Structured products issuance $480 million for week amid election rally; big digital trades eyed

By Emma Trincal

New York, Nov. 11 – It was almost business as usual for structured notes issuance amid a strong market reversal with a post-Elections Day rally. The dreaded elections turned out to propel the S&P 500 index 7.3% higher, its biggest weekly gain since April. Sales of structured notes for the week reached $480 million in 87 offerings, according to data compiled by Prospect News, a decent amount for the start of a month.

The previous week, which closed the month for Bank of America, recorded a $1.71 billion tally in 364 deals, revised data showed.

Strong rally

Last week’s sales could have been almost stronger.

“Issuers were waiting for more clarity before putting notes out the door last week,” said Mark Dueholm, chief trader at Landolt Securities.

“The week before was quite a bit better. Volatility was high ahead of the elections.”

Sales can benefit from high volatility, which improves the terms of the deals, motivating investors to buy notes. At the same time, too much uncertainty may put issuers on hold, he explained.

Volatility dropped last week but not necessarily uncertainty.

The CBOE VIX index fell to 24.56 on Friday from 38.57 at the open on Monday, a 36% drop.

What may have put some of the volume on hold was the lack of a clear outcome.

“Before coming up with deals, coupons and pricing, issuers need to know where the market is going,” he said.

At the close on Friday, a presidential winner had yet to be declared.

“I think now, everybody knows Biden is going to win despite the recounts. I don’t think you have the kind of question marks you had a couple of weeks ago,” he said.

Gridlock narrative

Another explanation for last week’s rally was the prospect of a split Congress, which would reduce the odds of far-reaching regulatory changes and tax increases.

Some however were skeptical about this theory.

“Last week’s headlines relentlessly said that the market was up because unlike what was expected, there was no blue wave,” a sellsider said.

“It was all about the market likes gridlock. The talking heads have to come up with something. To me it’s a far-stretched explanation. The real explanation is that nobody knows what the reason is.

“You’ll have a runoff in Georgia and that could change the balance of power in the Senate in favor of the Democrats who still have the House. That’s not something to cheer if you really want a divided government. So why such a rally?”

Vaccine optimism

Other factors drove stocks higher since the elections, starting with Covid-19 vaccine news.

On Monday, the S&P 500 index hit an all-time high at 3,646 as Pfizer Inc. and BioNTech announced a 90% rate of efficiency for their vaccine.

“The market overdid it on Monday. The rally was in part the news that Biden had won the elections. But it was mostly the vaccine news,” said Dueholm.

In the meantime, the market may still be grappling with the legal fight underway over the elections, which is likely to last another month.

Laggard October

Issuance volume in October was at $4.22 billion in 1,192 deals, a 31% decline from $6.1 billion in September issued in 2,107 offerings. These figures however are subject to upward revisions.

But for now, October is the weakest month of the year, falling just behind the lockdown months of May ($4.67 billion) and April ($4.72 billion). The top three months of the year, starting with March ($7.28 billion) fell into the first quarter. September, a transition month, which did not see a big resurgence of Covid-19 cases yet, was the fourth best month with $6.1 billion.

There may be a tax component to the story, said Tom Balcom, founder of 1650 Wealth Management, commenting on the October flows.

“You don’t want to buy a note that will mature next year in October. You’d have to pay taxes just a few months after. It’s better to buy in January something that’s going to mature a year later, that way you postpone your taxes to 2023. We have about six or seven notes right now that are getting close to maturity. We’ll replace them in January.”

Year to date

Volume for the year is up 37.5% to $57.37 billion from $41.72 billion through Oct. 31.

The number of deals climbed 31% to 17,804 from 13,577, the data showed.

“Many banks do more and more smaller deals. It’s good for volume. The more deals you get out, the greater the volume. However, it also depends on the average deal size, “the sellsider said.

“I think for the banks, the question of whether you should do more smaller deals or bigger deals is not relevant. For issuers, the more important thing is total volume. Whether it’s achieved with more deals or not, people don’t really care.”

The sellsider said he is optimistic for the remainder of the year.

“Maybe things are going to be more normal,” he said.

“Hopefully, we’ll have a vaccine next year. The market really cheered the vaccine news on Monday. But we’re not out of the woods yet. A vaccine still needs to be approved; it still has to be made available to everyone.

“The elections results are disputed in courts. A lot can happen from now until the end of the year.”

TD’s $83 million deal

Last week’s top deal was a leveraged capped note with no downside protection. Toronto-Dominion Bank priced $82.83 million of 15-month notes linked to the S&P 500 index. The payout at maturity will be 300% of the index gain up to a 19.5% cap.

Investors will be fully exposed to any index decline.

TD Securities (USA) LLC is the agent.

Big digitals

A series of large digital deals followed and prevailed. It was unusual since digital products tend to be sold in smaller sized deals compared to leveraged or even autocallable notes. Apparently BofA Securities, which priced 40% of the previous week’s notional, was not involved in the distribution of those block trades, according to the filings.

“When there’s demand, there’s demand for any kind. You can definitely put out these types of products,” said Dueholm.

The toppish market is a good reason to look for fixed payout, the sellsider said.

“We just hit another record high in the market. People don’t want maximum upside. They want to maximize the coupon,” he said.

Four trades

Those digital structures were “in-the-money,” which means that the initial price was above the strike at or above which the payout is triggered. They also had a buffer, and in most cases the buffer was geared.

Credit Suisse AG, London Branch priced $68.81 million of 15-month notes linked to the S&P 500 index.

If the index finishes at or above 90% of its initial level, the payout at maturity will be par plus 10.6%.

Otherwise, investors will lose 1.1111% for each 1% decline beyond 10%.

The agent is Credit Suisse Securities (USA) LLC.

Next, Bank of Nova Scotia priced $53.76 million of 18-month digital notes on the same index. The digital strike of 90% was identical as well as the 10% geared buffer. The digital payout was set at 11.8%.

Goldman Sachs & Co. LLC is the dealer.

Citigroup Global Markets Holdings Inc. followed suit with $32.13 million using the same structure on a 15-month tenor with a digital payment of 13.55%. Citigroup Global Markets Inc. is the underwriter.

Finally, the fifth top deal of the week was Royal Bank of Canada’s $28.51 million of another issue of buffered digital notes linked to the S&P 500 index. In contrast with the other deals, the payout was triggered above initial price (at-the-money). In addition, the 17% buffer was not levered. The digital payout at maturity is 18.08%.

RBC Capital Markets, LLC is the underwriter.

Institutional money

“Those digitals are bullet notes. Investors can’t get called. That’s why you can structure it out of a single underlying index. If it was an autocall, you would probably need a worst-of,” said the sellsider.

No matter how it is branded and structured, investors are increasingly eager to buy products with a fixed return.

“People want deals with decent yields. Interest rates are so low. They’ve been below 1% for one year. Issuers are just responding to demand in the market,” said Dueholm.

He was not too surprised to see the series of big digital offerings brought to market last week.

“These things are usually driven by a few big buysiders that have a specific structure in mind,” said Dueholm. It could be brokers with institutional clients, pension funds for instance or insurance companies.”

TD Securities (USA) LLC was the top agent last week with $93 million in five deals, or 19.42% of the total.

It was followed by UBS and Credit Suisse.

Toronto-Dominion Bank was the No. 1 issuer with $95 million in eight deals, a 19.8% share.

For the year, Barclays Bank plc is the top issuer with $8.11 billion in 1,684 deals, or 14% of the total.

© 2015 Prospect News.
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