Structured products issuance for week tops $219 million; August second best month of year

By Emma Trincal

New York, Sept. 11 – September began on a quiet note in the post-Labor Day week with $219 million in 42 structured products deals, according to preliminary data compiled by Prospect News.

On the equity front, which, as an underlying asset class, makes for 90% of structured notes issuance volume, investors welcomed the end of August. It was a volatile month marked by wide price swings in synch with tariff war headlines coming from the United States and China along with mounting fears of a recession ignited by an inverted yield curve. The S&P 500 index lost 1.8% for the month.

But in the meantime, the structured notes market did quite well. Agents sold $4.31 billion in 1,393 deals last month, making August the second-best month of the year after May, which saw the pricing of $4.96 billion in 1,652 offerings.

August and May

It should be noted that both May and August were tumultuous months for the stock market. The S&P 500 index dropped 5.8% in May alone.

Structurers are reluctant to declare there is an inverse relationship between stock gains and issuance volume because rallies can also boost confidence and sales. But volatility spikes have surely helped the sale of autocallable notes, which capture more premium when volatility is high.

Calendar versus one-off

Revised figures for the last week of August showing $1.81 billion in 556 deals revealed that the business last month was relatively spread out. The final week of the month is the “calendar” week during which the wirehouses, in particular Bank of America, price their largest trades.

The data showed that the final week of August was not the biggest one compared to other calendar months. Ahead were March, May and April in declining order, which all recorded final weeks finishing up on a higher note.

This seemed to indicate that smaller one-off income-oriented offerings, which get executed throughout the month, are gaining traction.

Different timetables

An analysis of deal structures throughout August showed that income-generating deals (contingent coupon autocallables, snowball autocalls) accounted for 60% of the total through Aug. 24. During the last week of the month, this category of products fell to 31% of the total.

Leverage issuance on the other hand, varied in inverse proportion to autocallable volume. Leverage during the first three weeks of August accounted to only 20% of total sales but rose to 46% in the final week.

Big deals to close

The healthy volume in August reflected a number of block trades, which priced during the last week of the month. Bank of Nova Scotia sold leveraged notes on the S&P 500 index for $116.82 million. BofA Finance LLC issued capped leveraged index return notes on the S&P 500 for $66.83 million, and Scotia again priced another leveraged deal on the U.S. benchmark for $60.79 million. Four other deals sized between $35 million and $40 million priced totaling $151.35 million. All these trades were distributed through the Bank of America platform.

Year still down

Volume for the year is down 19.8% through Sept. 6 to $32.35 billion from $40.35 billion last year, the data showed. The deal count dropped at a slower pace, down 6.9% to 10,525 from 11,308.

There is no clear consensus among market participants about the direct impact of the market direction and volatility on the overall volume.

Market and volume

Last week’s weakness in issuance volume for instance may have several causes. One may be the normal lag between the moment issuers file their deals on the Securities and Exchange Commission website and when they are accounted for by Prospect News. More likely, volume was light as the month just began.

Another factor could simply be that things returned to normal or as normal as they can be. While the U.S. and China tariffs tensions continued, better economic news worldwide pushed equity prices and the 10-year Treasury yield up. The S&P gained 1.8% on the week closing near its July record high.

“It’s hard to tell whether people price more deals when the market is up or down,” said a distributor.

“Is there an inverse correlation? Do we see more demand for structured notes when volatility goes up?

“I think it depends on how far volatility may rise. It also depends on the kinds of deals you’re talking about. For many structures the more volatility the better pricing you’re going to get on issues. It’s not a total correlation. But there’s something,” he said.

Pessimism growing

Others strongly disagree.

“The longer this trade battle goes on, the harder it’s going to get for the investors. We’re seeing growing nervousness among clients. Many are sitting on the sidelines.

“These tariffs are a drag on the U.S. economy and potentially global markets.

“If our economy was growing at 3% it wouldn’t be such a concern. But people worry that GDP might be falling below 2%.

“If growth continues to slow, we have the potential for disruption. Disruption is an issue in a market that’s already nervous.

