Structured notes issuance $478 million for week amid concerns about hawkish Fed talk, recession

By Emma Trincal

New York, Nov. 23 – Last week saw robust structured products issuance volume for a mid-month period with agents pricing $478 million in 87 deals, according to data compiled by Prospect News. Investors flocked to structured notes in search of protection amid growing fears of a recession next year.

Despite cooler inflation readings (CPI figures decreased in October and the PPI was flat), several Federal Reserve officials made hawkish comments last week, exacerbating those concerns. This led to a mild sell-off in equities. The S&P 500 index finished the week down 0.7% and the Nasdaq lost 1.6%.

The previous week, which was the second of the month, showed an updated $703 million tally, helped by the pricing of two large Canadian bank deals, according to the latest figures.

Two big deals

The largest of those two issues was Canadian Imperial Bank of Commerce’s $67.47 million of 0% capped leveraged buffered notes due Feb. 14, 2024 linked to the performance of the S&P 500 index paying 1.5 times the gain at maturity up to an 18.72% cap. Investors enjoyed a 20% geared buffer on the downside. CIBC World Markets Corp. was the agent.

“We’re seeing some of these with bigger downside protection especially on the short end. You used to have to go out five years to get a 20% buffer, now you can get it on much shorter terms,” said a sellsider.

As to illustrate the point, Bank of Nova Scotia priced $55.8 million of 13-month buffered digital notes linked to an international basket of equity indexes. A 10% geared buffer was included in the structure.

The payout was the greater of the basket gain and 13.2%.

Scotia Capital (USA) Inc. is the agent.

Deep barriers, buffers

Last week’s supply suggested a strong appetite for notes with decent protection levels.

The largest deal was Morgan Stanley Finance LLC’s $31.35 million of six-year trigger jump notes tied to the S&P 500 index. The payout was the greater of the index gain and 60%. The contingent protection offered was a 65% barrier.

The same issuer also priced a $21 million deal of 14-month in-the-money digital notes with a 20% geared buffer. The threshold was at 80% of the initial price, and the digital payout was 24.12%.

Inflation, bearish bets

On the rate side, JPMorgan Chase Financial Co. LLC priced two issues of floating-rate notes linked to the Consumer Price Index with principal protection.

“I’ve seen some of them,” the sellsider said.

“It’s OK if you feel that inflation is going to persist. But if inflation is at a peak and declines, you’re out of luck. You may still have a high coupon for some time but not for an incredibly long time.”

A classic but rare structure came out of GS Finance Corp., which priced $4.97 million of bearish notes on the S&P 500 index. The notes featured an 80% daily observation barrier. If breached and regardless of the final level of the index, investors received par plus 1%. If the barrier never breached, the final payout would be either 1% if the index finished up or the absolute return if it declined. UBS was the agent.

UBS, also on the behalf of GS Finance, priced five-year principal-protected notes for $8.73 million. Linked to the Dow Jones industrial average, the return was 1.1x on the upside capped at 70.7%.

Single stocks blues

Last week’s decline of stock-linked notes issuance was hard to ignore. Only $14 million in 16 deals priced in this category. For ETFs, the tally was even lower at $10 million. Meanwhile, equity indexes continued to dwarf everything else with $372 million in 59 deals, or nearly 80% of the total.

“As interest rates are moving higher, investors may gravitate more around less risky assets. The pendulum risk/on-risk/off may be changing. When you can buy a one-year T-Bill yielding 4.78%, it becomes very tempting to sell your riskier assets and park your money short term to a place where you know you’re going to get paid,” said Clemens Kownatzki, finance professor at Pepperdine University.

For yield and growth seekers, the natural tendency is to move to index-linked notes for more attractive risk-adjusted returns. Last year, index notes made for 56% of total issuance volume. Their market share this year has jumped to 71.4%. In terms of volume, total sales rose from $48.6 billion a year ago to $54.8 billion, a 12.8% increase.

Leverage, autocalls

But sales have also migrated to rate-linked notes, which in many cases provide full principal-protection. Sales of such products have nearly doubled this year although their market share remains less than 3%.

Prospect News methodology when accounting for rate-linked products does not include step-up or step-down notes, fixed-to-floating rate notes and capped floaters.

The balance between growth notes and income products as percentage of total sales was relatively even last week at 23% and 28%, respectively. It reflected a trend seen throughout the year. Autocallable notes this year to date made for 43% of the total versus 25% for leveraged products. Even if autocalls continued to prevail, their market share has declined this year compared to a year ago when these products accounted for 63% of the tally. In terms of volume, autocallable issuance dropped 39% this year.

“I think with rates being where they are, the need for income via structured products is not as significant as it was last year when rates were at zero,” the sellsider said.

“Now investors have other solutions available with traditional fixed-income.”

September tops

Issuance data on a per-month basis confirmed that September, with $10.2 billion, was not just this year’s best month but also the best month ever, according to Prospect News data going back to 2004.

During the first half of September, Barclays was buying back from investors notes it had over-issued. Eligible securities amounted to $17.7 billion, and by Sept. 15, the bank had already returned to the original note holders $7.7 billion, according to news releases from the bank. The rescission was good news for those investors as they recouped their investment at par.

“This huge volume in September was the direct effect of all the money coming back,” said the sellsider.

“Investors who had incurred serious drawdowns got their money at par or near par, which had a positive psychological effect as well. That’s the reason why September was the biggest month.”

Despite the September boost, issuance for the year through Nov. 18 is lagging last year’s totals. So far sales amounted to $76.74 billion compared to $86.78 billion a year ago, an 11.6% decline.

Declining year

The gap has been progressively narrowing month after month this year. But with only four weeks left before the holidays, it is unlikely that sales of structured notes this year will set any new record.

“I don’t expect a whole lot of volume going to the end of the year and not just because people will be preoccupied with the holidays but mostly because of this wait-and-see mentality, people wondering what’s going to happen with inflation or worrying about a recession. So, I don’t think we’ll see volume larger than normal through the end of the year,” the sellsider said.

Last week’s top agent was UBS with $148 million in 31 deals, or 31% of the total.

It was followed by Morgan Stanley and JPMorgan.

The No. 1 issuer was GS Finance bringing to market 13 offerings totaling $78 million, a 19.6% share.

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