Structured products agents price $390 million during week amid third week of tech sell-off

By Emma Trincal

New York, Sept. 23 – It was another choppy week with volatility picking up in the technology sector, leading structured notes issuers to sell a larger than usual volume of autocallables with stocks and exchange-traded funds on the forefront.

Last week saw the pricing of $390 million in 185 deals, according to preliminary data compiled by Prospect News.

A total of $776 million were issued during the previous week after the Labor Day holiday, according to the most recent update.

Outlook for month

Volume for the month through Sept. 18 is at $1.67 billion in 670 deals, less than last month’s $2.41 billion.

But current data is not complete, and the month as of last week was far from over.

Some sellsiders are optimistic about upcoming flows for the remainder of the month, especially as volatility is reemerging. The S&P 500 index for instance dropped 9.25% from its Sept. 2 high through Friday.

“I think even if we get a 10% decline from here as we move toward year-end, I’m bullish on structured products issuance because people will continue to seek income and protection,” said a sellsider.

“We may have even more of a pullback. But it’s healthy for the market.”

Intraday volatility

Volatility does not necessarily mean falling stock prices, he said.

“My outlook for September issuance does not depend on what happens to the market, whether it’s up or down,” he said.

“We’ve seen volatility at high levels even during the rally. Volatility can spike intraday regardless of whether prices are moving up or down.

“There’s enough uncertainty around the Elections, the Supreme Court nomination, states seeing a growing number of Covid-19 cases, China and so-on.”

Two big deals contributed to boost volume last week. Relatively atypical, those were two Credit Suisse-issued synthetic convertible notes offerings linked to the stock price of Merck for a total of $75 million.

Autocallables

For the rest of the market, autocallable issuance shined with nearly two-thirds of the total while leveraged products issuance shrank to only 6% of the market.

The balance between stocks, baskets of stocks and ETFs on the one hand and equity indexes on the other was better than average for the former with 46% of total sales versus 54% for the indexes.

The year-to-date average market share revealed that equity indexes made for nearly two-thirds of total volume against less than 30% for stocks and ETFs.

Choppy week

The market fell again last week with the S&P 500 index down 0.6% for a third consecutive week.

Stock prices were up first, but the trend turned mid-week after a non-eventful Federal Open Market Committee.

Mostly the mega-cap tech stocks led the market lower.

One factor was so-called “quadruple witching,” a not-so-common market event defined as the expiration of futures and options contracts on the same day.

As the expiration date approached, more positions were being hedged, leading to increased volatility levels.

Other drivers weighed in including the political climate around the Elections, doubts and hopes about a Covid-19 vaccine, the absence of a deal in Congress on another relief package, and ongoing tensions between the United States and China.

The passing of Supreme Court judge Ruth Bader Ginsburg had no impact on the market however due to its timing on Friday evening.

More top deals last week were structured around a single index, such as the S&P 500 or the Nasdaq-100, rather than worst-of indexes, even if the number and volume of worst-of on indexes continued to be high.

“Indices are getting more attractive. It all comes down to the more competitive levels you can get when volatility is rising,” said a sellsider.

“Structured notes on tech stocks also look better,” he noted.

Microsoft Corp., Apple Inc. and Amazon.com, Inc. were among the most widely used underlying stocks last week.

Advanced Micro Devices, Inc., Netflix, Inc. and Nvidia Corp. captured investors’ attention as well.

In other sectors, other stocks popped up such as Walt Disney Co. and CVS Health Corp.

UBS priced five small deals on UBER Technologies, Inc.

Tech bulls

“As we move toward the Elections, investors are increasingly seeking protection and defined outcome,” the sellsider said.

“They are doing tech stocks because tech is what has performed best. It’s what drove the recovery.

“The pandemic has changed how everyone interacts with technology. We use it in our daily lives whether it’s for work or in our personal lives.

“People expect short-term volatility on those names, but they believe they could withstand a pullback.”

A tale of two distributions

A market participant agreed, adding that changes in the industry have facilitated tactical plays.

“Volatility in tech is facilitating the pricing of better terms. Issuers have become better at quickly adjusting to the market for the hedging and pricing of their deals” he said.

This nimble strategy may not work for the larger deals the wirehouses market throughout the month and strike at the end of the month, or “calendar” deals. But it fits a growing market of independent advisers.

“There will always be a calendar market for retail investors placing small deals. But for high-net-worth who do reverse inquiries, those guys who can put out a $5 million trade, the market has become much more responsive.”

Synthetic Merck

Volume may have been higher than usual for this part of the month due to a big synthetic convertible deal distributed by Credit Suisse Securities.

Credit Suisse AG, London Branch priced $59.8 million of seven -year 0% equity-linked notes linked to Merck & Co., Inc.

The payout at maturity will be the reference value, which is the product of the final level multiplied by an 8.15648 conversion ratio.

Credit Suisse priced another deal for $15.2 million. The underlying, maturity date and conversion ratio were identical.

“This is not your typical structured note. It’s likely to be an institutional investor, asset manager or hedge fund with a thesis on that name or a need to get exposure to the stock,” the sellsider said.

“It’s always a positive when non-retail investors use structured notes. It expands the space beyond the retail market.

GS Finance, HSBC

The second largest deal last week was a fixed-rate product with issuer call.

GS Finance Corp. priced $36.39 million of 4.75% one-year trigger callable yield notes linked to the S&P 500 index with monthly interest payments.

The notes are callable after three months. The barrier at maturity is at 60% of the initial price.

“I like it. It has a deep protection. The yield is only 4.75%, but it’s guaranteed. When you compare that with any bond alternative it’s compelling,” said the sellsider.

Next came an “in-the-money” digital note with a geared buffer: HSBC USA Inc.’s $26.18 million of index-linked notes due Jan. 11, 2023 tied to the S&P 500 index.

If the index finishes at or above 85% of its initial level, the payout at maturity will be par plus 15.35%.

Otherwise, investors will lose 1.1765% for each 1% decline of the index beyond 15%.

“Digitals are good because everyone understands them,” the sellsider said.

“The gearing complicates that a little bit but it’s an OK note, especially if you don’t need the periodic income. The odd maturity was probably the result of targeting a specific coupon at around 15%.”

Equally weighted

Of interest for its underlying was Citigroup Global Markets Holdings Inc.’s $16.96 million of three-year autocallables linked to the worst of the Invesco S&P 500 Equal Weight ETF and Invesco QQQ Trust, series 1.

The equally weighted S&P reduced the excess concentration in mega-tech stocks while investors may find pure tech exposure in the Invesco ETF. The Invesco QQQ Trust replicates the Nasdaq-100 index. It has a nearly 60% weighting in information technology and communications services.

The coupon barrier for this deal is 70%, and the quarterly coupon is 8.12% per annum.

The top agent last week was UBS with 102 deals totaling $145 million, or 37% of the total, according to Prospect News data.

It was followed by Credit Suisse and HSBC.

Credit Suisse AG, London Branch was the No. 1 issuer last week with $95 million in 11 deals, or 24.35% of the total.

Barclays Bank plc leads for the year to date with $7.38 billion in 1,508 deals, a 15.15% share.

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