Structured notes issuance $2.29 billion in final full week of August; tally for year $60 billion

By Emma Trincal

New York, Sept. 8 – August structured products issuance finished on a strong note, according to updated figures compiled by Prospect News.

Agents priced $2.29 billion of structured notes in 359 deals in the week of Aug. 22, which closed the monthly calendar.

BofA at that time sold $811 million in only 40 deals, capturing 35.5% of the total issuance volume.

JPMorgan was next with $302 million in 36 offerings, or 13.2% of the week’s total.

Data for last week was not available at press time due to the Labor Day holiday weekend.

Monthly, weekly cycles

The final full week of each month is always the busiest one. On average, $2.8 billion get sold on those weeks wrapping up the month, according to the data.

This is when the wirehouses, mainly BofA Securities, bring to market their monthly inventory.

However, flows tend to be more spread out throughout the month than they used to be as a result of automation and customization.

“Wirehouse deals sold on a monthly calendar cycle are not the only way anymore,” a distributor said.

“We cover the third-party space where we see a huge growth.

“Customized business is developing fast. As soon as you get a spike in volatility, people want to strike at the opportune time instead of sitting in cash. You can have the docs ready in 15 minutes. People move quickly.

“That’s the beauty of structured notes. We haven’t had much volatility, and as soon as you see some, you can customize a deal on that day.”

Near record year

The year so far is remarkably strong. There is a chance that 2021 could break a record since Prospect News began collecting data in 2004. Agents have priced $59.71 billion through Aug. 31, a 25.7% jump from last year’s $47.49 billion.

With nearly $60 billion, the industry has already generated more sales in dollars than during the full calendar years of 2019 ($56.77 billion) and 2018 ($53.11 billion). The year 2019 and 2018 were the second and third best year on record, respectively.

The top year, which has yet to be matched, was 2020 with $72.7 billion.

In order to top last year’s notional, the upcoming issuance volume needs to rise by at least $13 billion in the next four months, or $3.25 billion a month.

While it’s unclear wither such a result will be achieved, it’s likely that the current tally is under-estimated as data is live and gets constantly updated upward.

Low yield is everything

“I wouldn’t be surprised if we were to beat last year’s volume. A lot of money is in motion. This low yield environment will continue to create demand for those contingent coupon autocallable yield notes that have been the engine of growth,” the distributor said.

The burst in sales of income notes is for a large part the source of this year’s growth.

Autocallables, including autocallable contingent coupon notes (Phoenix types) and snowballs (paying a call premium with memory feature), have increased in volume by 57% to $37.9 billion from $24.12 billion, according to the data.

This structure now makes for 63.4% of the total versus 50.6% last year.

In comparison, the leverage category has slightly declined, down 4.8% to $12.34 billion from $12.96 billion, yet not enough to offset the general growth trend induced by the flood of autocalls.

A new environment

If what supports the growth of autocallables is the low interest rate environment, what will happen when the trend reverts and rates begin to rise?

Such development is more and more plausible with mounting inflationary pressures and the Federal Reserve signaling it is getting close to tapering its monthly bond purchases even if short-term rate hikes are not yet on the horizon.

The distributor said he saw limited risk if rates move higher.

“Our market is very flexible,” he said.

“While autocalls have been key, investors have also been starving on the principal-protected and CD side.

“No one can get half of a percent in yield and expect to keep up with inflation.”

Higher interest rates would make principal-protection much easier to structure and to sell.

“It would benefit a lot of advisers who have not been participating in principal-at-risk products and who have been sitting on the sidelines,” he said.

This distributor’s outlook for the remainder of the year was cautiously optimistic.

“We still like the autocalls. But we may be on for a bumpy road this month and in October due to the monetary policy, the vaccine and this legislature’s agenda,” he said.

“However, I’m pretty confident the year will finish strong. I’ve been in this business for more than a decade. It’s a pretty resilient business.”

