Structured products issuance $632 million for week; big digital buffered offerings eyed

By Emma Trincal

New York, May 18 – In another volatile week for equity markets, structured products agents priced $632 million in 93 deals, according to preliminary data compiled by Prospect News. As inflation data came out higher than expected, the sell-off continued for a sixth straight week, pushing down the benchmarks for the week.

The Dow Jones industrial average dropped 2.1%, the S&P 500 index fell 2.4% and the Nasdaq lost 2.8% despite a late-week rally. The VIX index, which measures volatility, rose to above 35 at the beginning of the week on Monday.

Notes issued last week were mostly linked to equity indexes with a notable surge in large digital offerings.

Uncertainty

A strong rally on Friday following days of selling pressure left analysts divided about the current state of the market, which has been negative since the start of the year as a result of inflation, the war in Ukraine and the Federal Reserve’s tightening. Some believe the market has reached a bottom and is prone for a rebound. Others see in sudden one-day gains the signs of relief rallies typical of bear markets.

“The challenge we face today is the uncertainty of where we are in the market,” said a sellsider.

“The Fed is shrinking its balance sheet. We don’t know the future path of inflation. Stocks, bonds, even crypto...everything is under pressure. It’s challenging.”

Monthly volume

Issuance volume this month was at $1.461 billion through May 13, flat from the same period last month.

From a year ago, however, this month’s sales have dropped 47% from $2.764 billion.

The best month this year was March with $8.74 billion, followed by February’s $7.27 billion. The VIX spiked in early March, rising close to 38, but descended progressively throughout the month. In February, the volatility index followed a more consistent trend, rising to new highs nearing the January peak. It’s unclear what the pattern will look like this month as the averages continue to deteriorate while periodically interrupted by sharp one-day rebounds.

Year to date

Issuance volume is now down 15.6% this year through May 13 to $30.83 billion from $36.52 billion last year, according to the latest updated data.

Perhaps just as concerning is the sharp drop in the deal count – 6,120 offerings this year versus 10,815 a year ago, a 43% decline, which is significant even if the data remain subject to upward revisions.

“The stock market has the most direct impact on issuance volume because ultimately if investors don’t want to buy notes, notes don’t get done,” said a trader.

The Nasdaq-100 index since its high of November has dropped 29% to 11,494. The S&P 500 index is flirting with a bear market, down 18.5% from its January high.

The biggest challenge for the industry is the lower volume of rollovers as deals don’t get called, sources said.

Growing pains

To be sure, this year’s decline is measured against a record year, a higher hurdle to beat, a source said.

And while the trend is definitely negative for the overall market, it varies from shop to shop.

“We are not seeing a decline as far as our business is concerned. We’re actually up year over year both in volume and deal count,” said the sellsider.

“The wirehouses are maintaining heavy size deals and we think their volume is stationary.

“But it’s fair to say that there’s a significant decline in the independent broker dealer market for a number of reasons, one of which is their greater dependence on calls.”

For this sellsider, the registered investment advisers’ market is growing and offers untapped opportunities.

“We customize deals for RIAs, which is exactly what they’re looking for. We’re also actively pushing to find new users – that helps too. We see room for continued growth.”

For this sellsider, the structured notes market is a mixture of different compartmentalized segments.

“We’re seeing changing dynamics within the wealth management market. The legacy buyers are not necessarily the buyers of today or tomorrow. There is potential for growing pain,” he said.

Flexible investments

The reduced number of calls this year as a result of the downward market has been offset by other positive factors, he added.

“Many people are still trying to find timely ways to deploy their cash. They also don’t expect to see a market roaring back. If you can find a structure with a payoff/protection tradeoff that fits your view, that’s a call for action.

“The benefit of structured notes is the flexibility they provide in a market where timing is critical,” he said.

Market sentiment has turned more bearish recently, he noted, compared to where it was only two or three months ago.

“People are more afraid of downside pressures on stocks than they are of missing the upside. There are tons of products addressing this specific view, starting with autocalls,” he said.

Barclays

A recent factor, which has been invoked as a potential source of volume decline is the absence of a top issuer in more than two months. On March 28, Barclays disclosed that it had sold $15.2 billion of structured notes and exchange-traded notes in excess of its shelf capacity. The bank is in the process of getting ready to repurchase the affected securities at their original price.

