Structured products tally for third quarter $20.8 billion; Q4 could rise even more

By Emma Trincal

New York, Oct. 13 – An updated tally of structured products issuance for September showed the pricing of 1,327 deals totaling $6.33 billion, according to data compiled by Prospect News, which could still be upgraded. This pushes the total for the third quarter to $20.8 billion in 4,503 offerings.

Quarterly data

It is too soon to compare Q3 with Q1’s $24.6 billion and Q2’s $23.31 billion as not all deals have been yet counted.

But with $68.8 billion priced this year through Oct. 8 versus $54.41 billion last year, it is becoming increasingly likely that 2021 will be the best year since 2004, when Prospect News began compiling the data, outpacing last year’s record of $72.7 billion.

Last year’s final quarter, with $19.1 billion, was not the worst except for the first quarter, which surpassed all others with $21.56 billion. Interestingly, the S&P 500 index rallied by more than 10% in the final quarter of last year while it endured a severe but short-lived pullback during the first.

Range bound and volatile

It turns out volatility is making a comeback since the beginning of September, a month that saw the S&P 500 index drop 5%.

In October, the market has been bouncing up and down as it did last week. The S&P 500 index finished last week up 0.8% but slid several times before the usual buy-on-the-dip players brought it back up.

Uncertainty reigned last week with the debt ceiling issue not resolved until Congress agreed to raise it temporarily on Wednesday. Meanwhile, a weak job report on Friday was mixed and did not trigger the big market move many had expected as investors could not get clear signals as of to what the next Federal Reserve move may be.

Big changes in monetary policy with the Fed likely to taper its bond purchases next month along with increasing inflation, rising yields and uncertainty about the final amount of stimulus packages have made investors nervous.

“Volatility is a positive thing for structured notes issuers, investors and advisers – everyone,” a sellsider said.

That’s because issuers can price better terms, investors are enabled to secure more downside protection and advisers can offer more attractive yields, he explained.

“As the year moves toward year-end, you might see a pickup in activity as people will be making decisions about their portfolios.

“They’ll have to reposition themselves ahead of a possible rise in inflation or maybe a market pullback as we’ve seen last month. There’s also the issue of the Fed tapering or not. Right now, the stock market is sitting relatively range bound, up one day and down the next. Not sure what the catalyst will be for a new direction.

“Structured notes buyers will have to position themselves in this uncertain environment.

“I’m optimistic about November. I see the strong momentum continuing next month.”

Stocks mania

When putting several indexes or ETFs together in a worst-of is no longer sufficient to provide attractive yields, investors flock into stocks.

“People are hesitant to buy indices. The terms are terrible,” the sellsider said.

Issuance volume of index-linked notes is up only 6.6% this year through Oct. 8 to $38.39 billion from $36.01 billion during that time last year, the data showed. Also significant, the market share of those notes was only 56% of total sales this year versus 66% last year.

Conversely, issuance of notes linked to stocks (single and baskets) accounted for nearly $20 billion this year versus $12 billion in 2020, a two-thirds increase. Those notes make for 29% of total sales versus 22.5% last year.

Allocation component

One may ask about the real motivation of advisers when showing stock deals to their clients.

Have structured notes buyers become stock-pickers, do they have sector views?

The sellsider did not think so.

“I think advisers allocating to notes tied to single stocks or baskets of stocks are already using these names in their portfolios,” he said.

“It’s not like: I see news on Coinbase, let me buy a note on it.

“The market changes every week. Sectors rotate. I think advisers are picking single stocks for their clients in their books of business. In other words, if you don’t buy single stocks for your clients, you’re not going to buy structured notes on stocks.”

Neutral position

He offered an example with the energy sector and various possible views on some energy companies.

“You could be bullish, neutral or bearish. If they’re bearish they avoid it. So, for instance, they may avoid exploration companies,” he said.

“If they have a moderately bullish perspective on mega-cap energy stocks like Exxon or Chevron, they may buy an income note on it.

“And if the client likes ESG or renewable energy, if they’re bullish on this part of the energy sector, they’ll buy the stocks outright.”

Not everyone is a fan of single stocks or stock worst-of, however.

“We prefer indexes almost always,” a buysider said.

“We stay away from stocks as underliers. There’s too much risk in an individual name. But we do like ETFs for their diversification. I consider them to be very similar to indexes.”

