Structured products issuance $1.13 billion for week; BofA contributes $450 million

By Emma Trincal

New York, Aug. 3 – Structured products agents priced $1.13 billion in 197 deals in the latest week, according to preliminary data compiled by Prospect News. BofA, which tends to price the bulk of its inventory in the final week of the month, sold $450 million in just 26 offerings, or 40% of the total.

The Federal Reserve raised interest rates by 75 basis points last week without interrupting a bullish momentum, which pushed the S&P 500 index 4.3% higher on the week.

Since mid-June, the stock market has been rallying. The S&P 500 index jumped 14.4% in less than seven weeks.

Some bad economic news such as the 0.9% annual decrease in GDP in the second quarter following a 1.6% decline in the first quarter have become good news for the market, according to some analysts, who said that the futures market has already priced in rate cuts for next year.

BofA week

Last week’s breakdown of structure and asset types was not typical given the impact of BofA’s action. For instance, income notes with autocalls made for only 20% of the total while leverage accounted for half of it. In comparison, the average for autocallables on a year-to-date basis is 42% while leverage remains limited to 25%. Interestingly the market shares of autocalls have strongly declined this year (to 42% from 65% a year ago).

The bulk of last week’s tally came from index-linked notes totaling $971 million in 119 deals. Sales of worst-of indexes were limited to only $124 million. In comparison, single indexes accounted for $787 million. The difference were notes tied to weighted baskets of indexes.

“I think last week is not typical of what worst-of issuance usually represents,” a structurer said.

“Traditionally, BofA doesn’t do a lot of them. They also don’t do many income notes. The autocalls they do are not pure income plays.”

Big ARNs

Indeed, the top deals last week were the commonly seen Accelerated Return Notes or ARNs sold under the BofA Securities franchise and issued by a diverse group of Canadian issuers, as usual.

Canadian Imperial Bank of Commerce priced $83.33 million of 14-month ARNs linked to the S&P 500 index paying par plus triple any index gain, capped at par plus 18.92%. Investors will be exposed to any index decline.

Separately, Royal Bank of Canada priced $69.42 million of two-year leveraged notes on the S&P 500 index. The leverage factor is 2 and the cap, 22.2%. There is a 10% downside buffer.

Issuers also priced a few absolute return notes and digitals.

On the absolute return side, BofA priced on the behalf of CIBC $22.97 million of two-year notes on the S&P 500 index. The upside payout is the index gain capped at 15% while the absolute return is offered within the range of a 21% buffer.

Autocall evolution

One sellsider was bullish on autocalls.

“We’ll see more. That’s where the market is headed. People like those deals because money is not locked up. As evidence of that, we’ve seen more autocalls with participation at maturity, a sign that the market is growing beyond income solutions,” he said.

GS Finance Corp. offered an example of those autocall structures, which are not primarily designed for income, in the pricing of $71 million of three-and-a-half-year index-linked notes tied to the Nasdaq-100 index.

The notes will be called at par plus a 15% call premium if the index closes at or above its initial level on a single observation date after one year.

If the notes are not called, the upside payout at maturity will be par plus 1.4 times the index return with no cap and an 80% barrier on the downside.

Bear twist

Structures remained conventional last week with not many exotic plays. One exception: a small bearish note co-distributed by Citigroup and UBS. Citigroup Global Markets Holdings Inc. priced $5.26 million of one-year bearish barrier market-linked notes with daily barrier observation on the S&P 500 index.

If the barrier is breached on any day, investors get 10% at maturity. If not, they either receive par if the index return is positive, or the absolute return within the 0% to-20% barrier range if it’s not.

The structurer noted that the offering was small in size. Very few bearish notes have been priced lately although more were seen prior to the July rally, according to the data.

“Advisers almost never buy bearish notes. They’ve never been that popular,” he said.

“Most structured notes are mildly bullish. They already have some sort of embedded protection. Investors who buy bearish notes are really bearish. They’re betting against the market. It’s a speculative bet. Very few people have this kind of mindset.

