Structured products agents sell nearly $1 billion in final week of November amid stock, bond rally

By Emma Trincal

New York, Dec. 6 – Issuance closed November and began the last month of the year on a strong note with nearly $1 billion sold, according to data compiled by Prospect News. Agents priced $996 million in 261 deals as the stock market continued to rally for the fifth consecutive week and rates were still trending lower.

On Friday, the S&P 500 index was up nearly 19% for the year and the Nasdaq had gained more than 35%. Meanwhile the S&P 500 index made a fresh 52-week high.

Leveraged notes regained some market share last week, representing 31% of the notional in $307 million. For the year, their market share is only 20%.

Leverage

Last week’s push in leverage notes issuance could be just due to the calendar, a structurer said.

To be sure, leverage issuance was flat from October to November. For the year, it even declined substantially by nearly 20%.

The structurer refuted the notion that leverage may have benefited from the bullish mood seen last week.

“I would never say: the market is bullish therefore, here are the bulls jumping to buy leveraged notes,” he said.

“Structured products don’t really have a direct correlation to the market. If the market is too bullish, you don’t have structured products. People will think: why don’t I close my eyes and just buy SPY? When the market crashes, investors don’t invest. They stay away.

“It’s when the market is toppish or moving sideways that people are more likely to buy structured notes.”

ARNs

Each month is different, however, and last week’s figures do not show any big BofA offering. This agents’ large offerings had not been filed with the Securities and Exchange Commission at press time.

Among those block trades are BofA’s Accelerated Return Notes. Those products are typically 14-month securities linked to a single index paying 3 times the gain up to a cap and without any protection on the downside.

This very specific structure made for 3% of total issuance this year with 183 deals totaling $2.45 billion.

Those “ARNs” are also among the largest equity products in size.

In July for instance, BofA Securities sold on the behalf of Canadian Imperial Bank of Commerce $99.66 million of ARNs on the S&P 500 index with a cap of 14.13%.

Last week’s top offering was another example. The agent was UBS, however, not BofA.

UBS sold on the behalf of HSBC USA Inc. $50.81 million of 14-months notes linked to the S&P 500 index paying 3x the index gain up to 14.85% with full downside risk exposure.

Two big floaters

Rates were in fashion last week with two sizable offerings of floating-rate notes coming from JPMorgan and Citigroup.

JPMorgan Chase Financial Co LLC priced $50 million of 13-month floating-rate notes paying a monthly interest rate equal to the one-year U.S. dollar SOFR ICE swap rate plus 70 basis points.

Citigroup Global Markets Holdings Inc. issued another $50 million deal. The terms and underlying were the same. But the interest was paid quarterly, and the spread was raised to 75 bps.

Most analysts attributed the stock market rally to the market expecting a Federal Reserve rate cut sooner next year on the view that inflation is slowing. The bond market rally, which gained momentum since mid-October, is also part of this new market cycle. The yield on the two-year note fell by 40 bps last week while the 10-year rate dropped 24 bps. Since its 5% high at the end of October, the 10-year rate has lost nearly 1%.

Betting on rate

Citigroup and JPMorgan’s floating-rate notes take the other side of those market expectations. Both are bearish bets on bonds.

For the structurer, Fed easing is not a given, so the trades are not necessarily contrarian plays.

“Not everybody believes that the Fed will cut rates. There is no such thing as ‘everybody’ in the market. If everybody is doing the same thing, there is no market,” he said.

“A lot of people expect a rate cut. But if you don’t, you buy that one-year floater, and that’s your view.”

Next, GS Finance Corp. priced one of those so-called “catapults,” which provide a one-time autocall and in the absence of an early redemption, uncapped leveraged return at maturity. GS sold $35.5 million of such product with a five-year tenor and exposure to the Nasdaq-100 index.

The call premium after one year was 12%. The leverage multiple at maturity was 1.165 and protection was offered via an 80% barrier.

Prospect News does not categorize this structure as a callable note but as a leveraged product.

A resilient structure

Callable notes did well last week making for 36% of the total in $363 million. Sales of those notes have slightly increased year to date to $40 billion from $37 billion. It has not been easy, a market participant said. Perhaps the modest uptick may be attributed to rising call activity.

One major difficulty faced by advisers and brokers is the rising interest rates environment, he said.

“It’s harder to do income notes now compared to when rates were at 1.5% or even 3% like last year.

“If I can get more than 5% on Treasuries or even cash, why bother taking the equity risk, the credit risk, having my coupon at risk and a limited liquidity?

“If you give me an 8% contingent coupon, that’s not even two times the risk-free rate. Why not sit in cash?

“As long as rates remain high, it’s going to be tough to sell income products,” he said.

Yield enhancement

And yet, issuers manage to be able to sell big size callable trades with riskier terms such as “American” barriers, which are observed any day.

An example last week was BofA Finance LLC’s $33.38 million of trigger callable contingent yield notes with daily coupon observation due June 1, 2027 linked to the worst performing of the Nasdaq-100 index, the Russell 2000 index and the S&P 500 index. Based on an American coupon barrier of 70%, the contingent quarterly coupon was 10.15% per annum. The European barrier at maturity was 60%. UBS was the agent.

Stocks, ETFs

Deals were much smaller in other asset classes.

Single-stock issuance accounted for 13% of the total with 72 deals totaling $128 million.

UBS AG, London Branch priced the top one with $18.52 million of three-year autocallables on Apple Inc.

The notes will pay a quarterly coupon of 8% per annum based on a 65% coupon barrier.

The no-call period is six months. The barrier at maturity is 65%.

Not surprisingly, big tech was the most popular play among stock-linked notes. Four autocallable deals on Microsoft Corp., which priced at $10 million each, followed down the list. Royal Bank of Canada issued one and Citigroup Global Markets Holdings the other three.

ETF sales totaled $78 million in 19 offerings, or approximately 8% of the total.

Among the top sector plays, GS Finance sold $12.1 million of autocallables on the iShares Semiconductor ETF.

Morgan Stanley Finance LLC priced $10.2 million of digital notes linked to the SPDR S&P Oil & Gas Exploration & Production ETF.

Barclays Bank plc issued the top of deal with $12.81 million of notes tied to the worst of the SPDR Dow Jones Industrial Average ETF Trust and Energy Select Sector SPDR fund.

Year to date

The tally for structured notes was $85.73 billion in 20,894 deals for the year through Dec. 1, a modest decline of 2.8%, according to the data.

The gap will almost certainly be bridged as many deals have yet to be filed with the SEC.

“We came a long way,” the structurer said.

“In June, we were down 16%. The market caught up. Now we’re down less than 3%. It’s a good trend and it’s encouraging. Hopefully the momentum will continue in 2024.”

The top agent last week was UBS. With $380 million in 89 deals, or 38.2% of the total.

It was followed by JPMorgan and Goldman Sachs.

The No. 1 issuer was GS Finance bringing to market 41 offerings totaling $223 million, a 22.4% share.

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