Structured notes issuance tops $159 million in shortened week; index-linked autocalls lead supply

By Emma Trincal

New York, Nov. 20 – The week following Veterans Day saw the pricing of $159 million in 108 deals, with an overwhelming majority of autocallable structures, but equity indexes remained dominant. Put in another way: leverage was nearly absent, according to preliminary data compiled by Prospect News.

Revised figures for the prior week, which marked November’s debut, turned out to be $610 million in 170 deals.

Compared to all first weeks of any given month this year, it was the third best tally after May ($836 million) and August ($788 million).

Autocalls top

Autocallables continued to be the top structure. On a year-to-date basis, leverage represents a little bit over a third of total notional with $14.24 billion. Autocallables account for $16.46 billion, a 38.8% share.

Last week pushed this trend to an extreme with $127 million worth of autocallables, or nearly 80% of the flow, while leveraged notes made for only $10 million, or 6.3%.

A sellsider said that if forced to choose, many on the buyside will opt for the downside protection rather than the leverage.

“One feedback we get from advisers is to use structured notes strictly as hedge for capital preservation,” he said.

“They ask for non-levered notes with no cap and a sizable buffer on the downside. The trade negotiations are generating a fair number of negative headlines and a sell-off could happen anytime. The market is at its all-time high. They want to get this downside cushion.”

The robust growth of autocallable notes has proven to be a consistent trend this year but not to the point of dwarfing the issuance of participation notes.

One explanation for last week’s notable unbalance could be that not all deals were filed with the Securities and Exchange Commission by press time.

While it did not account for the weakness of leverage issuance, the top deal last week happened to be an autocallable. Alone it made for nearly a quarter of the week’s volume, naturally skewing the data.

Citi’s $37 million deal

Citigroup Global Markets Holdings Inc. priced $36.73 million of five-year autocallables linked to the worst performing of the Dow Jones industrial average and the S&P 500 index.

The notes are called at par plus a premium of 8.5% per year if each asset closes at or above its initial level on any annual call valuation date.

The payout at maturity will be the 42.5% premium applicable to that valuation date if the worst performing index closes above its initial value.

The payout at maturity will be par if the worst performing index finishes above its 70% trigger level and below its initial value, otherwise investors will be exposed to losses of the worst performing index.

Popular snowballs

“This is a snowball. It’s a great structure. We’ve seen an increased pickup as the traditional autocalls are not paying coupons that are attractive enough. These price better,” a distributor said.

Snowballs are a category of autocallables, which pay a premium upon the call only. They are distinct from Phoenix autocalls, which generate income each time the price closes above a barrier on an observation date while the call strike is at a higher level, usually at par.

“The snowballs price better because you need to be above 100 to get paid and not just above a sub-100 barrier. It’s a way to raise the return,” the distributor said.

“It’s for a more passive type of investing. The call is on an annual basis. Folks who buy it don’t have to worry about being called in three months.”

Snowballs come with a “memory” feature, which allows for the cumulation of premium.

Another feature of this deal, which contributed to its success, was what some issuers call the “oxygen feature,” he added.

“As you get close to maturity, they allow you to get your final premium at a barrier level, below the initial price. You have a greater chance to make it if you haven’t been called during the life.”

Equity indexes, worst-of

Canadian Imperial Bank of Commerce priced the second deal in $14.8 million of digital notes due Jan. 27, 2022 linked to the S&P 500 index.

If the index return is greater than or equal to negative 15%, the payout at maturity will be par plus 14.3%. Otherwise, investors will lose 1.1765% for every 1% that the index declines beyond 15%.

Equity indexes remained the top asset class last week with $96 million, or nearly 60% of the total, while stocks accounted for $50 million, or nearly 32%. Stocks fit into two sub-categories, according to Prospect News methodology: single stocks, first, which were at $37 million, and stocks used on worst-of, which totaled $13 million.

The implication is that stocks were mostly used as single assets and not so much in worst-of.

On the other hand, more than three-quarters of equity index notes ($73.2 million) were associated with worst-of.

This result however is largely skewed by the size of the top deal.

Still last week confirmed some trends observed before: leverage is less visible; autocallables prevail and within this group, index-linked worst-of are increasingly popular.

Top stock deals

JPMorgan Chase Financial Co. priced the top stock deals.

One for $6.52 million was an autocallable linked to the least performing of Oracle Corp., Microsoft Corp. and Intel Corp. paying a monthly contingent coupon of 9.15% with memory based on a 60% trigger level, operating as both a coupon barrier and principal repayment barrier at maturity. The notes are automatically callable above the initial price on a monthly basis.

Correlations

The use of worst-of with underlying stocks within the same sector or industry is one of the ways to appeal to investors as it lowers the risk associated with negative correlation, explained this distributor.

During the previous week, Barclays Bank plc priced $7.12 million of two-year contingent income autocallables with worst-of based on Visa Inc. and Mastercard Inc.

“We’ve seen those lately. It just depends on the correlation,” the distributor said.

The choice of stocks depends on a variety of factors.

“It could be names coming out from earnings. It could be popular pairs with higher correlation. You get better terms with lower correlation. But when it’s too uncorrelated, it’s tough. There’s just too much risk of barrier breach.

“You could be picking a stock because there’s a thesis on it.

“Maybe it’s got higher volatility. Or maybe it has higher dividends. Either way, it will give you more pricing power with the options,” the distributor said.

Year still down

October remained the third best month of the year with $4.53 billion, accorded to the latest update, behind August and May.

For the year, volume through Nov. 15 is down 16.4% to $42.47 billion from $50.80 billion. The number of deals has declined by 3.75% to 13,793 from 14,330.

For some, the continued bull market is to blame.

“People are looking for deeper protections in this toppish market, and it’s not easy to get,” the distributor said.

“That’s why you see so many income-generating notes with deeper barriers.

“The S&P is up 24% this year. You would think with the trade deal, the impeachment talks... there would be a potential pullback. But it hasn’t happened yet.”

The Dow Jones industrial average on Friday crossed the 28,000 milestone. The S&P 500 index has been hitting a series of new highs for the past six weeks.

“There is still uncertainty. But the market is shrugging off the negative headlines.

“It’s compelling to be long equities when the market keeps on going up,” he said.

UBS, top agent

The top agent last week was UBS with $57 million in 79 deals, or 36.26% of the total. It was followed by Citigroup and JPMorgan.

Citigroup Global Markets Holdings Inc. was the No. 1 issuer with two deals totaling $38 million.

For the year, JPMorgan Chase Financial is the top issuer with $5.96 billion in 2,275 offerings, a 14.04% share of the total, closely followed by Barclays Bank plc with 1,467 deals totaling $5.80 billion.

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