Structured products agents price $421 million for week; single-stock deals in focus

By Emma Trincal

New York, Jan. 22 – Banks sold 153 structured products deals in the week ended Friday totaling $421 million as the market kept on rising to new highs.

Stock-linked notes issuance volume was higher than usual at the start of earnings season. A tally of $81 million of deals linked to single names and $54 million to baskets of stocks combined made for almost a third of total notional sales, according to preliminary data compiled by Prospect News.

Autocallables accounted for 60% of the total, including contingent coupon autocallables and snowballs paying a call premium.

“We’re seeing a lot of autocalls both on index and single stocks,” a distributor said.

Leveraged notes issuance volume recovered somewhat from its previous week slowdown. It represented 17% of the total versus 7.5%.

As the tone of the market was decisively bullish, high valuations had some investors concerned about a potential pullback. This may explain why virtually all leveraged structures last week included a barrier or buffer.

“The market has been up a lot in the last three weeks. If it continues it could cause people to slow down a little bit,” a distributor said.

“People are rebalancing their portfolios right now. There’s a lot of activity. Tax season hasn’t begun yet.”

Month, year

For the month through Jan. 17, volume is down 30% to $1.33 billion from $1.90 billion in December, according to the data. Figures however are not final and are subject to upward revision.

“My feeling is that it’s the other way around. I never found December to be a good month. There are a lot of distractions,” a market participant said.

“This month so far looks good. Some deals are getting called. There’s new money coming in.”

The distributor said it was too soon to draw any conclusion about January versus December.

“It’s only two weeks. Once you get to the end of the month, you’ll have a more accurate picture,” he said.

The year-to-date data however showed a strong growth from a year ago. Volume this month through Jan. 17 was up 43.2% from $927 million the year before. The number of deals has also increased to 429 from 295.

This may not come as a surprise: at this time last year, the market was recovering from the severe pullback of December 2018.

One notable characteristic of last week’s action was the presence of many stock deals among the top offerings.

Big BofA deal

The exception was a block trade sold by BofA Merrill Lynch, which was unusual for a mid-month date. The deal was sold on the behalf of Bank of Nova Scotia for $36.91 million. It was a six-year autocallable market-linked step-up tied to the S&P 500 index.

The annual call premium of 5.1% is paid if the index closes at or above its initial level on an annual observation date.

If the notes are not called and the index finishes above the step-up value, 130% of the initial level, the payout at maturity will be par plus the index gain.

If the index finishes at or below the step-up level but at or above the initial level, the payout will be par plus the step-up payment of 30%. There is a 15% buffer on the downside.

“I like the oxygen feature at maturity. But from a coupon perspective, I feel like the product is not enhancing the yield that much. Obviously, given the size of the deal, someone liked it,” the distributor said.

The so-called “oxygen” feature is the ability to collect the total cumulated call premium at maturity if the product has reached its term and meets the call conditions at the end.

The second deal was linked to a basket of international equity indexes and the third, to the S&P. But following on the list were stock-linked note offerings.

“Banks are coming up with their top picks,” the distributor said.

“People are seeing top-performing stocks. They’re looking at Tesla. It’s the start of the earnings season. It typically coincides with single-stocks.”

Super Bowl deal

In some cases, the deal comes with a fixed rate. An example was the fourth deal – HSBC USA Inc.’s $16.14 million of one-year 7.6% airbag autocallable notes linked to Molson Coors Brewing Co.

The agent is UBS.

The notes will be called at par if the shares close at or above their initial level on any quarterly observation date.

The payout at maturity will be par unless the final share price is less than the conversion price, in which case the payout will be a number of shares equal to $1,000 divided by the conversion price. The conversion price will be 90% of the initial share price.

“They’re getting ready for the Super Bowl. It’s a very cool ticker symbol,” the distributor quipped.

“Obviously, it’s a tactical, opportunistic trade...their earnings are on Feb. 12.

“But there’s not a huge barrier. For that type of barrier, on a single stock, short term, most people would be looking at a 10% coupon.

Guaranteed coupon

To be sure, the quarterly interest rate is guaranteed, which is more costly to structure than contingency, he noted.

“We’re seeing more fixed coupon. There are different ways to do it,” he said.