The firm stopped issuing new notes since March 7. During the 67 days that followed up until Friday, the gap in issuance from Barclays may represent at the most between $1.5 billion and $2 billion, according to the data, based on the bank’s averaged issuance volume in January and February. Not only is this notional amount small, but it may also be irrelevant, according to the sellsider.

“People who used Barclays are turning to other issuers. They’re not going to sit and wait,” he said.

40-year deal

Mixed views about the market translated in a variety of underlying for structured notes issued last week.

While equity indexes continued to prevail, accounting for 78% of total sales, rate-linked products pushed up to 7% of the notional in two deals.

“Rate deals are in demand,” the sellsider said.

“The overall flattening of the curve provides better opportunities for fixed-to-floaters steepeners. Clients are increasingly inquiring about products that will help them keep up with higher rates and inflation.”

The top deal in this asset class with an unusually long maturity was JPMorgan Chase Financial Co. LLC’s $38.27 million of 40-year floating-rate notes linked to SOFR. The notes pay SOFR minus 25 basis points. The SOFR currently yields 80 bps.

Investors may request their notes be repurchased annually at 98 starting May 16, 2025 and at par starting May 16, 2058, according to the prospectus.

Canadian Imperial Bank of Commerce priced a smaller rate trade for $6 million. It was a three-year issue of floating-rate notes linked to the two-year U.S. Dollar SOFR ICE swap rate. The rate will be the two-year ICE rate, subject to a floor of 2.95% and reset quarterly. Interest will also be paid quarterly.

Both structures offer full principal-protection.

Commodities, stocks

Commodities offerings continued to attract investors seeking inflation hedges, making for 3.5% of the total, a progress in comparison with the 1.25% market share average for the year to date.

UBS, Citigroup and Morgan Stanley each issued principal-protected notes offerings tied to an equally weighted basket of several commodities. UBS AG, London Branch priced the largest one for $17.97 million.

The bid on stock-linked notes faded last week as growth and technology stocks continued to be battered as a result of disappointing earnings and higher interest rates.

The exception was JPMorgan Chase Financial’s $9.82 million of 13-month autocallables linked to Microsoft Corp. paying a 14.5% annualized rate based on a 77% coupon barrier equal to the barrier at maturity. The notes are autocallable monthly after six months.

Big digital trades

Last week presented a surprising trend with a plethora of large sized short-term digital notes offerings. The common characteristics included: exposure to a single underlying index (the S&P 500), geared buffer, in-the-money digital payoff (the trigger was below initial price and equal to the buffer threshold). The structure gave investors a chance to obtain a positive return on the downside within a limited band.

The top of such deals was JPMorgan’s $89.88 million of 15-month digital notes linked to the S&P 500 index. If the index finishes at or above 90% of initial level, the payout at maturity will be par plus 13.91%. Otherwise, investors will lose 1.11111% for every 1% decline below 10%.

Toronto-Dominion Bank came up with a similar deal sold for $38.75 million. The 18-month digital notes tied to the S&P 500 index pay 14.1% at maturity if the index finishes at or above 85%. Investors have a 15% geared buffered protection with a multiple of 1.1765. TD Securities (USA) LLC is the agent.

Still on the S&P 500 index, Credit Suisse AG, London Branch priced $37.06 million 21-month digital notes with a 90% trigger, 19.2% digital payment and a 10% geared buffer. Credit Suisse Securities (USA) LLC is the agent.

While those digital notes are increasingly common, they don’t tend to be so big. Last week showed an unusually large number of larger offerings in this category of products.

Income, leverage

Back to worst-of indexes and on the income side, BofA Finance LLC priced $36.81 million of trigger callable notes due Nov. 15, 2025 linked to the least performing of the Dow Jones industrial average, the Russell 2000 index and the Euro Stoxx 50 index.

The high 14.52% quarterly contingent coupon and perhaps the deep 50% barrier at maturity can be attributed in part to the daily observation of the 70% coupon barrier. UBS is the agent.

On the leverage side, Citigroup Global Markets Holdings Inc. priced $32.89 million of 15-month notes on the S&P 500 index paying 3x the index gain up to a 23.01% cap with no downside protection.

The top agent last week was UBS with 35 deals totaling $207 million, or 32.7% of total issuance volume. It was followed by JPMorgan and Citigroup.

The top issuer was JPMorgan Chase Financial with $202 million in 20 offerings, a 31.8% share.

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