Stock picking

Another main driver for growth this year has been the surge in single-stock-linked notes issuance, whose volume has jumped 76.4% to $13.22 billion from $7.5 billion. The asset class now makes for 22.15% of this year’s tally versus 15.8% last year.

“There’s definitely a lot more money going into single names. Stock picking can significantly boost yields,” said the distributor.

“We’ve just seen a three-year on Tesla paying a 17.5% coupon with a 65% barrier,” he said.

“Of course, those notes are riskier than index products. But it’s not for a large portion of the portfolio.”

Meanwhile, sales of equity index-linked notes have not increased by much. The $33.17 billion tally for this year revealed a modest 4.2% increase from $31.85 billion last year.

Catching bouts of vol.

Investors have become nimbler trying to seek volatility and therefore better terms when it comes. Without tactical plays taking advantage of short-lived spikes in volatility, terms remain less attractive than they used to be a few months ago. The culprit is the never-ending bull market pushing volatility levels lower.

Yet structured notes continue to compete with fixed-income instruments.

“When you look at the 10-year Treasury at 1.33% or the ongoing CD rates, it’s all relative. Autocallable contingent coupon notes still offer much better yields.”

A sellsider agreed.

“This is not an issue limited to structured notes. It’s across portfolios and across all types of securities,” he said.

“People are trying to figure out what the future of 60/40 portfolios is going to be.

“Lower yields are not a structured products problem. It’s a general problem for investors. People have to adjust their portfolios to this new reality.”

To your health

The week of Aug. 22 saw large sector plays. Among some of the larger deals not previously reported, Canadian Imperial Bank of Commerce priced $35.73 million of 13-month leveraged notes linked to the Health Care Select Sector SPDR fund. The leverage multiple of 1.5 enhanced the gains up to an 18.3% cap. Investors are fully exposed to the fund’s decline.

Travel deals

The back-and-forth rotation from growth to value or in other words from tech to cyclicals remains a constant theme.

“We’re seeing the airlines, the cruises, the casinos but also tech,” the distributor said.

“It depends on the client.

“There is not a clear trend right now. The pendulum between cyclical and tech changes constantly, almost every day.”

One typical recovery trade was JPMorgan Chase Financial Co. LLC’s $16.95 million of three-year autocallable contingent yield notes linked to Hilton Worldwide Holdings Inc. paying an annual rate of 8% based on a 53.5% coupon barrier. UBS is the agent.

Issuers were able in some cases to use weighted baskets to package cyclical stocks deemed to appreciate in a recovery scenario. Bank of Nova Scotia for instance priced $20.65 million of 14-month leveraged notes linked to a basket of airlines stocks (JetBlue Airways Corp., Delta Air Lines, Inc. and Southwest Airlines Co.) in equal weights. The notes pay triple the gain up to a 31.2% cap with no downside protection. The agent is BofA Securities.

Morgan Stanley Finance LLC used a basket of travel stocks to price $14.96 million of contingent income autocallable securities due May 29, 2024 paying a monthly coupon of 10.5% per year based on a 70% coupon barrier with a 60% barrier at maturity. The notes are linked to an equally weighted basket made of American Airlines Group Inc., United Airlines Holdings, Inc., Norwegian Cruise Line Holdings Ltd. and Carnival Corp.

Value, tech

JPMorgan priced $26.94 million of an unusual value play using two value exchange-traded funds of different market capitalization types – the iShares Russell 2000 Value ETF and the iShares S&P 500 Value ETF. The three-year autocallable contingent coupon deal pays a 6% annual rate based on a 72% coupon barrier applied to the worst of the two ETFs. The notes are autocallables after six months. The agent is UBS.

On the tech side and among block trades not previously reported by Prospect News, JPMorgan Chase Financial priced $67.97 million of 13-month leveraged notes linked to the Technology Select Sector SPDR fund. The payout is 1.5 times any gain in the ETF, up to a 20.25% cap. Investors are fully exposed to any losses.

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