March structured notes issuance $7.19 billion, exceeds January tally; year to date up 92%

By Emma Trincal

New York, April 15 – The structured notes tally in March was $7.19 billion in 2,104 deals, outpacing the $7.03 billion notional of January coming in 1,905 offerings, according to data compiled by Prospect News.

The best month was February with $7.23 billion in 1,942 deals.

March turned out to be the top month in terms of count.

Volume for the year to date through April 9 reached $21.79 billion, a nearly 92% jump from $11.35 billion during the same time last year.

The number of deals climbed by 61% to 6,023 deals from 3,735 deals.

Last week’s data remains incomplete with only $67 million in 34 deals. A significant amount of volume and deals had yet to be filed with the Securities and Exchange Commission ahead of the holiday weekend.

The financial markets were closed on Friday in observance of Good Friday.

Extraordinary week

From an equity market standpoint though, last week offered a historical rally. The S&P 500 index rose 12% in the four trading sessions.

The main drivers were improvements regarding the numbers of new coronavirus cases as well as the Federal Reserve coming up with a new $2.3 trillion funding package on Thursday.

Stocks

Last week saw 51% of the volume tied to single stocks with notable financial names such as Citigroup Inc., American Express Co., MasterCard Inc. and Goldman Sachs Group, Inc., some of which priced ahead of earnings.

Among the technology group, two well-established companies – Apple Inc. and Microsoft Corp. – were the most frequently used stocks.

Market in two phases

While structured notes structures do not always closely match market trends, some correlations do exist.

A look at structure types from the pullback to the rally offers some clarity.

From its March 23 low to the end of last week on Thursday, the S&P 500 has gained 24.7%.

This two-week rally came on the heels of a brief and brutal bear market, which saw the benchmark drop 34% from its Feb. 19 peak.

A comparison of the structure types between the two periods – sell-off followed by recovery – reveals how quickly investors switched from autocallables to leverage.

Autocalls down, leverage up

During the bear phase between Feb. 19 and March 23, autocallables accounted for 56% of total volume.

This included autocallable contingent coupon and snowball deals.

From the start of the rally in March 23 to April 9, autocalls saw their market share drop to 21.25%.

Conversely, leveraged products, which made only 22.35% of the market during the pullback, jumped to 48.4% during the ensuing rally.

The market rebound also revealed a greater percentage of leveraged notes with buffers or barriers within the leverage space.

While protected leveraged deals made for only 17.65% of the total issuance volume during the pullback, their share rose to a third during the runup.

These figures suggest investors remained cautiously bullish despite the uptrend momentum.

Autocallables dropped during the rally giving room to leverage. But investors when bidding on leveraged notes clearly opted for buffers and barriers as opposed to unprotected downside even as the market surged.

Rapid shifts

Matt Rosenberg, head of trading and strategic initiatives at Halo Investing, agreed with these results. But he does not anticipate autocallable sales to fade anytime soon.

“We still see both types of products, growth and more tactical-oriented plays,” he said.

“When the market was down, we’ve seen people putting on more income deals. They were trying to monetize the losses and find companies poised for further growth after the rebound.

“As some people became more optimistic during the rally, we’ve seen more leveraged notes without downside protection.”

He warned however against drawing rigid conclusions.

“These preferences between income and growth, protection versus risk can switch rapidly depending on the market,” he said.

More autocalls to come

Rosenberg believes that uncertainty and volatility are still the predominant theme, which will switch the pendulum again toward autocallable structuring.

“The market had such a strong runup – 25% up from the lows. No one knows what to expect, what’s going on.

“There is still a lot of uncertainty. The market will continue to be volatile.

“With that, the appeal of autocalls will remain much alive. There is a value proposition in getting those barriers and the income,” he said.

He said autocallables are flexible instruments that allow investors to pick a risk-reward profile they can be comfortable with.

“As people have become savvier about those products, we’ve seen people increase the size of the barriers even if there’s some yield give up for that.

