Structured products issuance $719 million for week; issuers bring out big, out-of-the box trades

By Emma Trincal

New York, May 3 – Structured products agents priced $719 million in 92 deals last week amid a relatively positive week for the stock market as quarterly earnings were better than expected. The S&P 500 index finished up nearly 1% for the week.

Trades from GS Finance Corp. and JPMorgan Chase Financial Co. LLC were spotted for their relatively large sizes given newer or unusual terms.

The data compiled by Prospect News remains preliminary as some large block trades from BofA Securities, Inc. could not be added by press time.

Equity indexes remained the top asset class with $640 million sold in 70 deals, or 89% of the total notional.

Only eight stock offerings priced totaling $20 million, a perplexing result given the fact that the earnings season was in full mode last week. Technology and communications were the top plays with autocallable notes linked to Nvidia Corp. (Barclays Bank plc’s $8.51 million) and Verizon Communications Inc. (Citigroup Global Markets Holdings Inc.’s $3.8 million) being on the forefront.

Leveraged notes accounted for 43% of the total but this did not include BofA’s big deals usually structured as Accelerated Return Notes. The majority of last week’s leveraged notes were linked to a single index. Only six index-linked worst-of leveraged notes offering were seen and they were all below the $3 million mark.

Year to date

Issuance volume for the year to date through Friday amounted to $26.7 billion in 5,251 deals, a 17% decline from last year’s $32.11 billion in 9,651 offerings.

“Let’s hope these numbers improve. But the decline is not surprising given all the uncertainty in the market, from geopolitical issues to the U.S. debt ceiling negotiations and the crisis with the regional banks,” a sellsider said.

“Anytime something is wrong with the banking system, people get a little skittish. With structured products, where banks are the issuers, it’s even more of a concern.”

But the greatest unknown in the market remains the future direction of the Federal Reserve’s monetary tightening in its stated objective to fight inflation.

“Right now, people worry that the Fed is not going to be able to deliver a soft landing,” he said.

“Whatever we all say about the benefits of structured notes...that they can be popular for the protection they provide, when people are worried, they avoid putting money in risky assets.”

Last week’s release of the first-quarter GDP figures was disappointing, showing a growth rate of 1.1% on an annualized basis, which was lower than the 2% expectations from the consensus.

Yet there is a strong bullish sentiment if one looks at this year’s equity returns and the compressed volatility.

The bull market is much more pronounced in the tech sector with the Nasdaq up 16% for the year while the S&P 500 index has gained less than 8%.

A mixed picture

Market participants are puzzled by the market’s mixed signals. The assumption among investors is that this year is a classic recovery story after the 2022 bear market, which saw the S&P 500 index drop 27% between January and October.

Structured note investors may be inclined to invest in both up and down market but not every investor is the same and markets may not always signal definite trends, said a market participant.

“Structured notes are not for everyone. If you can’t handle volatility and are willing to give up some of the upside for the protection, that’s fine,” he said.

“But most clients are not interested in giving up the upside. You already have to forget about the dividends. That’s a given. But the cap is a big stumbling block too. Bullish investors are not willing to make those tradeoffs just to get the protection.

“It’s a balance between greed and fear. When clients are afraid of volatility to the point of selling their positions at a loss, they would be better off holding a structured note for a while. Not having liquidity works to their benefit.

“But most often, they sell at the wrong time, or they sit on the sidelines.”

Meanwhile the VIX, which measures 30-day volatility of S&P 500 index options, continued to make lower lows. On Monday it hit another low at 15.53 not seen since the summer of 2021.

“I’ve been asserting for some time that the reason for lower peaks in VIX is that institutions were caught off guard in early 2022; as the year went on, they de-risked organically – raising cash and moving into more defensive securities – with less need for options to bear that load,” said Steve Sosnick, chief strategist at Interactive Brokers.

Autocall + uncapped x

Last week’s top deal was built on an increasingly popular structure, a hybrid between autocall and leverage. Issuers’ ability to uncap the upside over a relatively short duration has made those deals popular over the past couple of years, especially this year. Last week’s offering was no exception given the size, but the structure put the emphasis on a buffer in exchange for a long tenor rather than on a shorter tenor.

GS Finance priced $108.19 million of five-year buffer autocallable gears linked to the S&P 500 index.

The notes will be called at par plus a call premium of 10.8% if the index is flat or up on a unique autocallable observation date, a year after issuance.

At maturity investors get 1.713 times the index gain on the upside and a 20% buffered protection on the downside.

UBS is the selling agent.

FX twist

Another large deal offered a unique characteristic with conversion into U.S. dollars, which is extremely rare as most structured notes on foreign indexes remove the currency risk (or reward) exposure. This note did not.

JPMorgan Chase Financial priced $50.49 million of 14-month leveraged notes linked to the Euro Stoxx 50 index and converted into U.S. dollars.

The payout at maturity will be par of $10 plus triple any index gain, up to a maximum return of 25.03%.

Investors will be exposed to any losses.

The initial value was based on a euro/dollar exchange rate of 1.10435 on the trade date. The underlying currency is the euro but with the conversion at maturity, investors have exposure to both the equity return and the performance of the euro relative to the U.S. dollar.

UBS Financial Services Inc. and J.P. Morgan Securities LLC are the agents.

Citi’s $47 million digital

Citigroup Global Markets Holdings priced a large in-the-money digital trade with $47.01 million of 13-month notes on the S&P 500 index.

If the index gains or declines but by no more than its 20% buffer, the payout at maturity will be par plus 7.9%. Investors will lose 1.25% for every 1% the index declines beyond its buffer.

Finally, an unusually large autocallable was brought to market by Barclays Bank plc, which issued $37.09 million of three-year notes tied to the least performing of the Dow Jones industrial average, the Nasdaq-100 index and the Russell 2000 index. The monthly contingent coupon was 8.75% a year based on a 70% coupon barrier. The barrier at maturity was identical.

After six months, the notes are automatically called monthly if the worst-of is at or above its initial price.

The top agent last week was UBS with $286 million in 21 deals, or 40% of the total.

It was followed by Citigroup and BofA, based on available data at press time.

The top issuer was GS Finance, which brought to market 14 deals totaling $172 million, a 24% share.

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