Agents price $332 million of structured notes in shortened week; year’s tally encouraging so far

By Emma Trincal

New York, Jan. 29 – Structured notes issuance volume hit $332 million in the shortened holiday week ended Friday in 137 deals, according to preliminary data compiled by Prospect News.

The market was closed on Monday in observance of Martin Luther King Jr. Day.

Impressive previous week

Last week followed one which saw the sales of $1.57 billion, an especially strong tally for the middle of the month.

Part of the large flow was due to an unusually high number of offerings – 352 for that second week of the month alone. The other main driver was the presence of seven block trades in excess of $30 million totaling $277 million during that same week preceding last week. GS Finance Corp. issued 60% of that amount in just four deals.

“The stock market rallied most of the first half of the month. It only gave back last week with those coronavirus concerns,” said a sellsider.

The Standard & Poor's 500 index indeed fell 1% last week as concerns about the virus and its potential impact on some sectors of the economy as well as global growth mounted. It was the complete reverse of the previous week, which saw the benchmark hitting new all-time highs and finishing up 2%.

“If you’re pricing worst-of when the market is up and volatility drops, you don’t get attractive terms,” he said.

Apparently, it did not affect issuance volume two weeks ago given the notional size of that period.

“The best explanation is rollovers. Deals got called and investors reinvested their assets,” he said.

Six out of the top seven deals in excess of $30 million seen in the week ended Jan. 17 were indeed autocallable contingent coupon notes. Their combined notional was $238 million.

“When money is available, you get rollovers. Brokers need to be paid. Investors need to be invested. Even if pricing is not best, if this is the best you can get, you go ahead an invest unless you are defensive or need to be in cash,” he said.

Volatility is back

Last week was an entirely different market. Volatility rose, which also helped sales of autocalls, this time from a pricing and tactical standpoint.

“When volatility spikes like last week, we see a ton of interest in autocalls. You get much higher coupons. This week, we’ll see big numbers,” he said talking about the current week.

Autocallable contingent coupon notes amounted to $159 million last week, or 48% of the total in 103 deals. A little bit more than a third of this segment was tied to stocks. In most cases, stocks showed little correlation to one another.

Overall stocks made for 23% of the total across structure types. The bulk of last week’s stock-linked notes however came from two tracker deals a Canadian issuer routinely brings to market a couple of times a year. Combined those two deals accounted for more than $76 million.

Year to date up

With two good weeks in a row, volume for this early part of the year skyrocketed compared to a year ago.

The tally is $2.81 billion for this month through Jan. 24, a 22.85% increase from $2.29 billion during the same period last year. The deal count is up as well to 765 from 515, a 48% surge.

These figures however need to be put in perspective.

“Last year at that time was pretty bad. Maybe this is a reversion to the mean,” said the sellsider.

“The market a year ago had just gone through a huge sell-off in December. There was no roll money. It crushed the business for the first two months of the year.”

Beating December

Last week’s seasonal trends were atypical. Usually the best months are in the first quarter. The summer tends to be slow as well as the last two months of the year. Because of the late 2018 short-lived bear market, structured products issuance volume in 2019 was slow to emerge. But momentum picked up toward the fourth quarter with November and December finishing as the top months of the year. Together those two final months accounted for more than 21% of the total yearly volume.

This helped explain the strong gap this month versus December. Agents priced $2.81 billion through Jan. 24, a 34% drop compared to December’s $4.25 billion.

The pre-Christmas part of last month was particularly robust, noted the sellsider.

“December is a funny time,” he said.

“We used to ask brokers: when do you want us to close? The week before Christmas or the week after?

“It was a 50/50 split. Half of them would say: ‘I’m always in the office at the end of the year.’ The other: ‘I close and I leave until the New Year.’

“It’s very hard to pin down a specific pattern in the U.S. for the year-end/Christmas period.:

It should be too soon to tell how January will fare versus December. But the $5.52 billion tally for the full month of December seems like a high-water mark not easy to match.

Raymond James’ best picks

Bank of Montreal priced the top deal last week with $50.05 million of one-year notes linked to a basket of equally weighted stocks selected as Raymond James Analysts’ Best Picks for 2020.

BMO Capital Markets Corp. is the agent. Raymond James handles distribution. Another similar deal sold for $26.16 million.

In both issues, the reference shares are: Aaron's, Inc., CVS Health Corp., CyrusOne Inc., EchoStar Corp., Fidelity National Information Services, Inc., HealthEquity, Inc., Invitation Homes Inc., Masco Corp., Pioneer Natural Resources Co., Polaris Inc., Rapid7, Inc., salesforce.com, inc., TCF Financial Corp., Under Armour, Inc., United Parcel Service, Inc. and Zimmer Biomet Holdings, Inc.

The notes are a tracker-type of structure: investors buy the product for the embedded equity research. They are exposed to the return of the basket.

This issuer priced another issue of this series for $26.16 million.

Earnings into high gear

Last week’s bearish tone and earnings momentum were two good reasons to price and invest in autocallable deals tied to stocks, the sellsider said.

Some of the names used were: Netflix, Inc., which reported earnings Jan. 21, Facebook, Inc., Target Corp., Biogen Inc. and Altria Group, Inc. due this week.

“We’ve seen big volatility spikes on Uber, Netflix, Tesla. There’s a lot of activity selling volatility on those names right now,” the sellsider said.

Tesla Motors Inc. will announce its results on Thursday; Uber Technologies, Inc., next week.

Strong earnings results from Intel Corp., Proctor & Gamble Co. and American Express Co. eased some of the anxiety around the Wuhan coronavirus.

“We just had very good numbers from Apple. GE also had positive results, which hasn’t happened in a while.

“The earnings season is going pretty well,” a market participant said.

Market sentiment

Investors last week did not buy a lot of leveraged products. Leverage was sold only with barriers and buffers for a tally of $62 million, an 18.7% share of total issuance volume.

After hitting all-time highs prior to last week’s sell-off, some question whether investors may have become overly complacent about the market.

“I think there’s a reasonable amount of complacency out there. Sentiment remains very bullish,” the market participant said.

The market dropped since its record close on Jan. 17 until its recent low on Monday, he noted.

“But it’s bouncing back.

“If the market was going to get whacked it would have gone way more down.

“I think people believe that this coronavirus will be handled,” the source said.

Worst-of on indexes

The second deal after the two BMO offerings was from Barclays Bank plc, which issued $21.05 million of six-year callable contingent coupon notes linked to the worst performing of the Dow Jones industrial average, the S&P 500 index and the Russell 2000 index.

The notes pay a contingent quarterly coupon at an annualized rate of 7% if each index closes at or above its coupon barrier level, 66% of its initial level, on the valuation date for that period.

The notes will be callable after one year.

The principal repayment barrier at maturity is 60.

Non-U.S. correlations

Lately more deals giving investors international exposure have been seen, especially on worst-of.

Morgan Stanley Finance LLC offered an example with the sale of $12.63 million of three-year callable contingent income securities linked to the Euro Stoxx Banks index, the Russell 2000 index and the MSCI Emerging Markets index.

“It’s a volatility correlation play creating better options,” the sellsider said.

“We’ve noticed it with the Euro Banks index. It adds value.

“But this is not demand-driven. People are not suddenly falling in love with Europe or European banks. It’s a pricing thing.

The top agent last week was BMO Capital Markets with its two deals for $76.21 million, or 23% of the total. It was followed by Morgan Stanley and UBS.

Bank of Montreal was the top issuer.

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