Structured products issuance $1.1 billion for week; big $368 million Boeing-linked deal eyed

By Emma Trincal

New York, June 29 – Structured products agents priced $1.1 billion in 69 deals in a shortened week that started with the Juneteenth market holiday on June 20. The data compiled by Prospect News is preliminary and subject to upward revisions.

The week displayed an unusual number of very large trades in non-equity asset classes as well as a giant hybrid stock-linked deal, mixing characteristics of a structured product and a convertible bond.

The hefty volume was not attributable to the monthly input of any particular dealer but rather to the impact of those block trades.

Summer rally

The equity market finished last week in a strong rally sending the S&P 500 index 6.5% higher and the Nasdaq, up 7.5%. But the S&P 500 still finished the week down 19% from its Jan. 4 high.

“We are in a bear market. Any time you’re in a bear market, you have these very sharp rallies and then it gets sold off,” a sellsider said.

Andrew Valentine Pool, main trader at Regatta Research & Money Management, agreed.

“It was a bear rally. People have borrowed a lot of money to purchase cars, houses and now consumer spending is capped out. It’s not going to get any better with the Fed reducing liquidity in the system. We’re getting very close to a recession,” he said.

Cash-settled deal

JPMorgan Chase Financial Co. LLC priced $368.25 million of five-year cash-settled equity-linked notes tied to the Boeing Co. on June 23 with a coupon of 0.5% and threshold price premium of 49%. The notes are non-callable and have no put features.

“That’s a big deal for sure and not the type we would be doing,” said Pool.

“We don’t buy notes on single stocks anyway and this one is not a pure structured note although in one way it is since it’s linked to a stock.”

The sellsider said the structure was “somewhat involved.”

“It’s definitely a structured note. It’s JPMorgan issuing a note tied to the performance of Boeing. But you can see similarities to a convertible bond in the economics. Since the underlying is distinct from the issuer, it’s more of an exchangeable bond than a convertible,” he said.

“Given the size it’s got to be an institutional trade. Retail investors don’t do those kinds of deals.”

Single-stock underliers made for 36% of last week’s notional with $394 million in 12 deals, a rare instance in which stock-linked notes issuance outpaced the volume of equity index products. Indexes made for 28% of the week’s notional, totaling $307 million in 38 offerings, according to the data.

Not the first one

JPMorgan’s deal on Boeing was not the first cash-settled offering of the year, nor was it the largest one.

Last month, BofA Finance LLC raised $530.45 million from the sale of 0.6% cash-settled equity-linked notes due May 25, 2027 linked to Merck & Co., Inc.

Not all cash-settled deals are necessarily that big, but these types of structures are among the largest ones.

In 2018, a number of issuers priced such hybrid notes on the price of Voya Financial Inc. JPMorgan issued the top one in May of that year for $600 million. In February 2020, Barclays Bank plc priced $250 million cash-settled equity linked notes tied to Visa Inc.

Floating rates in favor

A flurry of floating-rate notes offerings hit the market last week, also showing large sizes.

Floaters were the second top structure last week after leverage and ahead of autocallables. Agents priced $212 million in four such deals, a 19% share.

The four issues were all linked to the two-year U.S. dollar SOFR ICE swap rate.

Bank of Nova Scotia issued the largest one, a three-year note offering for $100 million.

The interest rate (payable quarterly) will be equal to the two-year U.S. dollar SOFR ICE swap rate, subject to a floor of 3.62%.

Citigroup Global Markets Holdings Inc. priced another one for $50 million, Bank of Montreal, one for $35.6 million and Royal Bank of Canada issued a smaller one for $26.35 million.

These offerings came on the heels of another large trade priced the week before when Goldman Sachs Group, Inc. issued $53.65 million of 14-month floating-rate notes tied to the same swap rate plus 25 basis points with a floor of 0.1% per annum.

Forward pricing

“With a floor, at least you have an opportunity to make more if the underlying rate goes up. That may be a decent opportunity for conservative clients,” said Pool.

“The whole idea is to be able to deal with inflation. With inflation at 8%, if you already get 3.62% as a minimum you may offset or beat the inflation rate.”

The sellsider was not surprised by the size and popularity of those floating-rate notes.

“If I was an investor who thought rates will be higher and if I wanted to put money to work, I would love to do a floater,” he said.

