April structured notes issuance volume ends with nearly $2 billion, heavy bid on buffers

By Emma Trincal

New York, May 10 – April ended strong with $1.97 billion of structured products issued in 364 deals for the month, according to updated figures compiled by Prospect News. Last week’s numbers, which marked the beginning of May, were not fully available. The use of buffers expanded across a variety of structures, the data showed.

Not surprisingly, BofA Securities was the top agent in the week starting April 23 with $465 million in 46 deals, or 24% of the total. UBS was next with $451 million in 51 deals followed by Morgan Stanley, which priced $354 million in 67 offerings.

BofA’s participation

BofA’s advance compared to its peers was limited compared to similar weeks during which the bank closes its monthly calendar.

The 24% market share of BofA Securities in the last week of April, however, was in line with what this agent usually captures. During the last weeks of January, February and March, BofA’s shares were 28%, 16% and 28%, respectively. Each of those weeks showed a total notional of over $2.25 billion.

But typically, BofA prices a greater number of block trades, which were somewhat missing at the close of last month. On the week of April 19 for instance, BofA Finance LLC priced $93.4 million of autocallable notes tied to two indexes. In contrast, the top issues priced by BofA Securities in the last week of April were around the $30 million mark.

One was Canadian Imperial Bank of Commerce’s $35.8 million of capped leveraged notes on the S&P 500 index. The other, also from CIBC, was a $32.16 million issue of leveraged notes on the Euro Stoxx 50 index.

“Many of their deals may not have settled. We haven’t noticed a decline in volume from them,” said Brady Beals, director, sales and product origination at Luma Financial Technologies, about BofA Securities.

Diversity of structures

One notable trend during that last week of April was the relatively high volume of absolute return notes issuance making for 11% of the total in 30 deals totaling $210 million. Digital products sold well too with $155 million in 25 offerings, an 8% share. Overall, those two structures combined accounted for nearly one fifth of total sales. The structure mix was more balanced than usual with leverage and callable products making for 34% and 30% of the total, respectively.

Buffering up

Another recent trend is the increased use of buffers across different structure types, including those, such as autocalls, which usually rely on barriers for the downside protection.

“It doesn’t shock me. The majority of the notes are still using barrier protection. But buffers are more common now, maybe because we’ve seen more funding than in the last five years,” said Beals.

“Issuers can now allocate more of their funding budget to buffers, which is what people prefer versus barriers.”

Overall, investors have expressed demand for “risk-off” structures.

“We’ve seen a little bit more conservative trends. Aside from buffers, we’ve noticed deeper barriers, longer no-calls, and also more selective underlying,” he said.

“Advisers are not as comfortable with risk. That seems to be the trend.”

Regarding the greater selection of underlying, he pointed to the declining use of international equity exposure.

“Deals on the EAFE or emerging markets have dried out,” he said.

Phoenix series

Another development was the pricing of Phoenix autocalls featuring not only a buffer but also a memory coupon. A series of such deals, all tied to the SPDR S&P 500 ETF Trust, were spotted during the last week of April.

They all shared some common characteristics: a one-year maturity, a $10 million size and a 13% geared buffer at maturity, setting the coupon barrier at 87%. The frequency for the coupon payments and autocallable observations was typically monthly.

Bank of Nova Scotia issued one paying an annualized monthly contingent coupon of 12.95%. The agent was JPMorgan.

Scotia also issued another deal showing the same contingent coupon but paid quarterly. Morgan Stanley distributed the notes.

HSBC USA Inc. brought to market two such deals both sold by JPMorgan. The first one paid a quarterly contingent coupon of 11.9%; the second, 11.85% also on a quarterly basis.

The same trend went on last week with other similar deals completing the series and featuring other issuers and slightly different underliers. Using the same terms (similar buffer size, coupon barrier and tenor) GS Finance Corp. priced $20 million of such buffered Phoenix autocalls but this time on the S&P 500 index. The monthly contingent coupon was 12.3% per annum. The memory feature was not available. JPMorgan was the agent.