September finale

The previous week of Sept. 26 was updated to reflect $1.053 billion of structured products issuance in 253 deals.

Among some of the large deals that came out during that week was Barclays Bank plc’s $31.46 million of five-year autocallable contingent yield on the worst performing of the SPDR S&P 500 ETF Trust and the SPDR S&P Regional Banking ETF.

The contingent coupon is 7.11% payable quarterly based on a 70% barrier applied to the worst-of. After six months, the notes are autocallables at or above initial price. The barrier at maturity drops to 60%. Barclays and UBS Financial Services Inc. are the agents.

“This is a good size deal,” said the sellsider.

“The 7% coupon is higher than if you were doing this on broad indices, but you would get more yield out of a basket of stocks or a single stock. The 60% barrier at maturity is in line with the defensive approach of the trade.”

Energy stocks

Last week’s preliminary figures show $111 million in 37 deals, a number, which will be revised upward.

With oil prices rising, the energy sector was the best-performing last week and demand for notes linked to oil stocks picked up although in modest sizes.

UBS AG, London Branch for instance priced small autocalls on single stocks such as BP plc, Schlumberger NV, Marathon Oil Corp. and Diamondback Energy, Inc.

“Issuers are promoting what’s most relevant to the market in terms of pricing but also in terms of what clients want,” the sellsider said.

Samuel Adams

Talking about pricing, UBS last week used the Boston Beer Co, Inc. in at least three deals with coupons in the 11% to 12% range. This underlying is relatively new. GS Finance priced a $2.26 million deal on it in September. Founded in 1984, the company’s first brand of beer was named Samuel Adams in reference to the Founding Father.

The stock last week priced at $537.81 in one deal and $545 in two others. Those price levels represent a 60% drop from the April high of 1,350, which explains the 63.93% implied volatility of the stock.

This type of speculative play is designed for investors seeking higher returns and lower barriers, which the deal offered. The trigger levels and coupon barriers on these deals ranged from 50% to 60% for one- to two-year maturities.

Finance, tech

Also of interest last week, HSBC USA Inc. priced $2.75 million of one-year autocallable contingent income barrier notes with memory coupon linked to two bank stocks (Wells Fargo & Co. and Citigroup Inc.) in addition to brokerage Charles Schwab Corp.

The one-year notes will pay a 12.46% annual contingent coupon. Barrier levels are 70% of the initial price both on observation dates for the payment and at maturity.

Two other deals reflected investors’ strong need for yield as well as a speculative bias.

Barclays Bank plc priced $6.84 million of three-year Phoenix autocalls tied to Alibaba Group Holding Ltd. paying a contingent coupon of 20% per annum based on a 70% coupon barrier.

Amid the Chinese government crackdown on Big Tech, Alibaba shares fell by nearly half. Since the beginning of the month, however, bidders have moved the stock higher.

Tech stocks underperformed last week due to rising yields. Another volatile play was seen in Citigroup Global Markets Holdings Inc.’s $2.2 million of three-year autocallables tied to the ARK Innovation ETF. The 9.5% coupon is contingent upon a 70% coupon barrier. The barrier at maturity is 65%. The implied volatility of the ETF, which focuses on “disruptive” technologies, is 37.77%.

Fundamentally speaking

While investors in the equity markets focus on government policies, Treasury yields and inflation, they tend to downplay the issue of high valuations.

A financial adviser said there is no need to look elsewhere than price-per-earnings to find what may be the catalyst to a downturn.

“The absurdly high price-earnings ratios for stocks is something investors are not paying attention to. Hardly anyone is talking about by far the biggest risk to global asset valuations,” he said.

“This is not just a stock market issue. Every asset is overvalued, including real estate and commodities.

“Valuations are much higher than justified by the fundamentals. To bring valuations where they should be, the market will have to drop substantially.”

Last month

For September, the distribution of deals in asset classes and structure types was in line with the yearly averages.

Equity indexes, stocks and ETFs accounted for 57%, 27% and 10% of the tally, respectively.

Autocallable notes made for 62% of the total while leverage with barrier or buffer amounted to a 12% share while unprotected leverage represented 9% of total notional.

The top agent in September was Bank of America with $1.103 billion in 71 deals. It was followed by Morgan Stanley and Citigroup.

The top issuer for last month was Morgan Stanley Finance LLC bringing to market 115 deals totaling $861 million.

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