Structured notes issuance slow pre-holiday, but final week of June ends with nearly $2 billion

By Emma Trincal

New York, July 8 – Structured notes issuance was subdued in the holiday-shortened week, but the final and full week of June ended with $1.97 billion in 435 deals, making the month the best of the second quarter, according to preliminary data compiled by Prospect News.

Available data showed only 39 deals totaling $74 million for last week, ahead of the Fourth of July. The Independence Day holiday was observed on Friday.

The S&P 500 index jumped 4% during the week on hopes of a Covid-19 vaccine and after solid jobs report, leading to optimism about the reopening of the economy.

Bank of America was the top agent for the week ended June 26 with 38% of the total in 26 deals, including big block trades for the close of the calendar month.

For the year through July 2, issuance volume reached $36.11 billion, a 49.3% jump from last year.

Meanwhile the number of deals rose 37% to 10,753 from 7,874.

Seasonal pattern

The distribution of the yearly volume per months is beginning to look like a normal seasonal trend with the bulk of the sales in the first quarter followed by a slower second quarter.

Last year was a notable exception with the first quarter representing the worst three months of the year.

This year, March was the best month with $7.28 billion closely followed by February with $7.23 billion.

January, a month prior to the February-March crash, was still robust with $7.03 billion.

The deceleration recorded during the second half may coincide with the Covid-19 pandemic and the ensuing lockdowns, according to sources, although there is no consensus on this.

April ($4.72 billion of issuance) and May ($4.67 billion of issuance) were the worst months this year.

June’s $5.17 billion indicates a rebound. The tally may even improve with revised figures.

Follow that trend

What does it all mean?

Hard to say, according to Matt Rosenberg, head of trading and strategic initiatives at Halo Investing.

“It’s difficult to wrap your head around all these different factors. To me the market is what dictates not as much the volume as the types of notes investors are looking to buy,” he said.

“When volatility is high, demand for income-oriented products tends to increase,” he said.

“When the market is rallying, clients tend to want a cushion. Autocallables can provide some level of safety with their barriers.”

But a variety of structured investments, including buffered notes, can address the same need, he added.

“People when the market is up don’t really want to be involved in market-timing,” he said.

Market and product types

Rosenberg said his firm recently launched a platform on buffered ETFs in partnership with AllianzIM as demand for downside buffers has grown due to the volatility seen in the market.

This year buffered leveraged notes have been difficult to price.

In order to illustrate the impact of the market on the choice investors make between growth and income, Prospect News produced a table illustrating the percentage of sales for each structure type month-per-month during the first half of the year.

The market share of autocallables was at its highest in June, January, and to some extent February, when the market was slightly up or trading sideways, at least until the Feb. 19 crash.

The amount of autocalls remained high in March at 48% of the total. This may have been the result of the opportunities offered by the surging volatility associated with the bear market, which went on until March 23.

Autocalls as a market share fell the most in April, a month characterized by a buoyant bull market despite coinciding with the pandemic in the United States.

In May, during the continuation of the rally, autocalls were also slightly declining but still closer to their March levels (47.6%) than to the 40.48% penetration rate of April.

Separately, the table confirmed that leverage was at its best when the market trended up with 35.55% of the total for April. The interpretation for March, the second-best month, is less clear. The demand for buffered leveraged notes may have spiked during the sell-off and resumed across the board in the final week of the month when the market bounced back.

Not so logical

But as sources suggested, clear correlations between the market and preferred product types are far from obvious.

For instance, rising markets lead to calls, which brings investors to reinvest their proceeds into more autocalls. That would suggest that rallies benefit income notes, which is often true, according to sellsiders.

On the other hand, big market drops such as the pullback seen in mid-February until the beginning of spring invite tactical players to take advantage of higher premium induced by surging volatility. Hence the appeal of short volatility autocallables with high coupon and low barriers.

Covid-19 impact

The health crisis and the uncertainty weighing on the economy have had an impact as well, sometimes in unexpected ways.

Income notes have surged the most during the times of lockdown and prior to that in February as concerns over Covid-19 were rising. This coincide with the high-premium assumption. More anecdotical is the theory offered by some sellsiders who argued that lockdowns have bred a new generation of “day traders” betting on stocks while isolated at home.

To be sure, stocks are primarily used in autocallable notes, not in growth products.

“We’re seeing a shift of advisers buying fewer autocallable worst-of on indices and more on single-stocks,” said Rosenberg referring to the trend in general.

“People are increasingly following the market. I’m not sure that indices are the best way to articulate a view you have faith on.

“It’s something we’re seeing both with institutions and retail.”

Leverage

Leverage on the other hand seemed to regain momentum when the market rallied.

April for instance was bullish and saw the top share of leverage.

But again, exceptions make it difficult to draw broad conclusions.

March, for example, was the second-best month for leveraged notes and saw a rally in its final week.

However, most of the month was bearish with the S&P down 16% overall for the month.

Income prevails

One clear trend emerged however for the first half of the year. On any month, autocallables surpassed the sales of leveraged deals, accounting for 50% of total volume versus 25%, respectively.

“I’m surprised there aren’t more buffered notes, leveraged notes and digitals,” said a market participant.

“We find them more attractive than the autocallables. I guess people are so desperate for income, they go for products that offer limited return with significant risk on the downside.”

Since equity indexes make for 71% of total notional during the period, the great majority of autocallables remain structured on indexes.

However, the use of single stocks and baskets of stocks has increased as a percentage of the total to 20% from 15% last year.

June biggies

The week prior to last week saw the closing of Bank of America’s monthly calendar with a series of block trades.

Barclays Bank plc priced $133.79 million of 14-month Accelerated Return Notes linked to the S&P 500 index.

The payout will be par plus triple any index gain, capped at par plus 17.25% and full exposure to losses.

This was the fourth largest deal of the year.

BofA also priced on the behalf of the same issuer $98.5 million of six-year 0% autocallable market-linked step-up notes on the S&P 500 index.

The notes will be called at par plus an annual call premium of 8.67% if the index closes at or above its initial level on any annual observation date.

If the index finishes above the step-up level – 135% of the initial level – the payout at maturity will be par of $10 plus the index gain.

If the index gains by up to the step-up level, the payout will be par plus the step-up payment of 35%.

There is a 15% buffer.

Another big 14-month leveraged note came out of HSBC USA Inc., which priced $71.39 million of notes tied to the S&P 500 index paying 2x the index gain, up to a 14.01% cap with a 5% buffer on the downside.

BofA Securities, Inc. was also the agent.

The top agent in June was Barclays with $919 million in 180 deals, or 17.76% of the total.

It was followed by BofA Securities with $817 million in 38 deals and by Citigroup with $638 million in 137 offerings.

Bank of Montreal was the No. 1 issuer with $162 million in 41 deals. This issuer priced a $51.7 million offering of floating-rates notes tied to the two-year Constant Maturity Swap rate last month.

© 2015 Prospect News.
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