“While you could in theory use a bearish note as a hedge, investors prefer raising cash or buying puts. Buying a put may be expensive. But notes are not free either.”

Total World

Underlying indexes used the most remained big U.S. equity benchmarks such as the S&P 500 and the Nasdaq-100. For sector plays, the Energy Select Sector index was popular as well. Energy was one of the top-performing sectors, up 10% last week.

A BofA deal introduced the Vanguard Total World Stock ETF as a sole underlier. This fund was used before in a worst-of (with the S&P 500 index) or as a basket component but not as a stand-alone reference asset, according to the data. The deal was brought to market by Toronto-Dominion Bank in $19.34 million of two year leveraged notes featuring 2x the upside capped at 26.2% and a 10% buffer.

Barclays’ rescission

As previously reported, Barclays Bank plc began this week its rescission offer to eligible purchasers of about $17.6 billion of securities issued in excess of amounts registered under its U.S. shelf registration statement.

The rescission offer was filed this week, on Monday. The 30-business-day offer will end at 5 p.m. ET on Sept. 12.

The rescission pertains to notes that were issued in excess of registered amounts between late June 2019 and early March 2022. This more than two-and-a-half year time span exceeds the “approximately one-year period” Barclays initially estimated in its late March announcement. Through an independent review, the bank was able to update the amount of time during which the over-issuance of securities in the U.S. mistakenly happened as well as the dollar size of securities affected by it, which was $15.2 billion in the initial disclosure and $17.6 billion in the offer.

The cost of buying back the securities at par contributed to shrink the bank’s bottom line. Second-quarter profits amounted to £1.07 billion ($1.35 billion), a nearly 50% drop from the previous-year quarter, according to Barclays’ earnings report published on Thursday.

“Somebody screwed up for sure, and Barclays is paying a hefty price to fix it,” the structurer said.

Fewer deals

For the year to date, structured notes issuance volume continued to decline. Sales are down 16.85% to $48.07 billion through July 29 from $57.81 billion a year ago.

The number of offerings fell by 42% to 9,922 from 17,146.

The structurer said that the steep decline in the deal count may hide positive news: more deals may be sold to registered investment advisers (RIAs).

“RIA deals tend to be bigger than retail issues offered through brokers simply because RIAs put different clients in the same pool and use those trades for asset allocation rather than for tactical plays,” he said.

The 42% decline in the deal count is much greater than the drop in issuance volume of 17%, he noted. Meanwhile the average deal size has increased this year to $4.84 million from $3.37 million a year ago.

“Unfortunately, we have fewer deals, but volume is not dropping as fast. I think we can make a cautiously optimistic assumption that RIAs are becoming more and more buyers of structured notes,” he said.

Bullish on equities, rates

The sellsider said that volume declined due to current market conditions.

“The market is still down year to date. We know that notes haven’t been called. There’s not as much money out there to be reinvested,” he said.

But things could change.

“If the rally persists, autocalls will gradually come back. Once it happens, we could have a pickup. Personally, I think the rally will continue,” he said.

This sellsider also predicts more principal-protected notes (PPNs). Those structures benefit from higher interest rates, but recently yields have dropped in conjunction with the equity rally. The 10-year Treasury yield shed 73 bps since mid-June. For this sellsider, the downward move is only temporary.

“Rates will go up. That’s been the trend for the year. We’ll see more interest in PPNs as a result. Yields have declined a bit lately, so it’s a little bit more difficult to put together PPN deals. But it’s still doable compared to one-and-a-half years ago.”

The top agent last week after BofA Securities was UBS with $295 million in 81 deals, or 26.2% of the total, followed by JPMorgan.

The No. 1 issuer was CIBC, which brought to market nine offerings totaling $183 million, a 16.3% share.

The second top issuer was Royal Bank of Canada followed by TD Bank.

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