Structured notes issuance $198 million for week in slow December debut; November data updated

By Emma Trincal

New York, Dec. 11 – Structured products agents priced $198 million in 85 deals in the first week of December, according to preliminary data compiled by Prospect News. Mixed trade news with China despite a strong U.S. jobs report for November kept the S&P 500 index nearly flat for the week, with a modest gain of 0.2%.

A good month

It’s too soon to get any sense of what volume will be like for the last month of the year. But updated figures for November were encouraging. In all, $4.28 billion of structured products priced last month in 1,887 offerings putting the month in fifth place after May, August, October and September.

The week of Thanksgiving saw the bulk of November’s pricing with $1.68 billion sold in 346 deals, with Bank of America selling 38% of it. UBS was also active during the shortened holiday week with about $333 million in 60 deals, or 20% of the total.

Each firm had its own experience last month.

“Our performance hasn’t dropped this year at all and November was a great month for us,” said a source at the private wealth unit of a bank.

Market calling

A particular category of notes helped his business last month.

“In our channel we do a fair amount of autocalls,” he said.

“Some were languishing in the system, especially notes on the Euro Stoxx. Clients were getting paid but the notes weren’t called. The last couple of months, the Euro Stoxx rallied and we saw the early redemptions.

“That money had to be reinvested, which is why we had our biggest month ever in November. It’s really starting in November that most of our trades finally got autocalled.”

Euro Stoxx rally

Deals on the Euro Stoxx 50 index as a sole underlying peaked in volume in the first quarter of the year with $580 million, according to data compiled by Prospect News.

The second and third quarters however were particularly slow with $169 million and $80 million coming in, respectively. But in the last two months, appetite for the euro zone underlier rose with $225 million in October.

The Euro Stoxx is up 20% for the year and has gained 6% in the past three months.

Buffers preferred

Leverage deals were almost all defensive last week: nearly a quarter of total volume were leveraged notes with buffers or barriers. Only 6% of the week’s notional originated from leverage with full downside risk exposure.

This is probably due to the absence of BofA Merrill Lynch last week – this agent prices the biggest leveraged offerings with no downside protection – as well as a cautious sentiment on the part of investors given the recent all-time highs in the market and the upcoming Presidential Elections, sources said.

Income frenzy

The top agent last week was UBS with $105 million in 73 trades, or 53.2% of the total.

This may explain the high percentage of income notes seen last week. Those as a group amounted to two-thirds in contingent coupon autocalls and 4.2% in snowball autocalls (accumulated coupon paid upon redemption) for a total of $138 million.

“We’re in a toppy market. People are seeking income in simple, short-term trades, and these are autocalls,” a sellsider said.

Within this broad category of autocalls, the distribution between single-stocks and index underliers showed nearly twice more volume with index products ($90.5 million) than with stocks ($50.2 million). The deal count is even more disproportionate: four for index autocalls versus 72 for stock-linked deals.

“Most everything is index-linked in that autocall space,” said the private wealth source.

“We do a fair amount of single-stocks but we’re very particular on the stocks that are put into the worst-of.

“You can’t have oil, banks, retail thrown into one trade. They’re different industries. It’s risky. Instead you put three banks into the worst-of, all in the same industry. The correlation is a little tighter. It’s more conservative.”

RBC’s $37 million

Last week’s autocalls linked to stocks were all single-asset deals. In other words, there were no worst-of on stocks, only on indexes.

Royal Bank of Canada priced $37.19 million of two-year autocallable notes linked to the lesser performing of the S&P 500 index and the Russell 2000 index. It was the No. 1 offering distributed by UBS.

The contingent coupon is 8% per year if each index closes above a 75% barrier. The notes are automatically called above initial price starting on the first quarter. The threshold level at maturity is also 75%.

Another big index worst-of

Morgan Stanley Finance LLC priced the second deal. UBS is listed as an agent. It is a $36.14 million issue of 3.5-year callable contingent yield notes with daily coupon observation linked to the least performing of the S&P 500 index, the Russell 2000 index and the Euro Stoxx 50 index.

The quarterly coupon is 9.16% per year based on a 70% coupon barrier.

The notes are callable after six months. The repayment barrier at maturity is 60%. It is observable point to point.

Oil plays

The third offering of the week and top single-stock deal was linked to an oil stock, a sector that has been slowly recovering since early October while still remaining fairly undervalued.

UBS AG, London Branch priced $24.27 million of three-year contingent income autocallables tied to Schlumberger, NV.

Morgan Stanley was in charge of the distribution.

The 9.65% annual contingent coupon is paid quarterly based on a 50% coupon barrier. The notes are automatically called quarterly if the stock is at or above initial price. The barrier at maturity is also 50%.

UBS priced eight other offerings on oil stocks but of a very small size. Schlumberger was used in two other transactions, Petroleo Brasileiro SA in three, Marathon Petroleum Corp. in two and Chevron Corp. in one.

Not as bad for the year

Volume for the year to date is now down 14.1% through Dec. 6 to $46 billion from $53.54 billion during the same time last year, the data showed.

It’s an improvement. At the end of the first half of the year, total notional was down by more than 25%.

“I think the new platforms, Simon, Halo, Luma have a lot to do with that,” the private wealth source said commenting on issuance volume’s improvement in the second half.

“Many firms are embarking in the process. It streamlines distribution. It’s definitely pushing up volume.”

Fintech companies Simon Markets, Halo Investing and Luma Financial Technologies are independent multi-issuer platforms designed to help buysiders (advisers, broker-dealers, regional banks) to enter orders, get better pricing and monitor their structured products positions.

After UBS, last week’s top agent was CIBC with $32 million in four deals. It was followed by Morgan Stanley.

UBS AG, London Branch was the No. 1 issuer with 72 deals totaling $56 million, or 28.4% of the total.

It was followed by Morgan Stanley Finance LLC and Royal Bank of Canada.

For the year, Barclays Bank plc is the top issuer with $6.66 billion in 1,599 offerings, or 14.5% of the total.

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