Flurry of S&P MidCap 400-linked issues, autocallable notes hits market

By Emma Trincal

New York, March 17 - Notes linked to the S&P MidCap 400 index using an autocallable structure made up many of the largest deals in a week that saw $3.14 billion sold in 75 transactions, according to data compiled by Prospect News.

Barclays Bank plc priced an additional $2.5 billion of iPath S&P 500 VIX Short-Term Futures exchange-traded notes Jan. 30, 2019, which pumped up volume compared to the prior week.

However, even when excluding the large ETN deal, the total volume for the week ended March 12 was $643 million, nearly seven times more than the prior week's volume of $96 million.

MidCap fever

Ranking just after the ETN offering, the second-, third- and fourth-largest deals shared a common trait: They were all linked to "a somewhat esoteric index," as a source noted, the S&P MidCap 400.

All three deals were distributed by JPMorgan.

Goldman Sachs Group, Inc. priced $119.25 million of 0% autocallable index-linked notes due June 17, 2011 based on the S&P MidCap 400 index with a call price of 107 and a knock-out trigger of 20%.

Goldman, Sachs & Co. was the underwriter with J.P. Morgan Securities Inc. as co-agent.

JPMorgan Chase & Co. priced $89.8 million of 0% autocallable index knock-out notes due June 17, 2011 linked to the same index.

The structure is identical. Investors will see their notes called with a 7% return if the index closes at or above 107% of its initial level. The knock-out trigger is 20%, and a floor of par applies if the knock-out trigger is not hit.

Joining the fray, Morgan Stanley priced $67.72 million of 0% autocallable knock-out notes due June 21, 2011 linked to the same mid-cap stock index using the same structure.

Institutional assumption

"It's just too coincidental. The fact that these three mid-cap deals all happened in the same week tells me that it's got to be an institutional investor looking to spread credit risk between three names - actually three top banks on the Street as far as reputation goes," a New York sellsider said.

"Generally speaking, retail clients are not active investors in the MidCap index. And when you look at fees like 96 basis points or 1.06%, you can definitely bet that these were not deals structured for retail."

The JPMorgan deal had a 0.96% fee. Fees were 1.06% and 1.05%, respectively, for the Goldman Sachs and Morgan Stanley issues.

There have been only two other S&P MidCap 400-linked notes deals this year: JPMorgan sold $640,000 of 0% buffered return enhanced notes tied to this index due Sept. 8, 2011 last month, and Bank of America Corp. priced in February $10.72 million of 0% Accelerated Return Notes due April 29, 2011.

Pricing advantage

A New York structurer, without speculating on who the buyer or buyers may be, said that there are legitimate reasons for investors to look for other indexes than the S&P 500 when seeking stock exposure, citing pricing.

"You have fewer stocks in the S&P MidCap 400 than in the S&P 500. Fewer stocks will create volatility because you take away some of the diversification," he said. "Add to that an autocallable structure and pricing may be looking much better. If you bring down diversification, adding more volatility, it makes the option more expensive, and since it's the client who sells the put, the client gets a much higher premium."

Unlike a principal-protected structure where investors indirectly benefit from a cheap option bought by the issuer, autocallable notes are more attractive when the option costs more, he said.

"The investor is short the put and the issuer buys it. Even if it's expensive, it doesn't matter for the issuer as it's going to be priced in the structure. But for the client selling the put, the higher the cost, the higher the premium and therefore the higher the return," he said.

Autocallable bonanza

Besides the use of the S&P MidCap index, the popularity of autocallable notes - which represented six out of the top 10 deals - was another big characteristic of the week.

"Autocallable will continue to be successful deals simply because clients love it and brokers love it. If it works for everybody, the bonanza will continue," said the sellsider.

The three other issuers who brought large autocallable deals were Deutsche Bank AG, London Branch, Credit Suisse AG, Nassau Branch and Bank of America.

The underlying assets used for those three deals were currencies, the Russell 200 index and the S&P 500, respectively.

80% equity

Another trend for the week was the dominance of equity-linked deals - including stocks and indexes - which represented $515 million, or 80%, of the $643 million of deals issued, excluding the Barclays iPath ETN.

While the proportion of reverse convertible notes remained about the same as the prior week, 20% of the total, the amount of equity index-linked deals grew to 60% of the total volume from 25% the week before, a significant increase.

Commodity decline

Perhaps the appetite for equity products can be associated with the fall of commodity-linked deals, a source suggested.

With $9 million of commodity-linked notes priced last week in four deals, the decline of this asset class is significant, the sellsider said.

Commodity deals represented about a quarter of the volume during the week before last week, according to data compiled by Prospect News.

"Commodity clients really haven't done much since the start of the year or even December. Commodities have definitely come down from their high of last year when people wanted hedges against the declining dollar," said the sellsider.

"Demand has receded to a certain extent. It has to do with the rising dollar. But it mostly has to do with the equity market. While gold has done nothing since December, the S&P has risen. People are back in equity," the sellsider said.

Barclays on top

Barclays was the top agent of the week with 80% of the volume issued. Its large offering of $2.5 billion of iPath S&P 500 VIX Short-Term Futures ETNs contributed to the large market share. Since January of last year, the total amount of these notes priced is $7.5 billion.

The second agent for the week was JPMorgan with $300 million sold in 17 deals for a market share of 9.55%.

Goldman Sachs followed as third with $134 million in two deals for 4.25%.

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