Structured notes tally for November $7.54 billion; leverage gains share with low volatility

By Emma Trincal

New York, Dec. 13 – Although a top month for the stock market, November structured products issuance finished flat compared to October with $7.54 billion in 1,475 deals, according to preliminary data compiled by Prospect News. October saw the pricing of $7.57 billion in 1,682 offerings.

November, based on the preliminary data, is not among the best months of the year. Those are March, August and February with $9.53 billion, $8.98 billion and $8.47 billion, respectively.

However, November’s data remained preliminary, and the totals are subject to upward revisions.

One factor hindering sales last month was the sharp drop in volatility, which adversely impacted the pricing of short-volatility structures.

Last week of the month

The last week of November, however, was remarkably strong with $2.9 billion in 565 deals, according to the updated data. Bank of America dominated the action as it closed its monthly calendar. This agent’s sales represented 31% of the total for that period.

During that week of Nov. 26, leveraged structures prevailed, making for 38% of the total. The tally for leverage with no downside protection at nearly $500 million was slightly below that of leveraged notes with a barrier or buffer, which represented $600 million.

Still, half a billion dollars of unprotected growth products represented a large volume, some said.

No hedge

“I think it’s coming from BofA. In the RIA space that structure is not really utilized,” said Brady Beals, director, sales and product origination at Luma Financial Technologies.

The last week of the month offered an example of such BofA structures. The week’s top deal was Bank of Nova Scotia’s $112.57 million of 14-month notes linked to the S&P 500 index paying triple the gain up to a cap of 13.95% with no downside protection.

A market participant pointed to the danger of using those unhedged products.

“We live especially dangerous times,” he said.

“The VIX hit a four-year low on Tuesday at 11.81. People are not protecting themselves. They think this AI craze is going to lead to these magically greater profits.”

Professional traders usually view low VIX levels as a sign of complacency. Readings of the volatility index under 13 are considered bearish indicators.

Pricing factor

Low volatility determines pricing, said Beals.

“For the last couple of months, we’ve seen fewer income notes and an increase in growth products,” he said.

“The lower volatility gives better terms on growth.

“But pricing is bad for autocalls when volatility is down.”

That’s because autocallable notes sell volatility in part to generate coupons.

Volatility fell by nearly half of its value from its 23 level in October.

Call options are cheaper when volatility is low, which helps the pricing of the leverage.

The sale of out-of-the-money call options to structure the cap does not generate as much premium as when volatility is high.

“But your net cost still goes way down when volatility drops,” he said.

December

For the year, the tally for Phoenix autocalls, at $36 billion, is up only 5.3% from last year, a 41% share of the total. Two years ago, these notes accounted for $48 billion with a share of 56%.

Snowballs on the other hand have increased in volume by 27% to $4.71 billion from $3.7 billion. But their market share of a little over 5% remains subdued.

“Call activity is certainly there. I would expect December to be okay,” said Beals.

“A lot of people are waiting to see volatility rise. The VIX at 12 is not going to be the new normal.

“As soon as volatility goes up, we’ll see a lot more of issuance.”

Expectation game

Interest rate-linked notes issuance has done very well this year, doubling in volume to $4.72 billion from $2.33 billion.

“The rates going up most part of the year has made it easier to price those products,” said Beals.

Fixed-to-floating rate notes have been very popular.

The higher interest rates trend has been apparent from the spring to the end of October. Since then, the bond rally resumed, pushing down yields. Some predict that the rates have bottomed. Others see in next year’s Federal Reserve and economic outlook the signs that more downturn is in the cards. Last week however demonstrated more volatility in interest rates. After a strong job report on Friday, rates went up sharply on inflation anticipation.

“I think rates will come down. The chances of a recession have come down. But the Fed doesn’t need to cut rates,” said Beals.

“If inflation decreased, I would expect yields on the long end of the Treasury curve to fall. The shorter end may come down a bit but less. We may see an inversion next year. How does this impact rate structures, I don’t know.

“It’s really an expectation game.

“Perhaps an inverted curve will make steepeners attractive from a pricing standpoint. Does it mean people will rush into this contrarian trade? Probably not.”

Top deals

The top four deals in the last week of November were all distributed by BofA Securities.

Aside from the Scotia’s $112.57 million offering, the second issue was HSBC Bank plc’s $93.85 million of 14-month capped notes with absolute return buffer linked to the S&P 500 index.

The payout at maturity was one-to-one the index gain subject to 10% maximum payout. If the index finishes flat or falls by up to 10%, investors will receive par plus the absolute value of the index return. The 10% zone is a buffer.

HSBC also priced the third offering, a $67.94 million issue of leveraged notes linked to the S&P 500 Equal Weight ETF. It was a 15-month note with triple leveraged exposure on the upside up to a 14.55% cap with no downside protection.

Finally, Bank of Nova Scotia priced $52.01 million of two-year leveraged notes on the S&P 500 index paying 2x the index gain up to a 19.64% cap with a 10% buffer on the downside.

For November, Morgan Stanley Finance LLC priced $101.66 million of three-year 2.5% cash-settled equity-linked notes tied to the stock of RTX Corp. Those larger issues of single-stock hybrid notes are regarded as synthetic convertibles.

New structure

Of interest, Citigroup Global Markets Holdings Inc. priced a relatively new structure for $1.48 million on Nov. 30. The six-year autocallable notes pay a 10% annualized premium. No call will occur on the first year. After that first year, the observation is quarterly.

The innovative piece was the drop of the call trigger from 100% to 90% once a year, on the November/December observation date. At maturity, the 90% level served as the barrier for the protection as well as the final call trigger, allowing for a potential 60% return over the six years term. The underlying was not the S&P 500 index but the Energy Select Sector SPDR Fund.

“This is an interesting twist. I haven’t seen that. We see step-downs but not on a specific cycle like this,” a structurer said.

“You won’t get that 90% call trigger for the first two years. But lowering it at 90% probably reduces your premium. I would say possibly by 200 basis points. It’s good for clients because they’re more likely to be called.

“Why they did it that way, on the last quarter of each year? I’m not sure. It probably was client-specific.”

The top agent last month was Morgan Stanley with $1.62 billion in 241 deals, a 21.5% share.

It was followed by JPMorgan and Bank of America.

GS Finance Corp. was the No. 1 issuer with $1.41 billion in 233 deals, or 18.7% of the total.

For the final week of the month, BofA Securities priced $889 million in 84 offerings.

It was followed by UBS and Morgan Stanley.

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