“We’ve seen a pretty compelling deal on Apple with a fixed coupon. But it had an American barrier on principal. It’s one way to do it. It helps juice the yield on a not-so-volatile name like Apple.”

The high barrier level of the Molson Coors deal was another method to achieve the same result. The thinner the protection, the easier the pricing of a fixed rate is.

“A fixed coupon has merits to it. If I have a 10% fixed coupon and the market is down 12%, I’m only down 2%. Most people would want that. But it comes with a trade-off,” the distributor said.

“Personally, I like lower barriers. When you have a 50% barrier, it looks more like a buffer,” he said.

When the coupon barrier is low as well, it helps add a degree of certainty around the interest payment, he added.

Worst-of stocks

The most-common approach to yield enhancement has been the use of worst-of.

When issuers use single-stocks in a worst-of deal, the result is usually an above-average yield. HSBC applied this classic recipe in the pricing of $10 million of five-year autocallable return notes linked to the common stocks of AbbVie Inc., NIKE, Inc. and Constellation Brands, Inc.

The annualized call premium is 13.8%. If the notes are not called, the payout at maturity will be par plus 69% unless any asset finishes below the trigger level, 50% of the initial level, in which case investors are exposed to the decline of the least performing stock from its initial level.

HSBC Securities (USA) Inc. is the underwriter with JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC as placement agents.

A volatility problem

The use of stocks in autocallable deals whether the coupon is contingent or fixed and whether the payout is organized around a single asset or a worst-of is not just a matter of tactical bets ahead of earnings. The market itself has a role to play.

“You have to go with single-stocks to get those double-digit returns. I’m doing more baskets of stocks than indices now,” the market participant said.

“I mean...Look at the market!”

As the stock market keeps on reaching new highs, volatility is declining, limiting the premium available to produce high-paying coupon.

The S&P 500 index hit a new all-time high above 3,300 last week. Bulls were encouraged by strong economic data and the signature of the phase one of the U.S.-China trade deal.

The big banks delivered strong earnings as well. By the end of the week, the S&P 500 index was already up 3.1% for the year.

The CBOE Volatility index, which measure volatility of the options on the S&P 500 index, has plummeted as a result. At 12.5, it is twice as low as its 52-week high of the beginning of August.

Uber

Some stocks are volatile enough to generate high coupon without the help of other stocks in a worst-of.

For instance, UBS AG, London Branch sold $15.14 million of contingent income autocallable securities due April 19, 2022 linked to Uber Technologies, Inc.

The contingent coupon payable quarterly is 17.15% a year based on a 70% coupon barrier.

The notes will be automatically called quarterly if the price is at or above its initial level.

The barrier at maturity is 70%.

UBS Securities LLC and Morgan Stanley Wealth Management are the agents for this deal, the No. 5 in size.

Anticipating a pullback

The bullish momentum could end up instilling fear if it continues unabated.

The use of autocallables may be a defensive strategy, which investors should not overlook, the market participant said.

“I was having a conversation with an adviser who was telling me he’d rather buy stocks than autocalls. I’m thinking to myself: you’ll be back when you want downside protection,” the market participant said.

“People buying autocalls are good asset managers. They get double-digit returns; they have downside protection.”

Stocks + index

Another offering last week showed an interesting twist in the use of worst-of payouts. Instead of employing several indexes or several stocks, the underlying assets were a combination of both.

HSBC priced another $10 million of autocallables linked to the least-performing of the S&P 500 index and the common stocks of AbbVie and Target Corp.

The call premium is 14.2% if each asset closes above its initial level on any annual call date.

If the notes are not called, the payout at maturity will be par plus 71% unless any asset finishes below the trigger level, 50% of the initial level, in which case investors will be exposed to the decline of the least performing asset from its initial level.

HSBC Securities (USA) Inc. is the underwriter with JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC as placement agents.

“It’s not that common to see stocks and indices in the mix,” the distributor said.

“We see a lot more ETFs combined with indices. But it doesn’t strike me as odd at all.”

The top agent last week was UBS with $107 million in 70 deals, or 25.4% of the total.

It was followed by JPMorgan and Morgan Stanley.

JPMorgan Chase Financial Co. LLC was the No. 1 issuer with $91 million in 24 deals, a 21.7% share.

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