Agents sell $757 million of structured notes in pre-holiday week; year-to-date volume improves

By Emma Trincal

New York, Dec. 24 – It sure felt like a Santa Claus rally as early as last week with the market setting new record highs. On the structured notes front, Agents overall sold $757 million in 153 deals for the week, with Bank of America bringing half of it in 21 offerings, or $379 million, according to preliminary data compiled by Prospect News. Revised figures for the previous week ended Dec. 13 showed $518 million in 159 deals.

But perhaps the best news is the narrowing of the issuance volume gap between 2019 and the previous year, which was the best on record. Volume is now down only 11.3% to $49.24 billion from $55.52 billion through Dec. 20. The number of deals was virtually unchanged: 15,739 this year versus 15,605 a year ago.

Despite the holidays, things may even improve for the remaining week-and-a-half between now and year-end. At the same time a year ago, days before Christmas and onto Christmas Eve, the stock market was in turmoil, putting issuance on hold as fear and volatility skyrocketed. December was the worst year of 2018. As the mood has changed for the best, the year-to-date volume decline could very well shrink further.

All-equity, structure mix

Last week was all about equity-linked notes as the broad asset class made for 97% of the total, a record compared to the year-to-date average of 90%, the data showed.

With Bank of America on top, deals linked to equity indexes prevailed, accounting for 76.5% of the total while single stocks represented only 16.5%.

The types of structures were mixed. Income-generating notes accounted for 30% of the total. Those notes were for the most part contingent coupon autocallable structures and to a lesser-extent snowballs, which only pay a call premium upon the call event. Leverage made for 21% of the total with 15% in leveraged notes with buffers or barriers and the rest in leveraged with no protection.

But the majority of the deals fell into a variety of categories, mainly digital notes, BofA’s market-linked step ups and dual directional barrier notes.

“Everything is more expensive to price,” a structured notes distributor said.

“Low rates and low volatility make products more challenging to put together.

“But sometimes, investors are not looking for the home-run. They just want to maximize the chances of getting paid and this is what digital notes, dual directional notes and autocalls can do.”

Complacency

While last week’s structures – whether barrier autocalls or leveraged notes with a barrier or a buffer – appear to be defensive, investors have not grown cautious throughout the year.

For instance, leveraged with pure exposure to the downside remained stable between the first and the second half of the year at 11% and 10%, respectively. However, leverage with barrier or buffered declined from 25% to 19% in the second half.

Clemens Kownatzki, independent currency and options trader , said that while the bull market has been gaining momentum throughout the year, “complacency” has increased.

“If you look at hedge funds, they didn’t’ do so well with their hedges. The market rallied so much, they had all that protection and they didn’t need it,” he said.

“We’ve entered this era of consistent high returns; people don’t seem to recognize that it’s too good to be true.”

The S&P 500 index was up 30% at press time since its bottom on Christmas Eve a year ago.

The last decade has delivered some of the strongest returns in the history of the U.S. markets.

Most of this growth is due to earnings, he noted. But he was skeptical about the longevity of the bull run.

“These earnings forecasts seem unrealistic and to have these high valuations...It just doesn’t feel right.

“People should add more protection. They should think of hedging.

“But the market did so well. It’s easy to understand why investors are abandoning their hedges.

“In 2019 volatility evaporated. Protection has become so much cheaper. But people who bought protection have been hurt. What? You’re only up 10% and the market is up 30%? Fund managers have been yelled out.

“And that’s the danger: too much complacency.”

HSBC’s $71 million trade

Last week saw the pricing of four deals in excess of approximately $60 million. BofA priced nine out of the top 12 deals, including the largest one. Morgan Stanley priced the second one and Citigroup the third and last one of the 12.

In its top offering, BofA used its best-selling autocallable market-linked step up structure on the behalf of HSBC USA Inc. It was a $71.13 million issue of three-year notes linked to the S&P 500 index.

The notes will be called at par of $10 plus a call premium of 7.8% per year if the index closes at or above the initial level on an annual basis.

If the notes are not called and the index finishes above the step-up value, 121% of the initial level, the payout at maturity will be par plus the index gain.

If the index finishes above the step-up value, the return will be par plus the index gain; if the index finishes at or below the step-up level but at or above initial level, investors will get par plus 21%; if the index finishes below initial level, investors will have a one-to-one exposure to the decline.

$63.3 million worst-of

Morgan Stanley Finance LLC priced the second-largest issue in $63.29 million of 10-year trigger autocallable notes linked to the lesser performing of the Russell 2000 index and the Euro Stoxx 50 index.

Each quarter, the notes pay a contingent coupon at the rate of 6.09% per year if each index closes at or above its coupon barrier, 70% of its initial level, on the observation date for that quarter.

After one year, the notes will be automatically called at par of $10 if each index closes at or above its initial level on any quarterly observation date.

The barrier at maturity is 60% observed point to point.

Citigroup Global Markets Holdings Inc. priced $63.25 million of 0.17% equity-linked notes due Dec. 23, 2026 linked to the common stock of Exxon Mobil Corp. It was a convertible offering.

Big leveraged deals

Next, Bank of Nova Scotia priced $59.23 million of two-year capped leveraged buffered notes linked to the S&P 500 index. The leverage factor will be 2, the cap 13.73% and the buffer is set at 10%.

Barclays Bank plc priced the fifth offering: a $44.24 million issue of three-year absolute return notes with buffer. The return is linked to a basket consisting of commonly used international equity indexes with unequal weightings – the Euro Stoxx 50 index with a 40% weight, the FTSE 100 index with a 20% weight, the Nikkei 225 index with a 20% weight, the Swiss Market index with a 7.5% weight, the S&P/ASX 200 index with a 7.5% weight and the Hang Seng index with a 5% weight. The payout will be 1.237 times any basket gains with no cap.

If the basket falls by up to 15%, the payout will be par plus the absolute value of the basket return.

Investors will be exposed to any basket decline beyond 15%.

Finally, BofA priced on the behalf of Wells Fargo Finance LLC $38.93 million of 14-month Accelerated Return Notes linked to the Euro Stoxx 50 index.

The payout at maturity will be par of $10 plus 300% of any index gain, subject to a maximum return of 19.25%.

Top agents, issuers

After BofA Merrill Lynch, the top agent last week was UBS with $118 million in 56 deals, or 15.6% of the total.

It was followed by Citigroup and Morgan Stanley.

HSBC USA Inc. was last week’s No. 1 issuer with 12 deals totaling $123 million, a 16.2% share.

For the previous week, Bank of Montreal topped as it issued its annual offering on Raymond James Analysts’ Best Picks for 2020 for $61.04 million.

Barclays Bank plc is the top issuer year to date with $7.12 billion in 1,688 deals, or 14.46% of the total.

JPMorgan Chase Financial Co. LLC followed closely with 2,585 offerings totaling $6.69 billion, a 13.59% share.

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