March kicks off with nearly $1 billion of structured products issuance amid extreme price swings

By Emma Trincal

New York, March 9 – Agents priced $965 million in 199 deals in the first week of March. For stocks, it also was the fourth straight week of a sell-off induced by inflation and geopolitical tensions exacerbated by Russia’s invasion of Ukraine on Feb. 24.

BofA tops

BofA Securities Inc. prevailed for the second week in a row, pricing $280 million in 11 deals, or nearly 30% of the total, according to preliminary data compiled by Prospect News.

During the prior week, which closed February, this agent had already sold $339 million, or 21% of that week’s notional, according to Prospect News’ most recent update. In terms of leading issuers, BofA Finance LLC topped during that final week of February, but last week, Bank of Nova Scotia (as part of BofA’s platform) took a predominant place, capturing more than 30% of the issuance volume in $294 million.

Big allocation trades are expected to hit the market when BofA closes its calendar especially in the current market environment, said Matt Rosenberg, director of Halo Investing.

“BofA produces the biggest offerings in size. Those deals tend to be non-callable, short duration products,” he said.

“That’s an advantage right now. BofA has a more predictable money flow because its products are bullets.

“Meanwhile callable products don’t get called and money is sitting in cash.”

Slower year so far

The absence of calls whether automatically or at the discretion of issuers is the main reason behind the issuance volume slowdown observed this year to date, market participant unanimously said.

The tally for the year is $13.15 billion through March 4, a nearly 24% decline from last year’s $17.28 billion. These numbers are not final and are subject to upward revisions. The deal count, according to the preliminary data, has dropped even more to 2,877 from 5,168, a 44.3% decline.

“Autocalls are not getting called because the market is down. That’s the biggest factor. Volatility is good until a point,” a market participant said.

When issuers have the discretion to call, they don’t exercise the option, he added.

“Issuers won’t call the notes when they have the chance to do so.

“Interest rates are up. Volatility is up. Any new coupon would be higher. Why would they do it?” he said.

Index, leverage

When BofA dominates the flow on any given week, the profile of the products tends to return to the traditional model: enhanced return notes on indexes. Not surprisingly, equity indexes made for 85% of last week’s tally, or $813 million. The remaining 15% came from single stocks, baskets of stocks and ETFs.

The weight of BofA’s offerings also helped explain the unusual predominance of leveraged notes last week: $491 million or more than half of the total notional versus $260 million for income notes, which represented only 27% of the tally.

But market conditions contributed also to the return of leverage on broad indexes.

“There’s a renewed interest in leveraged notes due to the market sell-off,” said the market participant. “They don’t just offer a fixed income. From a good entry point you can participate in the upside whereas with an autocall, you’re still capped out with the yield.”

“Just a few months ago, low caps would deter investors from buying leveraged products. A 10% cap in the beginning of the year may now be priced at 15% today,” said Rosenberg.

The use of indexes makes sense when uncertainty dominates investors’ mindset.

“Those investing in structured products for the first time would rather have exposure to the broad markets, especially in times of elevated uncertainty,” Rosenberg added.

“The same applies to existing customers. The war in Ukraine, the Fed meeting next week, the escalating inflation, skyrocketing gas prices, these things are creating big price swings and better pricing. There isn’t a huge rationale to take on more risks on single stocks when volatility is at those levels.”

Tech to the rescue

Fintech platforms and customization through automation may help in times of market turmoil because the technology allows sellsiders to tap into new clients, he explained. But it remains to be seen whether those new market shares can compensate for the declining rollover flows.

“If you bought a $1 million deal and the product doesn’t get called, maybe you’ll redeploy $100,000 in cash. But it’s not $1 million. How much the benefit of finding new clients will offset the negative impact of notes not getting called is anyone’s guess. It’s going to be in large part determined by the market,” he said.

Market sentiment also has a role to play. Excessive fear in the market has the potential to switch investment decisions into risk-off mode.

“Rates have been up even before the conflict. Now volatility is surging because of the war. Terms are much better due to the higher volatility. The technicals help,” the market participant said.

“But pricing is not everything. Volatility weighs on consumer sentiment. It’s not a great thing. Uncertainty can be prohibiting. Too much uncertainty and people begin to wait on the sidelines.”

Invisible oil

Commodities-linked notes have not been in favor over the last decade, according to data compiled by Prospect News. So far nothing indicates a change. Despite crude oil prices climbing 30% since the invasion, no commodities-linked notes offerings were seen last week, according to the available data.

“You would think investors would want to find a way to take advantage of oil. But they don’t have the stomach to play trader,” said Rosenberg.

“It’s not because of the issuers. Issuers can obviously hedge crude futures. But advisers are just not comfortable.”

If unwilling to bet on futures, investors still have the option to use equity ETFs focusing on energy such as the Energy Select Sector SPDR ETF, which is listed under the ticker “XLE.”

The pricing of notes tied to this ETF has declined this year, according to the data.

“I’m not sure why we don’t see more deals on XLE. It’s a way to get exposure to oil via equities,” he said.

The largest offering tied to this fund – Credit Suisse AG, London Branch’s $32.53 million of Accelerated Return Notes distributed by BofA Securities – priced at the end of January.

BofA Finance issued another one for $20.15 million on Feb. 24. Many of the equity bets on oil have been based on small and sporadic trades linked to single stocks such as Devon Energy Corp., Exxon Mobil Corp., Valero Energy Corp. and Diamondback Energy, Inc.

In mid-February, JPMorgan Chase Financial Co. LLC priced a pure commodity offering with $5.33 million of 18-month digital notes linked the WTI crude oil futures contracts. The payout is 15.25% if the final price is at least 50% of the initial level, setting the downside barrier level at 50% as well.

“If you think there will be a higher commitment to domestic energy going forward, those oil bets could turn out to be profitable. This deep-in-the-money digital one is actually pretty good if you have big price swings,” he said.

Scotia’s block trades

Bank of Nova Scotia priced the top deal last week with $94.34 million of 14-month notes linked to the S&P 500 index.

The payout at maturity will be par of $10 plus triple any index gain, up to a maximum return of 15.61%. Investors will be exposed to any index decline.

BofA Securities, Inc. is the underwriter.

BofA also priced the second largest offering on the behalf of Scotia Bank with $66.03 million tied to the S&P 500 index. It pays two times any index gains up to a 12.87% cap and provides a 5% buffer on the downside.

Bank of Nova Scotia also brought to market the No. 3 block trade still within the BofA franchise in the form of $58.68 million of two-year capped leveraged notes on the S&P 500 index. The payout is 2x the gain up to a 16.36% maximum return. Investors get downside protection up to a 10% straight buffer.

The top agent after BofA Securities was UBS with 99 deals totaling $131 million, or 13.6% of the total. It was followed by JPMorgan.

GS Finance Corp. was the second largest issuer after Scotia Bank, bringing to market $146 million in 22 deals, a 15% share.

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