Barclays Bank plc issued another one based on the performance of the Invesco QQQ Trust, Series 1. This time the contingent coupon barrier was at 85% with a 15% geared buffer. The contingent coupon was 13.85% per year payable monthly. The agent was Morgan Stanley. Again, the memory feature was lacking.

“So many similar deals...That series screams institutional,” said Beals.

“Some mutual funds do have allocations to structured products. A $10 million trade is not huge, but they may have limitations on how much they can buy. It could also be dollar-cost averaging. They probably bought from different banks for credit diversification.”

Big April trades

The “buffering” used in other structures was noticeable by the size of certain trades.

In April, the two largest absolute return and digital deals were also buffered, which confirmed the popularity of hard protections. On April 28, JPMorgan Chase Financial Co. LLC priced $34.88 million of two-year dual directional buffered PLUS on the S&P 500 index paying 1.5 times on the upside up to 9.2% with a 15% buffer. The absolute return was provided above the 85% buffer strike.

On the digital side, Citigroup Global Markets Holdings Inc. priced $47.01 million of 13-month buffered digital notes on the S&P 500 index in early April. If the index gains or declines, but by no more than its 20% buffer, the payout at maturity will be par plus 7.9%. Investors will lose 1.25% for every 1% the index declines beyond its buffer.

Bearish bets on the dollar

Currency-linked notes have vanished from the U.S. structured products market for a while, but BofA Finance priced two such deals last week, both of which expressed a bearish view on the dollar.

The first one for $1.6 million was a one-year issue linked to the pound sterling/U.S. dollar exchange rate with a one-to-one upside exposure capped at 14% and full downside protection. The second one, also a one-year note, was linked to the euro/U.S. dollar exchange rate. The one-to-one exposure was capped at 13.25% and the downside was fully protected.

Unlike equity-linked notes, FX products can easily offer full principal-protection, said Beals.

“The pricing is going to be cheap because the models are not projecting a big appreciation of one currency over another one unlike equities where volatility is higher, and prices can move substantially above the spot. Currency futures don’t project wide exchange rate fluctuations,” he said.

But this does not fully explain why FX-linked notes issuance has declined so much. In 2013, agents priced $600 million of currency notes in 127 deals, which was about 2% of total volume for that year. Last year, only six deals priced in this asset class for a total of $8 million.

“There’s not much conviction about currency, and certainly at the advisers’ level, we don’t see any interest,” said Beals.

News catalysts

Important news popped up last week, which impacted investors’ sentiment. On the regional banks front, JPMorgan scooped up First Republic, which did not fully appease fears of a contagion as regional bank PacWest Bancorp plummeted three days later, losing 50% of its value. The Federal Reserve hiked rates by 25 basis points causing no surprise but raising questions about its future moves in June and July. A strong job report suggested that the labor market remained robust.

“Of all those headlines, the one that’s the most relevant for our industry is the regional banks situation,” Beals said.

“After all, notes are issued by the banks. Fortunately, people do not believe that the crisis is going to spread to the larger banks.”

Soothing fears

A market participant agreed saying that regulators’ interventions contributed to alleviating concerns.

“You can never be sure a big bank will be around in two, three or five years. But we do get the sense that it may be bought out by another bank, just like UBS bought Credit Suisse under the pressure of the Swiss regulators or the way JPMorgan acquired First Republic last week,” this market participant said.

“It’s comforting for clients holding structured notes. If you owned a note issued by Credit Suisse, now you’re holding a note from UBS. It doesn’t make a difference, really.

“Investors are getting a sense that their structured notes are not going to vanish even though the primary issuer is gone.”

Overall, investors are becoming more confident despite the banking turmoil and the Fed, said Beals.

“The rate hike was expected but the comments from the Fed were a little bit more ambiguous than people would like. The market, however, is leaning toward a pause,” he said.

At the moment, the CME Fed Watch tool shows an 86% chance for a 25 basis points hike during the June meeting, but the chance of a rate cut in July is as high as 36%.

“Market sentiment is much more positive. Last week’s job report was strong. Inflation numbers this morning were really good.”

The Consumer Price Index rose 4.9% year over year in April, less than expected, according to the Department of Labor.

“This should help market sentiment.”

© 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.