Structured notes issuance $324 million for week amid bid on autocalls, value, international plays

By Emma Trincal

New York, March 17 – Last week’s structured products issuance hit $324 million in 140 deals as the equity markets rallied, pushing the S&P 500 index up 2.6% to new highs, according to preliminary data compiled by Prospect News.

Long-term interest rates continued to rise with the 10-year Treasury yield hitting a 1.64% yield on Friday, but the impact was more visible on the Nasdaq, which closed slightly down while sentiment was bullish for value and cyclical names. Separately, more structured notes buyers were venturing into international exposure diversifying away from richly priced U.S. stocks.

Year to date

Volume for the year is slightly down, but current figures are not finalized and therefore are subject to upward revisions. As of Friday, agents have priced 4,326 deals totaling $14.81 billion, a 12.9% decline from $17 billion during the same time last year, which saw the pricing of 4,564 offerings.

“We’re feeling a little bit of a slowdown. Deals get called, but clients need a pause. We don’t see as many rollovers as before,” a sellsider said.

“There’s some kind of fatigue. We show a lot of structured products and at some point, you can’t tell the client everyday they have the next best thing.

“Investors want to sit back and see if the bull market is going to continue to run.

“They’re already long the market. They hesitate to get more equity exposure given that valuations are so much higher.”

Trailing 12 months

On a 12-month trailing basis, volume is still healthy, up 12.2% to $70 billion in 22,300 deals compared to $62.4 billion in 18,967 deals during the previous 12-month period.

“One week, one month are not significant, even the first two-and-a-half months of the year. That’s not going to give you an accurate picture of total sales. If you look at the trailing, we’re up, and that’s the most important measure, the one with less noise,” said a market participant.

Call, autocall bid

More than ever, autocallables and callable notes prevailed making about 90% of total volume, which is exceptionally high. The snowballs which pay a premium upon the autocall rather than a contingent coupon were widely embraced, accounting for 36% of the total. This $115 million worth of snowballs included BofA’s market-linked step-up deals, which offer full upside participation at maturity above the full “step-up” premium.

For asset classes, equity indexes surged making for 75% of total sales last week. Single stocks were not in high demand, investors preferring ETFs.

Compromises

The search for yield continued to be the main driver with investors accepting some necessary tradeoff. The top deal of the week offered two examples of such concessions within the same structure – an “American” coupon barrier (or daily observation) and an issuer call in place of the automatic call.

This deal was Citigroup Global Markets Holdings Inc.’s $31.22 million of two-and-a-half-year callable contingent yield notes linked to the least performing of the S&P 500 index, the Russell 2000 index and the MSCI Emerging Markets index.

Each quarter, the notes pay a contingent coupon at a rate of 10% per year if each index closes at or above its coupon barrier, 65% of its initial level, on every day that quarter.

The notes are callable at par of $10 plus any coupon due on any quarterly coupon payment date.

The barrier at maturity is 55% of the initial price.

Citigroup Global Markets Inc. is the underwriter, and UBS Financial Services Inc., the agent.

“I don’t think an issuer call is a big compromise for investors,” a market participant said.

“They know they can get better terms. What difference does it make? If you’re called, you get par and your premium. The only thing here that’s a little different is the daily observation on the coupon. But that’s how they can push down the barrier.

“You’re trading space for time. You can breach more often but at the end, you have more room before the fall.”

Value

As signs of economic recovery become more obvious, thanks in part to progress in vaccination across the country, investors continued to rotate out of tech stocks into value plays such as energy, travel companies and financials.

While modest in size, JPMorgan Chase Financial Co. LLC’s $5 million of 18-month leveraged notes linked to a J.P. Morgan consumer recovery basket of 49 stocks exemplified the demand for stocks that are expected to do well in a post-pandemic environment. Among the constituents: Royal Caribbean Cruises Ltd., United Airlines Holdings, Inc., Wynn Resorts, Ltd., MGM Resorts International, MasterCard Inc., Visa Inc., General Motors Co. and Starbucks Corp. to name only a few.

GS Finance Corp. used the S&P 500 Value index in combination with the MSCI Emerging Markets index to price another value-oriented note via $30.66 million of 10-year autocallable contingent yield notes linked to the worst of the two benchmarks.

The contingent quarterly coupon is at 6% per year based on a 70% coupon barrier.

The threshold level at maturity is 55% of initial price.

UBS Financial Services Inc. and Goldman Sachs & Co. LLC are the agents.

There was something “odd” in using a 10-year tenor in this worst-of, the market participant said.

“Those two indices are not very correlated. One of them, the emerging markets one, is volatile.

“The 6% coupon doesn’t really grab me.

“So, I’m a little bit surprised it’s a 10 year.

“Perhaps it’s because you only have two underlying and also, the S&P Value index is not very volatile.”

Foreign affairs

The Goldman Sachs deal however showed that investors have no qualm tapping into non-U.S. markets as U.S. stocks are at all-time highs.

Another decent-size deal based on foreign exposure was Morgan Stanley Finance LLC’s $18.4 million of five-year of autocallable jump securities linked to the MSCI Emerging Markets index with a 10% call premium and a 50% barrier at maturity.

If the index falls by up to 20%, the payout will be par.

Otherwise, investors will lose 1.25% for every 1% that the index declines beyond 20%.

Single underlying

Last week also revealed issuers’ ability to price reasonably large autocalls on a single index rather than having to use a worst-of.

HSBC USA Inc. for instance priced $24.81 million of two-year snowballs on the S&P 500 index, which pay an annual call premium of 9% with an 80% barrier at maturity.

Tapping into a more volatile underlying, Barclays Bank plc issued $20 million of two-year autocallable contingent interest notes tied to the Invesco QQQ Trust, Series 1. The 12.4% contingent monthly coupon is based on an 80% barrier. The notes are automatically called any month above the initial price. A 15% geared buffer with a 1.1764 multiple protects some of the downside. JPMorgan is the agent.

Another single asset deal was one of the four BofA Securities’ market-linked step-up autocallables, which the agent priced on the behalf of Canadian Imperial Bank of Commerce.

The $18.9 million offering was a six-year product linked to the S&P 500 index offering an annualized call premium of 5.6%. At maturity, if the index finishes positive but at or below a 135% step-up level, investors get the step-up return of 35%. Above 135%, the payout is the index gain. There is a 15% buffer on the downside.

Volatility and rates

Worst-of deals are used to get extra premium when volatility is not high enough, the market participant said.

“The normal assumption would be that there is plenty of volatility to do away with worst-of. You can price a nice coupon with a single index,” he added.

“That would be the wrong assumption because volatility hasn’t really gone up. The VIX is actually down. I’m not sure what allows some issuers to price deals on one index other than perhaps the recent rise in rates. As we know, when rates go up, it helps.”

The CBOE VIX index was down 25% last week to 20.69 from 27.61 but remains slightly above its 19.5 long-term average.

At the same time, higher interest rates have injected fear into the markets, which has introduced turbulence toward the end of January and during the second half of February. The S&P 500 index is only up 5% year to date but in less than the past two weeks, it has already rallied 7%.

“We could use a little correction,” the sellsider said.

“Such rising markets are not so great. Volatility goes down. Stock prices are perceived as being too high. You can show barriers at 50%; people will tell you the market was 50% lower a year ago.

“They just want to wait.”

The top agent was UBS with $169 million in 127 deals, or 52% of the total.

It was followed by Bank of America and HSBC.

Canadian Imperial Bank of Commerce was the No. 1 issuer, bringing to market four market-linked step-up deals totaling $58 million all distributed by BofA Securities, Inc.

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