Structured products issuance $297 million for week; calls, stock deals to help volume

By Emma Trincal

New York, June 14 – Structured products agents priced $297 million in 46 deals last week, according to preliminary data compiled by Prospect News. The robust equity market rally, which began mid-March amid the regional banking crisis, is having effects on structured notes issuance in several ways, including sentiment, pricing and call activity, a distributor said.

In addition, the rise in short-term Treasury rates continued to compete with sales of income notes tied to equity. However, May was the third best month of the year with $6.90 billion after March and February and ahead of January and April, the data showed.

The S&P 500 index has officially become a bull market as it rose more than 20% since its October low. A craze for AI has fueled the rally with the bulk of the gains limited to seven of the index’s top holdings, including Apple Inc., Microsoft Corp., Amazon.com, Inc., Nvidia Corp., Alphabet Inc., Tesla, Inc. and Meta Platforms, Inc.

Bulls are back

Last week also saw renewed interest for notes linked to stocks as a result of a low-volatility environment.

“Advisers are becoming more bullish,” said Brady Beals, director, sales and product origination at Luma Financial Technologies.

“Our business was good last month. I believe that June will be even better.”

“The bull market has helped sentiment but with some caveats.

“The low volatility makes pricing less spectacular,” said Beals.

Volatility as measured by the CBOE Volatility index has fallen by more than half to 14.42 from 31 in mid-March.

Older, newer

One factor helping issuance right now is the call activity, he noted.

“We had a summer rally last year and notes issued then didn’t have great terms. As these older products are coming due or getting called, advisers may refresh their portfolio and reinvest the proceeds,” he said.

Barclays’ rescission offer last September pushed up issuance volume at the time.

Those deals, if issued in September, may be called in June if the call frequency is quarterly.

“We may not be getting 100% of what’s getting called but we’ll get some,” he said.

The nature of the business also supports issuance despite less-than-stellar pricing conditions, he said.

“Advisers have an allocation strategy. They’re going to keep their allocation balanced. They may have to reintroduce the Nasdaq or the Russell in the deals they’re buying. But they’re going to continue to fill their buckets with autocalls. It’s part of the plan.”

Stocks

Stock-linked notes issuance, which was on hold over the past few weeks, made some progress last week.

“Sentiment is more bullish. There is more conviction in certain names or sectors,” he said.

“Each time the market is up, people need more premium. They have to be more selective. Demand for stock underliers should pick up.”

Stocks (worst-of and single names) represented nearly 10% of last week’s issuance at $28 million.

ETF-linked products had a smaller market share of 5.4% with $16 million sold.

Names rotation

For the year, though, volume for stock issuance has dropped 46% to $4.37 billion from $8.12 billion.

“It really dried up. Even sales of worst-of stocks have dropped this year,” he said.

Last year’s favorite name – Tesla – has lost its appeal, he noted.

“You see rotations into other names. Tesla, one of the most utilized single stocks, does not draw the same attention this year. People are looking elsewhere,” he said.

Issuance of notes tied to Tesla as a single underlier has dropped 55% to $252 million this year through June 9 from $563 million a year ago. The number of offerings fell to 75 from 274. Technology stocks, such as the top seven previously mentioned but also Advanced Micro Devices, Inc., have gained significant market shares.

Worst-of, tech stocks

“We’re also seeing more dispersion among stocks used in worst-of. That’s one of the ways to boost the coupon when volatility even with stocks is not there,” he said.

Examples of non-correlated underliers include Amazon.com, Delta Air Lines, Inc. and Ford Motor Co., which were recently used in a $1.71 million Phoenix callable deal.

“Not a lot of correlation. But these three even in a worst-of have less risk than Tesla,” he said.

Tesla’s implied volatility is 68.95%. Its share price soared 152% in less than six months since its January low.

The popularity of mega-tech stocks has led issuers to build worst-of on those names.

Barclays Bank plc priced $4.5 million of three-year Phoenix autocalls on the worst of Apple, Microsoft, Amazon and Alphabet. The 14% monthly contingent coupon is paid based on a 60% coupon barrier. The notes are automatically called above initial price after one year, and the final barrier is 60%.

On the single stock side, the same issuer priced $10 million of one-year Phoenix autocalls with memory linked to Microsoft. The 12% monthly contingent coupon is based on an 80% coupon barrier. The protection comes as a 20% geared buffer.

Oil

Commodities issuance continued to be tepid last week. But oil has recently been employed in notes.

Last week, UBS sold on the behalf of JPMorgan Chase Financial Co. LLC $4.75 million of 15-month digital notes linked to a WTI crude oil futures contract.

If the price of crude finishes at or above its 60% barrier, the payout will be 19%. Otherwise, investors will be fully exposed to the price decline.

This deal followed a much larger one at the end of May, which JPMorgan issued for $38.84 million. The terms were identical except the 15% digital return. JPMorgan was the agent.

RBC’s $89 million deal

Rates led last week thanks to a big deal issued by Royal Bank of Canada.

The $89.05 million three-year fixed-to-floating rate notes offer on the first year a 6.5% annualized coupon payable quarterly. After that, the coupon will accrue at an annual rate of two-Year U.S. Dollar SOFR ICE swap rate plus 90 basis points, subject to a floor of 0%. The payout at maturity will be par plus any accrued interest.

RBC Capital Markets LLC is the agent.

RBC also priced a smaller offering with similar features and the same underlier for $2.61 million.

Growth in rates

Sales of rate-linked notes have exploded this year, up 262% to $2.91 billion from $804 million.

Nearly all of this notional came from skyrocketing sales of fixed-to-floating rate notes, whose volume represents $2.8 billion.

The bid on steepeners has nearly vanished as the yield curve has become the most inverted in more than 40 years.

A sellsider saw in that gap an opportunity.

“Steepeners is a sleeping giant. When the Fed wants to slow things down and contain inflation, they raise interest rates. They’ve done it 10 times since March of last year. We don’t know if they’re going to pause this afternoon. But we’re already in a slowdown. We already had two quarters of negative GDP. I call it the quiet recession. They will pause. And history shows us that once the Fed pauses, they never go back. They don’t go back hiking rates. They will cut rates,” he said.

He was speaking ahead of Wednesday’s Federal Reserve policy committee, which decided to skip a rate hike.

“If they pause, the curve will go back positive. Steepeners will be the way to go. Right now, they’re very cheap. On the secondary, they’re trading at deep discounts.

“Just like fixed-to-floating have been the big trade this year, we’re going to see coupons rising exponentially on steepeners next year.

“It’s going to be a very profitable trade.”

The second largest deal last week after RBC’s rate deal was Morgan Stanley Finance LLC’s $50.38 million of four-year leveraged notes on the S&P 500 index.

The payout at maturity is 1.5x the index’s gain up to a 51.6% cap. The downside offers a 22.5% straight buffer.

The top agent last week was Royal Bank of Canada with three offerings totaling $96 million, a third of total notional.

It was followed by Morgan Stanley and UBS.

Royal Bank of Canada was also the No. 1 issuer.

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