“When you’re buying an autocall, you’re expressing a neutral, moderately bearish outlook.

“You can adjust the risk mitigation that fits your outlook,” he said.

The end of the beginning

In some ways the uncertainty is reflected in the major market swings with optimism giving way to fear on any given day. Rosenberg himself said he understands why some investors remain concerned.

“People are bullish because of the unprecedented buying by the Federal Reserve. It looks like the Fed is going to buy anything and everything to prop up the markets. It helps the fundamentals. On top of that, sentiment about the coronavirus pandemic has become more positive,” he said.

“But people still have plenty of concerns.

“Look at JPMorgan. And BofA and Citigroup...”

JPMorgan’s earnings dropped 70% in the first quarter. Profits at Bank of America and Citigroup are down 40%.

“There’s going to be more pressure in the next few months. Earnings are down. People are not paying rent. How is it going to impact businesses?

“This is a challenging market to forecast because there is no precedent.

“We’re only at the end of the beginning.”

However, for Rosenberg, such gloomy outlook bodes well for structured notes issuance, especially sales of autocalls. As volatility rises, terms improve and investors can get higher coupon with deeper barriers.

Paycheck to paycheck

Andrew Valentine Pool, main trader at Regatta Research & Money Management, was less upbeat.

“We haven’t really been looking at structured notes in the past month. We’ve been interacting with our clients and doing research in the past six weeks,” he said.

“Our clients aren’t too much into structured notes. There’s too much uncertainty.

“The idea that the economy will snap back is a fallacy.”

Products which would be of interest to his investors are fully principal-protected notes and market-linked certificates of deposits.

But with low interest rates, pricing does not work.

“When you have to go out seven or eight years to make the structure work, your clients lose interest in that,” he said.

One of the rare structures his clients are showing interest for are absolute return notes.

“Some of these may make sense if the ranges are wide enough.”

It’s not so much the health crisis that is impacting sentiment but the economic results of the lockdowns.

Choppy market

“We just had an unprecedented $2.2 trillion stimulus package. Small businesses are going to get loans to maintain payroll. But once you stop receiving those checks, what do you do to pay the bills? Do you operate a grass-cutting business? Become a legal transcriptionist or process server?

“The idea that these small businesses will reopen immediately is not reasonable.

“What do we think earnings are going to look like in the next quarter?

“What’s even scarier is that the government is spending trillions to support the economy, far more than what was deployed in 2008. And yet the market remains choppy.”

He took last week as an example. Most of the rally happened on Monday. On Tuesday, the S&P 500 index was down 3%.

“One day up, the next, down. Look, we’re down 2.5% this morning. It’s very choppy despite the trillion dollars in stimulus.

“Our clients are staying on the sidelines. They’re not buying anything,” he said.

Autocall on Citi

UBS AG, London Branch priced $25.45 million of three-year contingent income autocallable notes on Citigroup Inc. It was the top deal last week, according to the preliminary data.

The quarterly contingent coupon of 22.5% per year is paid if the stock is at or above a 50% coupon barrier.

The notes will be automatically called at par of $10 if the shares close at or above the initial share price on any quarterly observation except the final one.

The repayment barrier at maturity is 50%.

UBS Securities LLC is the agent. Morgan Stanley Smith Barney LLC is the underwriter.

Second-biggest deal

Updated data for the previous week ended Friday, April 3, showed $723 million in 281 deals. Bank of America was the top agent for this hybrid week in between March and April. The agent priced nearly 27% of the total in only three deals.

In particular BofA Finance LLC priced during that week $164.34 million of six-year autocallable market-linked step-up notes tied to the S&P 500 index.

It was the second largest one after Barclays Bank plc priced $250 million cash-settled equity linked notes tied to Visa Inc. in mid-February.

The top agent in March was UBS with $1.613 billion in 342 deals.

It was followed by Morgan Stanley and JPMorgan.

© 2015 Prospect News.
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