Structured notes issuance $226 million for week; final week of January sees $2.85 billion

By Emma Trincal

New York, Feb. 12 – The year 2020 is off to a very good start for structured products issuance, according to updated data compiled by Prospect News.

Last week was modest in sales volume but it was the early part of the month with $226 million in 81 deals.

The week before, which ended Jan. 31, showed an altogether different picture: firms priced $2.848 billion in 615 offerings, a top level of activity from a historical standpoint.

Such weekly volume is the fifth biggest one since 2004 when Prospect News began collecting data on structured notes, a period which consists of 841 weeks. The best week on record was the last week of January 2015 with $3.14 billion.

Year-to-date blowup

This burst of sales has propelled year-to-date issuance volume well ahead of last year.

Total sales in January amounted to $6.40 billion, a 73% increase compared $3.69 billion a year ago for the same month, the data showed.

A combination of factors helped explain the unusually high close of last month.

Growth goes on

First, the bull market inciting some advisers to reset their buffers.

“We saw plenty of growth products issued a few years ago,” said a sellsider. The market is now much higher than the original initial prices. Some clients elect to lock in their gains and to reinvest in a new buffer. The protection is at a higher level. But you now have realized gains.”

Aside from deals previously mentioned in last week’s issue of Prospect News Structured Products Daily (issues of $103.7 million, $68.17 million and $65.58 million), the final week of January saw an additional number of other significantly large trades.

One example, which priced on Jan. 30, was Canadian Imperial Bank of Commerce’s $130 million of 14-month leveraged notes linked to the S&P 500 index. The structure gave investors par plus 300% of any index gain capped at 10.25% with no downside protection.

The notes were distributed by BofA Merrill Lynch.

Leveraged notes for the final week of January made for 35% of the total in 133 deals.

Perfect market condition

“We’re seeing more index-based for this month even though you still have earnings-related trades trickling down as well as tactical plays around the coronavirus,” a distributor said.

A market shrugging off uncertainty and rallying to new highs did not entirely put fears of the coronavirus in the rear-view mirror, but the rally coupled with the uncertainty made for a fertile ground for sales of structured notes, he said.

“You had Brexit at the end of last month, political events, looming fears around the coronavirus. People are concerned about China as it’s the biggest importer of oil and gas. There are real fears and if the market has brushed it off to date, the unanswered questions continue to encourage people to look for structured products,” he said.

“Clients want downside protection and leverage as a differentiator in a portfolio.

“People are starting to question how they’re positioned for the next move in the market. With this increased uncertainty, we’re definitely seeing a pick-up in issuance volume.

“I hope it will continue for the month. I don’t necessarily mean the reason for this pick-up, which is fear, but the activity itself.”

Rolling over

Income products accounted for 39% of total notional in 318 deals or $1.1 billion during the final week of January, prior to last week, according to the revised data.

For the sellsider the main driver for this volume lied in one word: calls.

“With equity markets back to all-time highs, everything that has a call feature will be automatically called,” he said.

“In addition, we saw a lot of discretionary calls for deals issued in 2017, 2018 or even a year ago.

“Issuers elected to call those notes so money was looking for a new home.”

One of the top autocallable deals for the closing week of January was Bank of Nova Scotia’s $64.15 million of three-year autocallables linked to the Russell 2000 index. Goldman Sachs & Co. was the agent. The notes priced on Jan. 30.

The notes will be automatically called at par plus a call premium if the index closes at or above the initial index level on either of two annual call observation dates with a call premium of 8.2% for the first call and 16.4% for the second. If the return is positive at maturity, the payout will be 24.6%. Investors will be fully exposed to any index decline.

Issuer calls

Rollovers did not only originate from automatic calls. In many cases, proceeds came back to the market after issuers elected to call notes with discretionary calls, choosing to exercise the option.

“Issuers have called notes because the underlying indices, including the Euro Stoxx, are back to where they were when the deals priced,” this sellsider said.

“You have a series of factors: equity markets are up; volatility is down and rates are low.

“Autocalls in general are now pricing with lower coupons. Deals on indices used to produce 7% to 9%. Buyers accustomed to notes paying 7% or 8% now have to invest at lower rates... at 6% or even 5%.”

Some investors buy notes with issuer calls only to get the higher coupon, he noted.

From the issuer’s standpoint, calling the notes is the logical thing to do.

“There is a barrier for the coupon. With equity markets at record highs, the coupons are more likely to be paid and the chances of losing money are lower, he said.

“The value of those bonds is much better since they’re more like fixed income deals.”

Issuers buy them back at par, locking in a gain.

From both the demand and supply’s point of view, more notes with issuer calls are flowing into the market, he said.

First week of February

Last week’s action was more muted, but it’s only the beginning of a monthly cycle. Volume and deal count will also be revised upward.

Equity indexes last week rose to new record highs as investors appeared less pessimistic around the coronavirus.

The top deal was JPMorgan Chase Financial Co. LLC’s $45.77 million of leveraged notes linked to the Russell 2000 index.

The payout at maturity will be par plus three times the index gain subject to 15.84% cap. Investors will have one-to-one exposure to the decline.

“I like those in-the-money digital deals when the coupon threshold matches the protection level,” the distributor said.

“They’re easy to understand. Everybody likes them.”

Russell is hot

The small-cap benchmark has been more popular of late, he noted.

Last week’s second deal was also another one to be linked to the Russell 2000 index.

Toronto-Dominion Bank priced $25.38 million of 18-month digital notes paying a 7.3% digital payout if the Russell 2000 index finishes above 85% of its initial price.

Investors will lose 1.1765% for every 1% that the index declines beyond 15%.

“The Russell has always been the most popular U.S. index after the S&P. It’s much more common than the Dow,” the distributor said.

“We had the Euro Stoxx in the past. But people are looking to go back to U.S. exposure so the Russell is becoming more attractive.

“We’ve seen over the past 12 month the Euro Stoxx taper off. You were getting much better terms on the Euro Stoxx in the past, so people are not as interested as they used to be. Everybody knows the Russell. It’s a well-diversified index; it’s easy to explain.”

Shaking things up

Index-linked notes prevailed last week with 80% of the total.

Among stock underliers, new names emerged.

Royal Bank of Canada for instance priced $6.28 million of contingent income autocalls on the share price of Shake Shack Inc. with Morgan Stanley Wealth Management as distributor.

It was the first use of this stock as the underlier of a structured note, according to data compiled by Prospect News, which tallies registered notes.

The top agent last week was JPMorgan with $74 million in five deals, or 32.6% of the total.

For the previous week ended Jan. 31, Bank of America was No. 1 with $795 million, or 28% of notional in 32 deals.

UBS was second with $588 million in 153 offerings followed by Morgan Stanley.

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