Autocallable structured products issuance expected to rise amid volatile market in November

By Emma Trincal

New York, Dec. 8 – Structured products issuance volume for November picked up in momentum as stocks continued to fall on negative headlines regarding the spread of the new Covid-19 variant, inflation and the Federal Reserve’s tightening plans.

This should bode well for the sale of short-volatility notes such as autocallables, sources said.

The S&P 500 index fell 1.2% last week after a 2.2% decline the week before on fears of an economic slowdown especially after a disappointing November job report released by the Labor Department on Friday.

November

Agents priced $6 billion in 1,324 deals last month, in line with October figures, according to preliminary data compiled by Prospect News. But the tally will be revised upward as not all deals were filed with the Securities and Exchange Commission when the month finished.

November figures however already surpassed the $5.63 billion notional sold a year ago by 6.6%.

Issuance data for last week was unavailable, delayed in part by the Thanksgiving holiday.

However, the updated tally for the previous four-day week showed sales at $1.81 billion in 388 deals, a decent size for the close of a month and one that is also subject to upward revisions.

Issuance volume for the year through the end of November is up 28.4% to $83.26 billion from $65.85 billion last year.

At 22,179 deals so far, the deal count exceeds last year’s tally by nearly 2,000 deals.

Yield quest

The VIX index traded in the mid-30’s last week, rising as high as 35 on Friday when the weak employment report sparked new fears of a recession along with the spread of the Omicron variant of Covid-19. These levels have not been seen since January.

As volatility picked up in November, the demand for income-generating notes continued to be felt, according to the available data. Autocallable contingent coupon notes totaled $3.31 billion for the month, which is below the $3.84 billion observed in October. But again, those figures will increase as more deals get filed.

“It’s too soon to see if the second half of November will show a higher-than-average volume of autocalls,” said Matt Rosenberg, director at Halo Investing.

“But it’s safe to bet that it will. People tend to strike deals when volatility is up.

“Looking at our platform, it appears that we already see more index autocalls. That makes sense because the terms improve on indexes when volatility spikes.”

Uncertainty reigns

The market is already bouncing back this week and it’s unclear whether a Christmas rally may occur given the persistent uncertainty.

“Many of the traditional signals are getting mixed up,” a bond trader said.

“Usually with inflation, yields go up. Last week, they dropped. You had a stock market sell-off driven by Omicron and November jobs. It looks like people are reacting more over fears of a global economic slowdown than inflation. That’s puzzling to me.”

For some, a persistent spike in volatility is overdue.

“U.S. equity indices have been unusually calm throughout 2021, with the largest-cap funds in particular not experiencing typical pullbacks which occur even during years with notable positive returns,” said Steven Jon Kaplan, founder, and portfolio manager of True Contrarian Investments.

“Usually, periods of especially low volatility are followed by episodes of especially dramatic swings in both directions, and I expect that to be the case for at least the next few years until nearly everything has gone to some kind of opposite extreme and part of the way back again. Anticipate much larger intraday fluctuations than we have generally experienced during the past year.”

European basket

Among “Thanksgiving week” deals that recently popped up in filings, Morgan Stanley Finance LLC priced two relatively large leveraged note deals tied to an equally weighted basket of European-related indexes. The basket consisted of the Euro Stoxx Mid index, the Euro Stoxx 50 index and the Stoxx Europe 600.

The two five-year note offerings, which UBS was the agent for, priced at $43.75 million (2x leverage, uncapped) and $39.9 million (1.875x upside, uncapped). Both structures are uncapped and provide a 75% downside barrier.

“I like it,” said Rosenberg.

“This is a weighted basket on Europe. It’s the European version of the Russell, S&P and Dow basket. It’s a great way to be diversified away from the U.S. and to gain some diversified exposure within Europe.”

Big stock deal

On the stock side, several issuers priced notes on Affirm Holdings Inc. within the Morgan Stanley Wealth Management distribution channel.

GS Finance Corp.’s $41.72 million of three-year contingent income autocallables linked to the stock of Affirm Holdings priced on Nov. 26. Morgan Stanley was the distributor. The quarterly contingent coupon is at 21.5% on a 50% coupon barrier set at the same level as the downside threshold.

“It’s a big size for a stock deal. But for someone who has conviction in the space, if you can earn a 21% return with a deep protection of 50%, it’s not so surprising,” said Rosenberg.

Affirm is a U.S. provider of installment loans to online shoppers. It went public in January.

Morgan Stanley introduced the relatively new underlying in the summer. By now, this agent has priced seven offerings on the name totaling more than $100 million using several issuers such as JPMorgan Chase Financial Co. LLC and HSBC USA Inc. The HSBC notes priced for $28.13 million in October. The JPMorgan offering sold for $10.73 million in September.

For disruption’s sake

“Just because a stock like Affirm is an IPO doesn’t necessarily mean it’s riskier, “said Rosenberg.

“There’s a lot of trending around the buy-now-pay-later space. Those fintech concepts are increasingly attracting a younger demographic.”

“If you like the stock, if it’s a name paired with some equity research it makes sense to get the exposure with an autocall.”

The search for yield is not the only driver behind the use of high-tech and startup underliers, he noted.

“I don’t necessarily think the only reason to get exposure to names like Affirm or funds like ARK is to boost the yield although it’s part of the rationale,” he said.

“People also look at new concepts, like the metaverse coming into reality and they’re attracted to these themes. They want to invest in emerging growth, but they want the protection too.”

The ARK exchange-traded fund invests in the stocks of companies that create “disruptive innovation,” according to ARK invest, the actively managed ETF sponsor. Those companies introduce “technologically-enabled new products or services that potentially changes the way the world works,” the company stated on its website.

Nearly half a million dollars have priced this year on the ARK Innovation ETF alone, which is the ETF sponsor’s flagship fund, according to data compiled by Prospect News.

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