Structured products issuance $152 million for week amid near-record-high equities

By Emma Trincal

New York, Aug. 19 – Structured products agents priced $152 million in 85 deals in the second week of August, with autocallables capturing half of the volume and single-stock underliers making a push through several deals distributed by Morgan Stanley, according to preliminary data compiled by Prospect News.

Revised figures for the previous week showed $568 million sold in 120 offerings.

Data is live and final input of deals in Prospect News’ database is based on actual filings with the Securities and Exchange Commission, making upward revisions unavoidable.

July’s tally came out much higher than previously reported at $4.76 billion in 1,659 deals, increasing the ranking of this monthly volume above that of April and May. June remained higher with $6 billion, and the first-quarter months were all the strongest (over $7 billion each) with March and February leading.

Pullback memories

“Structured notes do really well in a sell-off environment, and we had a massive sell-off in February-March with people buying like crazy,” a sellsider said.

“Since then, demand is still high. But with every passing week and as things normalize, demand is getting back to normal.

“This exceptional first quarter for the industry was a move driven by the sell-off.”

Yearly tally

Issuance volume this year is well ahead of last year with $42.41 billion in 12,982 deals through Aug. 14. That’s a 44.3% increase from $29.39 billion in 9,527 offerings last year.

The year-to-date volume also surpassed the $36.47 billion sold in 10,221 deals through the same period in 2018, a record year since Prospect News began collecting data in 2004. Volume in 2018 hit $56.77 billion.

The best months for that groundbreaking year were January, February, and October in decreasing order of volume. Interestingly December was the worst month despite the sell-off, which came late in the year and during the holidays.

High valuations

No sell-off is taking place today in the market. On the contrary, U.S. stocks keep on pushing higher with the averages hitting or nearing their record highs.

The Dow Jones industrial average rose 1.8% last week to at 27,931.02. The S&P 500 index almost hit its record high twice, closing at 3,372.85, only a few points short of its Feb. 19 record high.

The Nasdaq Composite index after several attempts last week ended up reaching an all-time high this week, on Tuesday.

Market sentiment remains mostly bullish with investors buying the same big technology stocks that have driven the market rebound. Investors last week were further encouraged by a decline of weekly jobless claims, which were at their lowest level since March.

The dramatic bounce in the equity market since the end of March has made many investors forget the intensity of the 33-day bear market, which pushed the S&P 500 index down 34% from its high to its low on March 23. Since it bottomed, the index has surged 54%.

Single stocks

At the same time, uncertainty remained high around the U.S. Elections in November, the Covid-19 pandemic and the fiscal stalemate on Capitol Hill around a stimulus package.

It may not come as a total surprise that some of the top deals last week were built on single stocks although it is not a common trend, as indexes typically prevail by far. But single stocks carry high volatility, and investors need income in the low-rate environment. The 10-year Treasury yield slightly picked up last week on some unexpected higher inflation data but started to fall again since Thursday.

Autocallable notes constituted half of the supply seen in the market last week, and single stocks made for 63% of the total. These figures are preliminary and subject to revision.

With uncertainty looming, investors have mixed behaviors, some jumping in the market, others seeking protection and yield without great expectation for higher returns at these market price levels.

The sky has limits

Among the most bullish advisers, a complaint has often been the absence of “fairly priced” caps. With fewer leveraged notes and most income-oriented deals, capped upside has become the norm.

“I am bullish for the post-Covid years which are coming up soon. Once we discover a vaccine, the economy will recover strongly. Demand will be strong again. I expect the market to rise,” a market participant said.

“Rates are being kept extremely low. The Fed seems to be backstopping the economy.

“There’s a huge pent up demand. There’s a huge desire for travel, a huge desire for entertainment, things that have been taken away from us since February.”

This view led him to favor gains over protection.

“I don’t care about the downside protection. Let me have a two-year on the S&P, uncapped. Give me as much leverage as you can or give me a higher cap with respect to the leverage. I don’t want to be penalized if the asset class explodes, and I believe it will.”

If uncapped products have become less common, it is not due to pricing but to investors’ demand, the sellsider said.

“You could have uncapped return with a lower participation. It’s possible. I don’t see much of that. It’s not hard to price those products in general, but I don’t think there is much appetite for it. Investors right now are more concerned about the downside risk. Yes, they want to capture the upside, but people invest in this marketplace not to rack up big gains but to score decent returns. If you get a 12% or 15% annualized, people are not going to complain about it.”

Morgan Stanley deals

Last week presented several deals paying a fixed coupon, most of which being sold within the Morgan Stanley private wealth platform.

An important number of those deals were built on a single stock rather than indexes, and most of those stocks were tech names.

“The darlings of the market, Facebook, Microsoft, Apple, have a lot of volatility. They’re up a lot, trading on a huge momentum.

“But the implied volatility, which is the perception of risk in the market, is very high. They’re up massively.

“Therefore, they could go down,” the sellsider said.

Tech, value stocks

Morgan Stanley Finance LLC’s $20.9 million of two-year autocallable contingent coupon notes on Twitter, Inc. topped the list of deals priced last week, according to preliminary data. This offering paid a contingent coupon of 20.85% per annum based on a 70% coupon barrier. The barrier at maturity was also set at 70%.

On a more value-oriented approach, Credit Suisse AG, London Branch priced $10 million of one-year 14.55% autocallable fixed-income securities due Aug. 18, 2021 linked to Delta Air Lines, Inc. The notes are autocallable quarterly if the stock is above its initial share. There is a 40% geared buffer on the downside.

Morgan Stanley also priced $10 million of one-year income autocalls on Netflix, Inc. on the behalf of UBS AG, London Branch. The fixed coupon is 9.6% and the downside threshold, 70%.

For the same size and maturity, this dealer priced 11% autocallable notes on Microsoft Corp. with an 80% barrier at maturity and an issue of 12% autocallables securities on Alibaba Group Holding Ltd. with the same barrier level. Both deals were issued by Barclays Bank plc.

“These are momentum stocks everybody loves. People are doubling down. You can monetize their volatility to generate yield,” the sellsider said.

“It’s also good from a marketing standpoint if you can piggyback on the performance of these momentum stocks.”

Indexes, rates

Another fixed-rate deal sold by Morgan Stanley on the behalf of Barclays (this time on indexes) was a $14.5 million issue of three-year callable notes linked to the least-performing of the Nasdaq-100 index, S&P 500 index and Russell 2000 index. The rate is 6.5%, the notes are callable quarterly and the barrier at maturity is 60%.

Of interest, Citigroup Global Markets Holdings Inc. priced $2.5 million of 15-year range accrual notes on the 30-year Constant Maturity Swap rate, the two-year Constant Maturity Swap rate and the least performing of the S&P 500 index, the Russell 2000 index and the Dow Jones industrial average.

Interest will accrue at an initial rate of 8% for each day that the spread of the 30-year Constant Maturity Swap rate over the two-year Constant Maturity Swap rate is at least zero and each index closes at or above the 60% accrual barrier, payable quarterly.

Morgan Stanley was the top agent last week with $76 million in six deals. It was followed by UBS and Citigroup.

UBS AG, London Branch was the No. 1 issuer was $36 million in 68 deals.

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