Structured products issuance $485 million for week as rough month for stocks is ending

By Emma Trincal

New York, Oct. 6 – Structured products agents last week priced $485 million in 114 deals amid a negative week for the stock market closing a tumultuous month, preliminary data compiled by Prospect News showed.

“We had a sell-off last week. Last month was negative,” a sellsider said.

The S&P 500 index lost 4.8% last month, its biggest monthly decline since March 2020.

For the week, the S&P 500 index shed 1.7%; the Nasdaq-100 index took the biggest losses, down 3.2%. But the Russell 2000 held out and finished flat.

Last week’s issuance data compiled by Prospect News will be revised upward as not all offerings were filed with the Securities and Exchange Commission at press time.

Vol. up, but not by much

Most structurers have hoped for some increase in volatility to provide more favorable terms for investors. It happened last week with the CBOE VIX index rising to a 24.89 high on Friday. Yet it may still not be enough to make a difference in pricing, the sellsider noted.

A global economic slowdown, anxiety over the Fed’s announced tapering of its monthly bond purchases, the debt ceiling debate in Congress, rising yields and inflation amid a supply shortage of goods and labor, Chinese debt crisis with property development giant China Evergrande Group on the brink of bankruptcy, none of those headlines were encouraging. Yet the VIX is far from its 41 level of late October. It remained even lower than during the previous week when it surged to 28.79.

Flood insurance

Some analysts argued that protection remains relatively cheap.

But investors may not be ready to give up the strong returns of the bull market, buying more call than put options. The S&P 500 index has nearly doubled since its March 2020 bottom during the Covid-induced sell-off.

The term structure of the VIX futures shows that people are not panicking, wrote Steve Sosnick, chief options strategist at Interactive Brokers, in a recent research piece, in which he noted that the futures curve of VIX futures remains upward sloped or in “contango,” a sign of a “normal supply/demand balance.” An inverted curve (in backwardation,) usually “indicates a shortage of available volatility protection,” he said.

“We simply don’t see that sort of panic at the moment, despite some sharp dips in major indices,” he said.

And this means volatility has not increased enough to make structures more appealing to investors, the sellsider noted.

“Flood insurance can be expensive and difficult to purchase. As of now, insurance against the changing tide of liquidity is pricier than it was recently, but not particularly difficult to obtain,” Sosnick said.

One sign that some buyers of structured notes remain extremely bullish, or for some, perhaps complacent, can be found in the size of the top deals.

Most of the deals, which priced for more than $50 million this year provide high upside leverage with full downside exposure to market downturns.

“Advisers tend to be overly complacent and bullish at the wrong time,” a buysider said.

“They’re in a bind. If they stand out to play defense and the market continues to run, they’re being blamed. It’s much easier for them to follow the herd. If everybody is getting wiped out, who can blame them?”

Worst-of preeminence

For structurers and sellsiders alike, too much volatility, as seen last year in March or during bear markets, may lead investors to sell in panic and stay on the sidelines. In March of last year, the VIX hit 85 at the bottom of the pullback.

On the other hand, not enough volatility makes pricing challenging for structurers.

“Yes, volatility has increased a little bit. People are concerned about what’s happening in China. There are plenty of other headwinds. But investors don’t seem to be overly scared. There’s this perception that the Fed will bail out the stock market no matter what.

“Despite the rising inflation, the Fed put is still in place.”

Worst-of deals continued to prevail this year whether issuers use this form of payout with stocks, ETFs or indexes.

“We have some volatility but it’s not a lot. Interest rates are low. Dividends are low,” the sellsider said.

“Correlation is the only risk that can be used. That’s why we have so many worst-of in the U.S. That’s really one of the only ways you can still squeeze some juice.”

One example of a big worst-of offering last week came from Morgan Stanley Finance LLC, which issued $41.64 million of five-year autocallables linked to the least performing of two ETFs – the Energy Select Sector SPDR fund and the SPDR S&P 500 ETF Trust. The 8.2% annual contingent coupon relies on a 70% coupon barrier. At maturity, the barrier drops to 60%. UBS is the agent.

Leveraged notes picked up in momentum compared to previous weeks, making for a third of last week’s issuance volume. Autocallable notes accounted for 60% of the total.

Stocks

Stock-picking was visible last week with 26% of the tally in single stocks and 8.5% in stock baskets. This often happens when volatility spikes as terms and entry levels become more attractive, sources said.

Indexes last week represented 52% of the total against 56% on average for the year.

UBS AG, London Branch priced the largest single-stock deal last week with $10 million of one-year phoenix autocallable buffer notes with memory interest linked to Eli Lilly and Co. The contingent coupon is 15.75% per year and the buffer, 10%. The deal was struck on Sept. 28 after the share price dropped 2% but the stock rose 4% the next day after a Citigroup upgrade.

Segment plays

Other ways to improve terms include the use of more volatile indexes or asset classes, according to the sellsider.

Sales of notes tied to single stocks for instance have jumped nearly 70% to $14.69 billion this year from $8.66 billion.

“Stocks were not that popular before. Now we see a lot more of them. They give you the additional volatility you can monetize,” the sellsider said.

Moving from broad indexes to sector indexes has been another strategy as illustrated by last week’s top deal.

GS Finance Corp. priced $68.5 million of three-year notes tied to the PHLX Semiconductor Sector index, the MSCI ACWI IMI Fintech Innovation index and the MSCI ACWI IMI Cybersecurity Innovation index. If each index finishes at or above its initial level, the payout at maturity will be par plus 1.3717 times the return of the worst performing index. There is no downside protection. Goldman Sachs & Co. LLC is the agent.

Robust year

Year to date issuance volume is up more than 25%, according to the data. The tally has jumped to $67.25 billion this year through the end of September from $53.63 billion last year. It will only take an additional $5.45 billion in the fourth quarter to hit the $72.7 billion mark, which is the record issuance volume posted last year.

Bullish sentiment helped despite less favorable terms and a roaring stock market offering uncapped returns.

“This huge growth is not just in structured notes. It’s across the board. ETFs are having record inflows too,” the sellsider said.

“The number one reason is the massive amount of new cash that’s been put into the system.

“You had the stimulus checks. Then you had expenditure cut off by the pandemic inciting people to save more because they couldn’t spend as much. They’ve had money to invest.

“Where else would you put your money? You don’t get anything from your bank. Bond yields are negative in real terms. You have to invest in real estate or in financial assets.

“As long as interest rates remain low, investors will flock to the stock market. Buying stocks and ETFs is not the only way. They now use alternative investments like structured notes to get creative payoffs because when the market ramps up as much as it has, you need to be a little bit more defensive.”

Last week’s top agent was UBS with $173 million in 74 deals, or 35.6% of the total.

It was followed by Morgan Stanley and Goldman Sachs.

Morgan Stanley Finance LLC and GS Finance Corp. were the top issuers with $105 million and $104 million, respectively.

For the year, the No. 1 issuer remains Barclays Bank plc with $9.43 billion in 1,620 deals or 14% of the total.

© 2015 Prospect News.
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