“There’s a lot of uncertainty and negative news and it can be very damaging. It’s not just the trade war. You also have Brexit. These two are a double whammy for economic growth.”

Despite investors’ resilience, persistent uncertainty may derail the market and lead to a pullback.

“The market if it falls will hurt sentiment and consumer confidence and that would impact the economy. It’s some sort of a vicious cycle.”

In a range

Other sources said structured notes offer opportunities in a sideways market.

“The need to get some income or fixed payout is a given. In an environment like this one, which hasn’t been so friendly, more investors want autocalls for the barrier protection and the coupon. The idea is that you either get called or get paid as long as the market doesn’t fall dramatically. These autocalls products are increasingly popular when you anticipate a range bound market,” a sellsider said.

Citi’s $77 million deal

Last week’s volume owed a lot to one particular deal. Alone it made for a third of the volume issued.

The deal was unusual: Citigroup Global Markets Holdings Inc. priced $77.05 million of five-year 1% equity-linked notes linked to Schlumberger Ltd.

Interest is payable quarterly. The notes provide for the repayment of the principal in full.

Investors earn the periodic coupon payment and possibly more at maturity based on the performance of the shares according to a specific formula.

“This is way too complicated. I guess this was not for retail, for sure,” said the distributor, who specializes in fixed-income.

He was commenting on the formula for the payout at maturity, which is the greater of $1,000 and the alternative settlement amount.

The alternative settlement amount is defined as (i) $1,000 multiplied by (ii) (a) the final share price divided by (b) the threshold price, which is 135.4% of the initial share price.

There is no fee on the deal as the underwriter Citigroup Global Markets Inc. may profit from hedging activity related to this offering, according to the prospectus.

“For sure, it has to be an institutional deal,” the distributor said,” commenting on the “complexity” of the payout and the absence of a fee.

A bid on oil

Citigroup appeared to have one or several clients interested in oilfield service companies.

In a separate filing, the issuer plans to price on Friday a three-year autocallable worst-of tied to Halliburton Co. and Schlumberger. The notes will pay a fixed rate expected to be 10% to 1% per year quarterly. The automatic call will kick out after six months and be observed quarterly if the worst-performing stock is above its initial price. At maturity investors will get their principal back if both stocks close about 50% of their initial level.

Second top deal

Another big deal, and the second in size, came out last week with Toronto-Dominion Bank’s $55.91 million of five-year leveraged notes linked to the iShares MSCI Emerging Markets ETF.

If the ETF return is positive, the payout at maturity will be par plus 1.513 times the ETF gain. Investors will be fully exposed to any loss.

TD Securities (USA) LLC is the agent.

Also, notable last week was the announcement on Thursday that Jefferies planned to price $15 million of 0% one-year capped buffered senior notes linked to the S&P 500 index. While the terms of the red herring are not complete, the size of the deal set to price Oct. 1 was predetermined.

The issuers, Jefferies Group LLC and Jefferies Group Capital Finance Inc., said they may increase the issue size prior to settlement but are not required to do so.

Jefferies’ red herring

Jefferies LLC is the agent for this straightforward deal: one-to-one upside exposure up to a 13% cap and a 10% buffer on the downside.

What is unusual is having a pre-set size prior to trade date.

“They printed the deal, capped it out at $15 million. They’ll get a good pricing on this and they’ll sell as many as they can. It’s unusual but it happens sometimes with syndicated deals, when it’s best-effort,” said the distributor.

“You have two issuers. It could just be them...meaning the syndicate.”

Citi tops

The top agent last week was Citigroup with $81 million in two deals, or 37% of the total.

Citigroup Global Markets Holdings was also the issuer for those deals and brought to market the same amount, topping the list of issuers for the week.

The second agent was TD Securities (USA) LLC with five deals, including the large $55.91 million trade for a total of $68 million, an overall 31% share.

For the year, the top agent is Bank of America with $6.65 billion in 403 deals, or 20.6% of the total notional.

Barclays Bank plc is the No. 1 issuer with $4.77 billion in 1,196 offerings, a 14.8% share.

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