Structured notes weekly tally at $787 million; Barclays to commence rescission Monday

By Emma Trincal

New York, July 27 – Structured products agents sold $787 million in 193 deals last week, a robust tally in line with updated figures for the previous period at $785 million issued through 234 deals, according to data compiled by Prospect News.

Meanwhile the stock market rallied despite persistent growth concern highlighted by declining home sales, planned hiring slowdowns by some large companies and an inverted yield curve between the 10- and two-year Treasuries, which tends to accurately predict recessions.

The S&P 500 index jumped 2.5% and the Nasdaq rose 3.3% on the week leading to a paradox: stock prices have rallied since June while economic indicators are deteriorating. For some analysts the recovery signals the bottom of the bear market, but for others, it is only a temporary “bear rally.” Regardless, structured notes issuance has been improving with the market, and while July data is not yet available, June remains the second-best month of the year after March.

However, on a year-to-date basis issuance continued to lag. Sales have fallen by 15.5% to $46.28 billion through July 22 from $54.8 billion, according to the data.

The number of offerings had more impact than their size. A total of 63 deals in excess of $50 million were priced this year versus 46 last year. But the deal count collapsed 41% to 9,580 from 16,319.

Part of this decline comes from Barclays’ shut down of its U.S. business in March. It was the result of the bank’s realizing that it had issued over a period of approximately one year more structured notes and exchange-traded notes than it had registered with the Securities and Exchange Commission. The initial estimate of this “excess issuance” was $15.2 billion but has been updated to $17.6 billion, according to this week’s announcement.

The issuance in excess of the shelf limit gives a right of rescission to certain purchasers of affected securities, which requires Barclays to redeem the securities at par.

Barclays’ rescission offer

It took about four months for the bank to put together the rescission offer, a complex legal and operational process given the number of investors eligible for the offer, but one necessary to reopen the bank’s U.S. business.

Barclays will file its rescission offer on Monday, Aug. 1. The rescission will last from Aug. 1 to September 12, according to a company’s news release issued Monday. Starting at the open on Monday, Barclays will resume issuance and sales of most of its iPath ETNs except for six of them, which remain suspended until the end of the rescission period in September, according to the news release.

While the official announcements gave details on the ETNs and the rescission period, nothing was said about the reopening of the U.S. retail structured notes business, which totals $14.8 billion, or 84% of the $17.6 billion issued in excess of the registered amount.

The fun begins

However, the bank on May 23 filed a new shelf that covers both structured notes and ETNs, according to an F-3 filing.

“They have a new shelf up and running,” a source familiar with the situation said.

But the bank declined to provide information about the reopening of the U.S. structured notes business other than saying that it will happen “as soon as possible” while stressing that its global business continues to function normally.

“It’s going to be interesting to follow up and see how many people are taking advantage of the offer. It may be opportunistic for investors down 20% to get their money back at par,” a market participant said.

“The offer lays the groundwork for Barclays to get back in the market, and that’s the positive side.”

Monday’s announcement described some of the terms of the upcoming rescission offer, such as a list of documents necessary to prove eligibility.

“It’s not an easy process for investors and advisers but it may be worth considering,” the market participant said.

“If they bought an S&P note that’s down only 10% within the protection level, maybe it’s not worth your time. You may like the coupon and the level of protection and so you may decide that you don’t want to mess with it. Ultimately, it’s going to depend on your position. My five cents is that only really bad notes are going to participate in this. Not the ones that are moderately off.”

ETN split

The reasons behind Barclays’ decision to keep six of its iPath ETNs suspended until September while sales of 27 others will resume Monday remained unclear.

“The group of ETNs reopening for the most part had smaller divergence from NAV,” said Interactive Brokers’ chief strategist Steve Sosnick.

“The ones that still experience some problems or have shown some divergences from NAV remain halted and I’m thinking of VXX, OIL and GAZ.”

“VXX”, “OIL” and “GAZ” are the tickers for iPath Series B S&P 500 VIX Short-Term Futures ETN, iPath Pure Beta Crude Oil ETN and iPah Series B Bloomberg Natural Gas Subindex Total Return ETN, respectively.