The structure of those products may not be overly expensive to price, he added.

“The forward on the two-year swap rate shows that the market is not expecting rates to go much higher. I think it’s easy to guess why. The market expects the economy to go through a recession,” he said.

He pointed to the swap curve between the 10- and two-year rates.

“The two year is at 3.43% and the 10-year at 3.21%,” he said.

“It’s inverted. When this particular portion of the curve is inverted you’ve got a fairly good signal that we’re at the beginning of a recession. It’s reflected in the stock market. The risk of a recession is increasingly a concern among investors.

“If the Fed continues to raise rates, we’ll have a recession. If it stops, inflation will slow down the economy. We’re between a rock and a hard place.”

Top commodities deal

Commodities have regained a popularity not seen in years. Last week, this asset class made for 11% of the total issuance volume in just three deals totaling $124 million.

For the year to date, commodities remained small as a percentage of the total – 1.7% in 71 deals totaling $683 million. But their volume is already 2.5 times last year’s notional of $272 million through June 24.

The market is still far from its best year of 2011. Then the market priced $4.73 billion of commodities-linked notes, an 11.4% share at the time.

But there is not a week without commodities trades, which is new. And some trades are unusually big in size.

Last week saw the pricing of the top commodities issue of the year. GS Finance Corp. sold $96.89 million of 13-month notes linked to the Bloomberg Commodity index with a one-to-one exposure on both sides. The agent is Goldman Sachs & Co. LLC. There is no fee, according to the filing.

ETF replacement

“It’s a little bit odd because there is no buffer, no leverage, no cap. Perhaps it was done to get the exposure to this particular index and use it as a tracker,” said Pool.

“Personally, I use the DBC, the Invesco one. They don’t exactly track the same index, but it’s close enough. It doesn’t make sense to use a note. I’d use the tracker and put a stop loss on it.”

The Invesco DB Commodity Index Tracking ETF is listed under the ticker “DBC.”

There are no ETFs directly replicating the performance of the Bloomberg Commodity index. Barclays offers an exchange-traded note with its iPath Bloomberg Commodity Index Total Return ETN. Barclays however, has suspended issuance of all its ETNs and structured notes after it realized in March that it had exceeded the capacity of its issuance shelf. A rescission on offer is in the making.

“I would do the ETF. Maybe not exactly on this index. But you have the COMT or the GSCI,” the sellsider said.

The “COMT” ticker refers to the iShares GSCI Commodity Dynamic Roll Strategy ETF and “GSCI” designates the iShares S&P GSCI Commodity-Indexed Trust.

“But brokers don’t make any money selling ETFs so that probably explains why they did it, at least to some degree,” he said.

“There is no fee, so it’s probably sold to an RIA. The P&L is baked in the structure. Some of the profit comes from funding.

“Since there is no optionality, they buy the futures to hedge the return. When they sell the note, they sell the index. It’s a short position on the underlying which they have to hedge being long the index.”

More commodities

Separately, BofA Finance priced $20.73 million of a three-year principal-protected note offering on a commodities basket with 1.7 times leverage and no cap.

The equally weighted basket consists of a West Texas Intermediate light sweet crude oil futures contract, a natural gas futures contract, a corn futures contract and a soybeans futures contract.

This basket has become extremely common. Several issuers have priced similar notes on it over the past few months.

More modestly, JPMorgan Chase Financial priced $6 million of 13-month digital notes linked to a Brent Crude Oil futures contract.

BofA’s ARNs

The top equity index deal came from the BofA platform with Toronto-Dominion Bank issuing $93.28 million 14-month Accelerated Return Notes on the S&P 500 index.

The payout at maturity will be par of $10 plus triple any index gain capped at 20.31%.

“The three-time leverage may be attractive, but without the protection, I would only do it for speculative clients, only taking a small position on it,” said Pool.

Volume year to date is down 14% to $41.041 billion through June 24 from $47.847 billion last year, the data showed. The deal count dropped 43% to 8,130 from 14,232.

The top agent last week was JPMorgan with $420 million in 12 deals, or 38% of the total.

It was followed by BofA Securities and Goldman Sachs.

JPMorgan Chase Financial was also the top issuer with the same totals: $420 million brought to market in 12 deals.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.