Structured products tally nears $1 billion for week boosted by $515 million deal

By Emma Trincal

New York, May 25 – As the stock market continued to drop for an eighth straight week, structured products issuers priced $951 million in 110 deals during the week with one offering contributing to more than half of last week’s notional, according to data compiled by Prospect News.

BofA Finance LLC priced $515 million principal amount of 0.6% cash-settled equity-linked notes due May 25, 2027 linked to Merck & Co. Inc. The issuer sold the notes at 103 for total proceeds of $530.45 million.

May shines

The deal size contributed to help May issuance volume surpass the tally for April by 24% to $3.40 billion through May 20 from $2.74 billion last month.

“That’s amazing to see such a large size on a stock. We see single stocks on Phoenix autocalls, but they usually don’t go over $10 or $20 million. I guess Merck is a major company and the option market on this name is probably very liquid so they could do that size. Still ... to see that amount is really incredible,” a sellsider said.

He put into perspective the notional volume for the overall market in May through last week.

“You have to consider this half-a billion-dollar deal. If you take it out, sales this month may not exceed April by a whole lot. Also, May is not over yet. We have to wait and see,” he said.

In removing the $515 million deal, the monthly tally remains slightly better than last month at $2.88 billion, a 5% increase.

For now, the month of May beats April. The month-end data may confirm the trend as figures are still preliminary and will be revised upward.

The payout at maturity for BofA Finance’s $515 million notes will be the greater of par of $1,000 and the alternative settlement amount defined as the quotient of the final stock price divided by the 114% threshold price.

Investors as a result do not participate in the upside until the stock price increases by at least 14%.

The principal-protected notes reflect the appeal of defensive plays in a market rattled by soaring volatility.

No capitulation yet

Hawkish remarks from Fed chair Jerome Powell on Wednesday along with disappointing earnings from Walmart and Target triggered a severe sell-off in the equity markets.

The market finished the week negative with the Dow Jones industrial average and the S&P 500 index down 2.9% and 3%, respectively.

On Friday, the S&P 500 index entered a brief bear market, falling 20% from its January high. But the decline was intraday and not at the close, which technically does not correspond to the definition of a bear market.

“We don’t see any catalyst for stock prices to increase yet. Look at Snap losing almost half of its value [Tuesday] after its earnings. The sell-off is not over,” a structurer said.

“We’re not back to levels at which you can buy. But at some point, and I think very soon, somebody is going to call the lows. We just haven’t seen capitulation yet. But the market is going to turn because interest rates increases have already been anticipated. Covid in China is putting pressure on supply. But lockdowns in China are momentary. The economy is going to come back.”

Sitting on the sidelines

Market participants have different opinions on how the pain in the stock market is going to impact sales of structured notes for this first half of the year.

Issuance volume is down 14.6% this year through May 20 at $32.77 billion versus $38.39 billion last year.

“We really need a rebound to get issuance volume back on,” the structurer said.

“People say that volatility is good for our industry because coupons are higher. But that’s not true for volume. First people are not investing. They’re afraid. And second, deals are not autocalled. So, there is less money to invest in notes.”

He stressed how the sell-off is expanding to other sectors of the stock market.

“First tech stocks got hit with higher interest rates. Now it’s well beyond tech. Retail companies are seeing their margins eaten up by rising costs. Look at Walmart last week,” he said.

The sellsider was not overly optimistic about the effects of the near-bear market on issuance volume.

“We had a pullback since the start of the year. Deals are not getting called. Everyone realizes that. It’s a challenge,” he said.

“At the same time, some of this is offset by the more attractive terms you’re getting from volatility spikes as well as the opportunities to buy at much lower levels.”

Good pricing however does not always lift bearish sentiment.

“For some people there’s a need to wait and see. They see their statement. They see valuations being crushed and they’re not in a rush to buy more notes. Others want to come in at these levels,” he said.

In general, the impact of the pullback on distribution of structured products is hard to assess.

“It depends on who you ask. For us, volume has definitely declined,” he said.

“Sentiment is picking up. But many are still hesitating. The view is that there may be further selling pressure ahead of us. We haven’t seen the bottom yet.”

Notes linked to stocks evidently prevailed last week given the size of the BofA deal on Merck. Index-linked notes accounted for $257 million sold in 56 deals, or 27% of the total, including the $515 million trade.

Rates appeal

Another big trade came out last week in a less common asset class.

Royal Bank of Canada priced $100 million of three-year floating-rate notes linked to the two-year U.S. dollar SOFR ICE swap rate. The interest rate, which is paid quarterly, is the reference rate, with a floor of 3.15% per year. The payout at maturity will be par. RBC Capital Markets, LLC is the agent.

Goldman Sachs Group, Inc. priced another floater on SOFR in a 13-month note offering for $18.1 million.

The interest rate is compounded SOFR with a floor of 2.6% and a cap of 3%. Interest is payable quarterly. The payout at maturity will be par plus accrued and unpaid interest.

Goldman Sachs & Co. LLC is the agent.

“We’ve seen big prints on interest-rate linked products because they keep up with rising rates. There’s definitely an uptick in demand. People use them as a hedge against inflation,” the sellsider said.

Higher rates help the pricing of principal-protected notes, the structurer noted. He said his firm is taking advantage of this trend to create so-called “shark notes.”

“We’re doing a lot of capital-protected notes, including shark notes. You get 100% upside exposure up to a point. After 130%, the option gets knocked out and you lose the participation, but you get a rebate. And it’s a substantial rebate. For gold, we get 10% on a two-year, for oil, 6% on a two-year and on the SMI index, 32% for a three-year,” he explained.

The SMI index is the Switzerland blue-chip stock market index.

“These notes work well in this environment because the options are cheaper in a volatile market,” he said.

The options used are up-and-out call options with rebate, he added.

An up-and-out call option is only active when the underlying price rises up to the strike. It ceases to exist above it.

The structure is marketed in Europe, but the currency used is the U.S. dollar for “its higher rate,” he said.

Some of the underlying indexes employed in these deals also include the Euro Stoxx 50 and the FTSE 100.

$60 million on Nasdaq

On the equity index front, GS Finance Corp. priced $60 million of 0% autocallables due Nov. 21, 2026 tied to the Nasdaq-100 index.

The notes will be called at par plus a 14% call premium if the index closes at or above its initial level on a call date after a year.

At maturity, the payout is 1.5067 times any index gains with an 80% downside barrier.

The top agent last week was BofA Securities with three deals totaling $535 million. The second agent was UBS with $104 million in 46 deals followed by RBC’s $100 million.

The No. 1 issuer was BofA Finance with $537 million in four deals, a 56.5% share.

© 2015 Prospect News.
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