“VXX for instance reached a 30% premium when new issues were suspended in April. At various points, the premium had evaporated. Right now, it’s still trading at a 10% premium above NAV,” he said.

Trades on volatility and oil prices have incurred large price moves.

“OIL and VXX had bigger supply/demand imbalances so I can see why they would remain halted temporarily.”

“The premium on VXX has dropped because institutions have already derisked. Earlier this year when the market was moving quickly, people had an immediate need to buy volatility in order to hedge. But since then, they’ve hedged through portfolio rebalancing either by raising cash or buying less volatile assets,” he said.

“Oil had its own craziness in March.

Sosnick said he could not speak for Barclays about the reasons for the partial maintained suspensions.

“It looks like the ETNs that caused the most trouble are among those that are not coming back immediately,” he said.

“I’m speculating but it’s a little bit like having a giant mess in your house. Sometimes it’s easier to clean up first what’s nice and easy.”

Brighter picture

Sales of structured notes over the past five weeks appeared strong, in line with a market that has regained its footing. The S&P 500 index rose more than 10% since June 16 while issuers priced more than $7 billion.

“The negative market sentiment seems to subside. I don’t know if it’s the summer or fewer headlines, but despite mixed earnings the market seems to improve. That may be one of the reasons we’re seeing an uptick in volume,” the market participant said.

Indexes, autocalls

Despite a busy earnings week with Tesla, Twitter, Netflix reporting their results, only 7% of last week’s notional came from stock-linked notes offerings. Indexes on the other hand made for 89% of the total.

“We’re stabilizing and people are not market timing as much. I couldn’t tell why we see less stock deals other than the fact that index-led notes carry less risk,” he said.

Autocalls remained the structure of choice with approximately a third of last week’s total versus 28% for leverage.

The market status quo may explain the continued appeal of notes outperforming in a mildly bullish to neutral market, such as autocallable contingent coupons and digital trades, he said.

“The market is seeking direction. Some are calling for future declines. Other believe the market has rebounded. People are waiting for signals,” the market participant said.

Top trades

Last week’s top deals reflected an appetite for international equity exposure, fixed coupons and energy.

The No. 1 offering was UBS AG, London Branch’s $53.71 million of two-year jump securities linked to the MSCI Emerging Markets index. At maturity, if the index finishes at or above its initial level, the payout will be the greater of par plus 25.25% and par plus the return.

Otherwise, investors will be fully exposed to any losses of the index.

UBS Securities LLC is the agent and Morgan Stanley Wealth Management is the dealer.

Pure income

Citigroup Global Markets Holdings Inc. priced two one-year callable fixed-income notes tied to the worst performing of the Nasdaq-100 index, the S&P 500 index and the Russell 2000 index. One priced for $43.1 million paying a monthly 12.65% annualized coupon; the other for $37.37 carrying a 15.43% rate payable monthly.

The notes will be callable on any monthly review date after six months, and the barrier at maturity is 70% in both structures. Both deals carry a 0.35% fee.

“Those types of deals are increasingly popular. People want a predictable income stream with a guaranteed coupon subject to the issuer’s ability to pay,” the market participant said.

EAFE, energy

Another international equity trade came from JPMorgan Chase Financial Co. LLC’s $42.19 million of one-year uncapped notes with no downside protection and a 164% upside participation. The notes are linked to an unequally weighted basket consisting of the Euro Stoxx 50 index, the Topix index, the FTSE 100 index, the Swiss Market index and the S&P/ASX 200 index.

Separately, Credit Suisse AG, London Branch and Canadian Imperial Bank of Commerce priced deals on the Energy Select Sector index for $31.48 million and $33.9 million, respectively. The former pays a minimum return of 27% above a 90% strike with a 10% geared buffer; the latter, a 15-month note, provides 4x upside exposure to a 47.12% cap with full downside risk.

The top agent last week was Morgan Stanley with $175 million in 19 deals, or 22.3% of the total. It was followed by Citigroup and JPMorgan, according to Prospect News data.

The top issuer was Citigroup Global Markets Holdings with 36 offerings totaling $188 million, a 23.9% share.

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