Structured notes issuance $264 million for week amid earnings season; tech, bank sectors eyed

By Emma Trincal

New York, July 22 – Structured notes agents priced $264 million in 131 deals in the week ended Friday, following $602 million in 227 deals during the previous week, according to data compiled by Prospect News.

Single-stock deals took center stage, including financial stocks, as banks kicked off the earnings season on Tuesday.

Month, year

Volume for the month through July 17 was $1.23 billion, down by more than a half from June’s tally of $2.53 billion. The deal count dropped as well to 472 deals from 826 deals.

Figures are not final, and data is likely to be revised upward. But issuance slowdowns are the norm in the summer months.

The advance remained solid for the year to date with $38.17 billion priced through Friday, a 52.7% increase from $25 billion through July 17 last year.

Structures

In terms of structures, last week continued to see a prevailing proportion of autocallables (68% of the total) versus leverage, which represented only a 12% share.

As always, this imbalance is not only due to investors’ preferences for the structure itself but to the terms offered. Leveraged buffered notes and uncapped leveraged notes have become harder to sell due to low premium.

Digital notes were also in demand making for 16% of the total, mainly due to an HSBC deal in excess of $22 million.

“Digitals are popular. It’s easy to explain to a client. If someone is seeking yield with protection, it’s a lot more straightforward than a Phoenix autocall,” said a sellsider.

Stocks, ETFs

In terms of asset classes, equity indexes continued to lead with 63% of the volume.

Most of the index equity category was used in worst-of trades as it is usually the case.

“When people put worst-of on these index products, the caps look much better, perhaps not as good as they used to be but still better than on the S&P alone,” said the sellsider.

“Also, correlations are breaking down. They’ve been falling off year over year.

“Whereas the correlation between the S&P and the Russell was at 0.85, it’s now at 0.75. You get better terms on these products.”

The bid on stock-linked notes was heavier last week than usual and accounted for 30% of the total, reflecting heightened volatility ahead of earnings announcements.

“People are going more tactically oriented on single stocks,” said the sellsider.

“A one-year deal on Amazon can give you a deeper barrier and a much more compelling coupon.”

The most common group of stocks was found in the financial sector. As an example, UBS AG, London Branch used American International Group, Inc., Chubb Ltd. and MetLife, Inc. to price a $5 million autocallable worst-of deal.

Tech stocks continued to be highly bid in either worst-of or single-names offerings.

Toronto-Dominion Bank’s $4.35 million of autocallable worst-of reverse convertibles offered exposure to defense stocks, a more unusual sector play in its use of the worst of Lockheed Martin Corp., General Dynamics Corp. and Northrop Grumman Corp.

Exchange-traded funds accounted for 11% of total notional last week with two notable sectors: the SPDR S&P Midcap 400 ETF Trust and the SPDR S&P Regional Banking ETF.

Big Tech

Technology continued to magnetize investors although not always directly.

The volume of issued notes linked to one or several technology underliers (stocks and indexes alike) amounted to $40 million in 44 deals last week, or 15% of the total.

But the biggest exposure to technology was indirect and came from the S&P 500 index. After all, the five biggest tech companies now represent 24% of the index, sources noted.

Forty-two deals providing sole or worst-of exposure to the S&P 500 index were issued last week totaling $144 million, or more than half of total sales.

Sole exposure to the S&P 500 index represented a quarter of last week’s total sales.

“If technology stocks drop, it could have an impact on our market since so many investors have exposure to the S&P,” said a structurer.

“If you remove big tech from the S&P, you’ll find that three-quarters of the index is down, not up for the year. Meanwhile, the S&P is still up, or slightly up. It tells you how huge the impact on the performance the top five have due to their weighting.

“There’s a reason why tech became the bulk of the S&P. Tech companies are big companies and the S&P is market-cap weighted. That’s what you buy when you buy the S&P. Either you buy it, or you don’t. If you want to be a contrarian, you don’t buy it.”

Asked what the impact of a tech sell-off would have on notes tied to the S&P, he said that: “that’s why you have structured products. You want to have principal-protection, buffers, and barriers. You can’t blame the underlying or the issuer. People buy notes on the S&P because it’s popular among investors.

“Nobody has any strong conviction on anything specific. So, you buy the S&P. There is a lot of volume in notes linked to the S&P. But it’s driven by demand, not supply.”

HSBC’s digital

Last week’s top deal was HSBC USA Inc.’s $22.42 million of digital notes due March 9, 2022 linked to the S&P 500 index, according to the preliminary data.

If the final level of the index is greater than or equal to 87.5% of the initial level, the payout at maturity will be 13.29%. Otherwise, investors will lose 1.1429% for every 1% that the index declines beyond 12.5%.

HSBC Securities (USA) Inc. is the underwriter.

“Even if it has a geared buffer, it’s not a complex deal. People like that,” the sellsider said.

“The odd tenor might have to do with HSBC’s funding curve. Perhaps the rates are more compelling on a year and eight months as opposed to an 18 month.”

Chevron deal

Barclays Bank plc priced the second-largest deal of the week, this one based on a single stock: $16.54 million of three-year contingent income autocallables linked to Chevron Corp.

The quarterly contingent coupon is 10% per annum based on a 50% coupon barrier. The notes are automatically called on any quarter if the stock is at or above its initial price.

Barclays is the agent. Morgan Stanley Wealth Management is the dealer.

Earnings bet

During the previous week and ahead of banks’ earnings, Morgan Stanley Finance LLC priced $33.16 million of three-year contingent income autocallables linked to Bank of America Corp. stock.

The contingent quarterly coupon pays an annual rate of 11.8% if the stock closes at or above 60%.

The notes are automatically callable above the initial level on any quarterly determination date.

The barrier at maturity is 60% of the initial price. The deal priced on July 10. Bank of America reported its second-quarter earnings on July 16.

Last week’s top agent was UBS with $76 million in 57 deals, or 29% of the total.

It was followed by BMO Capital Markets and Morgan Stanley.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.