellsider noted.

“It’s still not a lot, at least not as much as you would expect. I’m not sure why,” he said.

Brazilian real

Last week saw the pricing of a currency deal, an asset class that has nearly disappeared. There have been only four FX offerings this year totaling $6.5 million, all sold by JPMorgan.

Last week’s issue was JPMorgan Chase Financial Co. LLC’s $550,000 of one-year autocallable contingent interest notes linked to the performance of the Brazilian real relative to the U.S. dollar. The embedded view was the appreciation of the Brazilian currency against the dollar.

“These currency notes are unusual today. FX tends to be an institutional trade,” said Rosenberg.

“For the average adviser, I don’t see the rationale of using currency notes unless you have existing currency risk in your portfolio. Also, it’s usually not part of the allocation. If you’re looking at tactical exposure in non-U.S. assets, I don’t know that you would do FX. You have many ETFs like sector ETFs, international equity ETFs and even commodities that resonate more with clients.”

Shorter paper

Higher interest rates have created better terms for investors but also shorter-dated notes, which are popular among certain investors, the sellsider said.

“For people who are more bullish and want uncapped upside with still a little bit of downside protection, there are tons of opportunities out there. You see deals that could not have been structured even a few months ago,” he added.

Uncapped leveraged notes with some downside protection for instance can now be done on a 12-month period as bullet notes.

As an example, Morgan Stanley Finance LLC priced on Friday $500,000 of one-year leveraged notes on the worst of the Dow Jones industrial average, the S&P 500 index and the Nasdaq-100 index paying 1.51 times on the upside with no cap and a 10% geared buffer on the downside.

Some sources invoke the inverted yield curve, which has boosted yields on the short end of the curve.

Rosenberg was skeptical.

“Given the uncertainty heading for this next year, people want the short term. The funding helps but is not the reason for this pick up in shorter-dated notes. It’s more client or adviser-driven,” he said.

The inflation factor

Higher rates and improved optics may not necessarily last, however.

Last week’s release of the CPI showing that inflation is cooling brought down the one-year T Bill yield from 4.75% on Monday to 4.58% by the end of the week.

“After last week’s CPI readings and the PPI on Tuesday, we see signs that inflation may be slowing,” the sellsider said. “It’s slowing but it’s still going up. The Fed is still going to raise rates for a couple of months or quarters. So, I think the trend of rising interest rates will still be in place. It’s just going to happen at a slower pace.”

While rising interest rates make structured products more attractive, they also come with a caveat.

“Deals look better as rates continue to increase. But it also means that our products face more competition from corporate bonds or Treasuries, which have seen their yields move higher,” he noted.

“Let’s say you’re a fixed-income investor who only needs 5% a year to survive. If you can get that on Treasuries, why would you take the equity risk of a note? Money is flowing into other assets, especially Treasuries and CDs. So that’s a negative. You have this push and pull. Better terms but more options elsewhere in the market that compete with your business.”

Stocks down

The volume of single-stock issuance was low last week, based on the preliminary data. Some of the underliers included Okta, Inc., Twilio Inc., Amazon.com, Inc., JPMorgan Chase & Co., Under Armour, Inc. and Verizon Communications Inc.

Indexes made for 57% of the total and the large rate offering brought the share for this asset class to 26%.

“There are fewer stock deals. Now that rates are higher, you don’t need single-stock risk. People are moving away from stocks towards index products,” the sellsider said.

“Single stock deals are often income products. You do want the income, but you also don’t want the knock in because you’ll lose a lot of money.

“When rates were low, it made sense to do those deals. You needed the premium to get a decent coupon.

“But now that rates are higher, it’s not necessary anymore. You can get high coupons with indices or even fixed rates. Why would you bet on tech stocks that have plummeted while you can bet on the S&P?”

Crypto carnage

Many events happened last week contributing to a turbulent market. Two days after the Elections, the better-than-expected inflation figures led to a 7.35% surge in the Nasdaq. On Friday, cryptocurrency exchange FTX Group filed for bankruptcy.

Some market participants in the past had foreseen the use of newly created bitcoin funds as an opening for the use of cryptocurrency underliers in structured notes. The extreme volatility in cryptocurrencies cooled off those expectations.

“No issuer is doing anything with crypto in structured products at this time,” said Rosenberg.

“They may be working on it. But we haven’t seen anything domestically. After what happened last week, I don’t know that it’s coming anytime soon.”

Regulation however would be a positive factor toward the legitimization of the asset class.

“Crypto regulation is key for the SEC. If more regulation was in place, it would be a good thing. Once you understand how this asset is regulated, it’s easier to issue a structured note on it.”

The top agent last week was Citigroup with $62 million in six deals, or 31.6% of the total.

It was followed by Morgan Stanley and UBS.

The No. 1 issuer was Citigroup Global Markets Holdings, which brought to market seven offerings totaling $72 million, a 36.7% share.

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