Structured products issuance $491 million for week, helped by big Exxon convertible deal

By Emma Trincal

New York, Nov. 25 – While the structured products issuance picture for November is not yet complete, the year 2020 is ending in flying colors.

The tally during the week preceding Thanksgiving week was $491 million in 166 deals, according to preliminary data compiled by Prospect News. Bank of America, which was absent during that week, is likely to price its monthly calendar during the two or three days preceding the holiday, following its monthly calendar routine. Many upcoming offerings were set to price on Nov. 24.

Revised figures for the previous week ended Nov. 13 showed $832 million in 234 offerings.

So far, issuance volume at $2.04 billion for the month through last Friday is lower than the October’s $2.28 billion tally during the same time.

While the complete data for the month will not be available until the first weeks of December, issuance volume for November’s sales so far are somewhat lagging. The worst month of the year, which was May, saw $4.67 billion for the full month.

November rally

It has been so far a good month for the stock market after consecutive announcements from pharmaceutical companies about the efficacy rate of their respective Covid-19 vaccines.

The S&P 500 index rose close to 8% in the first three weeks of the month, and the Dow Jones industrial average gained nearly 10%. Extending the period to the Nov. 24, when the Dow broke a record surpassing the 30,000 level, the benchmark jumped nearly 13% for the month.

The market however searched for direction in the week preceding Thanksgiving, torn between positive vaccine and political signals while the continued spread of Covid-19 and canceled flights for Thanksgiving holidays spooked investors.

Record year

What is no longer in doubt however is the record-setting notional sales this year.

Sales of structured notes through Nov. 20 are up 38.6% to $60.785 billion from $43.867 billion last year, according to the data. This makes 2020 a record year since volume, six weeks ahead of year-end, is already higher than any preceding full year, including 2018, which set the previous record at $56.8 billion.

Bernd Henseler, head of structured products Americas at index-provider firm Solactive, credited the ups-and-downs of the market.

“Volatility this year led to very attractive payouts,” he said.

“Conditions were ideal to offer deep levels of protection as well. You can deliver products with less risk than investing in the market directly. That’s what people buying structured notes are looking for.”

At the same time, fears that a contentious presidential election would trigger a sell-off similar to the February-March bear market have now dissipated.

“The money that was sitting on the sidelines is coming back,” a sellsider said.

“The elections are behind us. The market is telling investors, who were concerned about the election outcome, that they now can come back. Investors have indeed come back to buying whatever strategies they did put off before the elections.”

Volume is up for the year but so is the deal count, which rose 34% to 19,102 from 14,226.

“The emergence of fintech firms contributed to this trend,” Henseler said.

“But banks themselves are getting more efficient at issuing products. The cost of putting together new issues is lower than it used to be. That’s why you see more deals.”

Big Exxon deal

The asset class breakdown last week was unusually favorable to stocks.

Deals on stocks represented half of total volume, a market share that contrasted sharply with the yearly average of 23%.

On the other hand, equity indexes diminished as part of the total, making for only 42% compared to two-thirds on average for the year so far.

An obvious explanation for the high ratio of stock-linked notes issuance was the top deal, a big convertible offering:

Citigroup Global Markets Holdings Inc.’s $61.3 million of seven-year equity-linked notes linked to the common stock of Exxon Mobil Corp.

The payout at maturity will be the greater of par and the alternative settlement amount. The alternative settlement amount is par times the final share price divided by the threshold price, 136.6% of the initial price.

“It’s unusual to see a principal-protected note on a single stock. At the same time, it makes sense since you can no longer deliver full protection on indices in this low interest rate environment,” said Henseler.

“Certainly, the high dividend helps pricing like it helps most structures.”

Exxon pays a dividend yield of 8.3%.

The sellsider said he believes that investors may be buying more stock deals as the market is up and as money is free to be reinvested.

“My theory is that a lot of stock deals issued in April got called in October. Money was on the sidelines, and now that the market sees more stability around the elections outcome, it’s moving back in,” he said.

Snowballs rolling

Much more aligned with the general trend, structure types revealed a continued bid on autocallable offerings. Contingent coupon notes accounted for 54% of the total. The market share for snowballs picked up, making for 17% of the volume. It signaled a renewed interest in these call premium structures, which rather than paying a coupon offer a cumulative premium upon the call.

An example of this structure came out with last week’s second largest deal: Citigroup’s $37.89 million of five-year autocallable securities linked to the worst performing of the Dow Jones industrial average and the S&P 500 index. The notes will be called at par plus a premium of 8% per year if each asset closes at or above its initial level on any annual call valuation date. The premium for the final valuation date is 40% and will be paid if each index closes above its initial level.

Otherwise, the payout at maturity will be par unless any underlying asset finishes below its 70% buffer level, in which case investors will lose 1.428571% for every 1% that the worst performing index declines beyond 30%.

Tech worst-of

The third top deal offered uncapped leveraged exposure.

GS Finance Corp. priced $36 million of five-year index-linked notes tied to the least performing of the Nasdaq-100 index, the Nasdaq-100 Technology Sector index and the PHLX Semiconductor Sector index.

The payout at maturity will be par plus 1.35 times the least performing index return if each index finishes at or above its initial level. Investors will lose 1% for every 1% that the least performing index declines.

The absence of any barrier or buffer did not surprise Henseler.

“It would be hard to get some protection without a cap on a five year. The high volatility limits your ability to buy protection,” he said.

The play on three tech-heavy benchmarks also limited the dispersion premium as the three underlying are highly correlated, he added.

“This is for someone looking to maximize exposure to the tech sector,” he said.

Curve plays

Aside from equity, investors are bidding on interest-rates-linked notes, but those trades remain mostly secondaries.

“Of course, we continue to see more activity than ever in equity-based, index-based autocalls. But steepeners are coming back,” the sellsider said.

“There are discounted secondaries that attract a lot of investors’ interest.

“Why are people betting on a steeper curve? I’m not sure. I’m not a talking head. Inflation anticipation is one factor. But the curve is much steeper. That’s a fact.”

The spread between the 30-year Constant Maturity Swap rate and the two-year CMS, which is often used as an underlier for rates-linked notes, is now 103 basis points, or 25 bps wider than what it was three months ago, he said.

“That’s a big move. You put leverage on this, 4x, 5x, and it makes it even more attractive,” he said.

New issues often have an equity component in the form of a range accrual on indexes. Citigroup Global Markets Holdings Inc. last week for instance priced $2 million of 20-year callable fixed-to-floating CMS spread range accrual securities linked to the least performing of the Russell 2000 index and the Euro Stoxx Banks index paying a 9% fixed rate for the first year. After that, the rate will accrue at 13 times the 30-year minus two-year CMS spread for each day that each index closes at or above a 65% accrual barrier subject to a maximum of 10%. Investors receive their principal at maturity contingent to a 60% barrier.

UBS was the top agent last week with 106 deals totaling $144 million, or 29.3% of the total. It was followed by Citigroup and Morgan Stanley.

Citigroup Global Markets Holdings Inc. was the No. 1 issuer, bringing to market $116 million in nine deals, a 23.7% share.

For the year, the top issuer remains Barclays Bank plc with $8.335 billion in 1,762 offerings, or 14.1% of the total.

© 2015 Prospect News.
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