Structured products issuance $190 million for week; July ends strong but lags for year

By Emma Trincal

New York, Aug. 12 – Agents priced $190 million of structured notes in 45 offerings during the first week of August amid a continued stock rally, which saw the S&P 500 index rise 2.5%, according to preliminary data compiled by Prospect News.

Updated data for the previous week, which closed the month of July, showed a tally of $1.82 billion in 470 deals. It was the fifth best week so far this year in issuance volume.

Data for last week will be revised upward too as not all deals were filed with the Securities and Exchange Commission by press time.

The strong finish last month did not stop July from being the worst month of the year with $4.29 billion, just behind May’s $4.67 billion and April’s $4.72 billion.

Different takes

“It’s a summer month,” a sellsider said.

But activity varies from different corners of the market.

“I think the lighter volume is probably a subscription-based, calendar deals story,” said Matt Rosenberg, head of trading and strategic initiatives with Halo Investing.

“But from the customized side of the business, which is what we do, July was a pretty busy month.

“We saw more vanilla, core growth on U.S. indices.”

The impact of the pandemic may have unexpected effects, he added.

“It’s a strange time. People traditionally go on holidays in July and August. But now more people are still around following the market,” he said.

Some hurdles

For the sellsider, however, volume had slowed down due to the uncertainty.

“Volume is lower. We have so many known unknowns,” this sellsider said.

“There’s this reemergence of U.S.-China tensions; the Elections are looming over us. In Europe, the Brexit often forgotten is still not resolved.”

For this sellsider, the coronavirus pandemic was not the main reason behind the sluggish activity.

“I personally think it’s overdone. The Covid-19 is a health crisis. Right now, young people getting drunk in night-clubs are getting it. The problem is they’re passing it on to their friends and family.

“But the impact on the economy is not significant. And look at the market: it’s a meteoric rise.

“There’s collateral damage. The reticence to be indoors is not good for some businesses like McDonald's. But it certainly did not hurt Netflix or Amazon.”

The most active months for sales of structured notes this year were in the first quarter with monthly tallies exceeding $7 billion. March topped with $7.28 billion.

June was “in between” with $6 billion.

The early year momentum is still carrying over causing the yearly trend to remain strong. Volume this year is up to $41.42 billion through Aug. 7 from $28.69 billion last year, a 44.4% increase.

For the sellsider, one problem has been the “optics” of deals shown to advisers.

“People are less inclined to enter the market after they saw such high coupons and low barriers in March. Suddenly the coupons have dropped, and the barriers are higher. It’s not as compelling as it was during the pullback,” he said.

Sometimes long-only investment competes with structured notes, especially during good times.

The bull market has been a magnet for investors fearing to “miss out” on the rally.

As the S&P 500 index has now gained about 55% since its March low, more investors are willing to give up protection in order to eliminate or raise the cap.

“Clients don’t listen. They’ve been badly burned. They have a short memory. The sell-off is still too fresh,” said the sellsider.

At the time, death tolls and lockdowns precipitated stocks in bear market territory with the S&P 500 index losing more than 35% of its value in a 33-day span.

“The situation is different today. One of the things that boosts optimism is the hope for a vaccine,” the sellsider said. “It’s part of the bullish sentiment. Twenty companies are researching this vaccine. There will be one whether it be Russia, Moderna or Pfizer.”

Trend following

If biotechnicians are innovating in researching a Covid-19 vaccine, financial engineers are not really engaged in creating new structures, he added.

“Many innovations have probably crashed or not met expectations. There are plenty of popular products from leveraged notes to autocalls that people understand, and they fit the bill. There is no need for innovation right now.”

If investors like simple deals, they’re craving the stocks of highly innovative technology companies.

Big tech drove last week’s rally. The share price of Facebook jumped 6.35% for the week.

The top five – Apple, Amazon, Facebook, Microsoft and Alphabet – continue to dominate as reference assets of choice for autocallables.

“Structured notes buyers follow what’s in the news. Those stocks make headlines, so you’ll find plenty of deals on Apple, Amazon or Facebook,” said the sellsider.

“You can easily put together a reverse convertible on Apple. Is it a good idea with the share price up 55% this year? I don’t think so. But when you are in structured products you go with the trend,” he added.

Those names are also widely recognizable making them easier to show to clients.

“You could pick a utilities stock, say MDU Resources, but everyone knows the stock will not have a stellar rise. Apple is rising,” he said.

More leverage on stocks

Rosenberg spotted a new trend: now tech stocks are not just the underliers for autocalls. His firm is offering many growth products tied to those names.

“Big tech continues to drive the rally. When you throw two of these together in a worst-of, you can get uncapped leverage on a two year with some protection,” he said.

All those deals are not always uncapped, he said. But the trend consists of using those mega-cap stocks for growth in short-term plays.

“We see more leverage worst-of in general whether capped or uncapped. People want notes on technology. Apple, Amazon, Facebook...they have become the new blue-chip to watch,” he said.

$61.5 million digital

Last week’s top deal came from JPMorgan Chase Financial Co. LLC with an “in-the-money” digital product, which pays out if the underlying finishes above a strike placed below the initial level. The $61.48 million offering of 15-month digital notes linked to the Russell 2000 index pays 10% at maturity if the index return is greater than or equal to negative 15%.

Otherwise, investors will lose 1.1765% for every 1% index decline beyond 15%.

Goldman’s $30 million trade

Next, GS Finance Corp. priced $30.38 million of two-year autocallable index-linked notes on the MSCI EAFE index.

The structure features a one-time autocall after one year paying a call premium of 10%. If the notes mature, investors will get par plus 4 times the gain, capped at 46% with full exposure to any losses.

BofA’s ARNs

Some deals which priced on July 30 or July 31 appeared on the SEC website later last week. Of interest were three Accelerated Return Notes distributed by BofA Securities, Inc. All three deals were 14-month capped and leveraged notes.

The top one was Royal Bank of Canada’s $59.8 million linked to the S&P 500 index, paying double any index gain up to a 12.33% cap with a 5% downside buffer.

BofA Finance LLC issued $51 million on the Euro Stoxx 50 index with triple the upside return up to a cap of 15.69%.

RBC priced $34.74 million linked to the VanEck Vectors Gold Miners ETF. The notes pay 3x the gain capped at 46.05%. The downside is not protected.

Gold appeal

Gold miners’ funds have gained traction lately, in part due to the record-breaking increase in the price of gold.

For Philip Lawlor, head of global markets research at FTSE Russell, the main reason for this year’s rally has been the “precipitous” drop in U.S. Treasury yields below the expected pace of inflation.

“When real yields are negative, the opportunity cost of holding non-interest-bearing gold over income-paying alternatives evaporates,” he wrote in a memo.

The top agent last week was JPMorgan with $61 million in one deal, or 32.3% of the total. Data will be revised upward as more deals get filed with the commission.

It was followed by UBS and Goldman Sachs.

The top agent for the week ending the month of July remained BofA Securities, Inc. with $660 million in 26 deals, or 36.25% of the updated tally.

© 2015 Prospect News.
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