Structured products issuance $348 million for week; September expected to be strong

By Emma Trincal

New York, Oct. 12 – Structured products issuance volume for the first week of October was $348 million in 93 deals, according to preliminary data compiled by Prospect News. This came on the heels of a very big week ended Sept. 30, with saw $2.52 billion sold in 367 offerings.

While the final week of any given month is always the largest one due to BofA’s block trades at that time, the final week of September was the fourth biggest week of the year, according to the preliminary data. The tally for September is not yet finalized.

Last month

“I would expect September to be one of the best months given Barclays’ rescission giving people cash to redeploy,” said Brady Beals, director, sales and product origination at Luma Financial Technologies.

After Barclays realized in March that the bank had issued more than $17 billion of structured notes in excess of its shelf capacity since 2019, the bank had to buy back at par the “over-issued” notes from existing noteholders, a process named “rescission.” The rescission which commenced on Aug. 1 ended Sept. 12. By Sept. 15, initial investors in the over-issued securities received $7.7 billion in cash, according to a bank’s announcement.

“On top of that, optionality was good in September with the pullback,” he said.

September was a bad month for stocks and bonds alike as the Federal Reserve pursued its tightening measures amid hot inflation data.

The pullback may intensify fears with all three U.S. benchmarks now in bear market territory. On Friday, U.S stocks tumbled after a strong job report. Analysts interpreted the market reaction as a sign that investors previously anticipated that the Fed would pause or reverse its aggressive tightening policy but saw their hopes crushed by the stronger-than-expected employment picture.

Indexes top

The proportion of equity indexes underlying was overwhelmingly high last week, reaching 91% of total sales.

A market share over 90% usually encompasses not just indexes but also stocks, both under the umbrella of equity underliers, according to Prospect News methodology. As a comparison, 87% of this year’s issuance volume consisted in all equity assets. The share of equity indexes was only 71% of the total.

A breakdown within the equity indexes category last week showed an even distribution between worst-of indexes (46% of the total) and single indexes (44%). This represents a relatively new trend as worst-of indexes tended to overshadow single indexes earlier this year.

For stocks and baskets of stocks, the tally was $22 million only, a meager 6.3% of total sales.

“I can see that volume is more skewed toward indices and also more skewed toward single indices. We see fewer stocks,” said Beals.

He explained.

“There is growing uncertainty about the direction of the market. People have less convictions on stocks and sectors, so indices are the logical way to go,” he said.

“In addition, the optics are more attractive given the volatility, so advisers are more comfortable using conservative structures and conservative underliers.”

Bad trades

The decline in stock-linked notes issuance had more to do with pain than fear.

“A lot of single stock deals didn’t pan out so well. I’m talking about the Covid-type trades, names like Airbnb, Peloton, Zoom or Uber,” he said.

Peloton Interactive Inc. for instance dropped 93.3% from its high in October 2021 to its Oct. 3 low. Zoom Video Communications Inc. lost more than 55% during the same time between its 52-week high and low.

“People realize that single stock underliers come with additional risks,” he said.

Issuance volume of stock underliers (including single names and baskets) dropped more than half this year to $10.52 billion from $21.84 billion.

The top single names used last week were Boeing Co., Tesla, Inc. and Alphabet Inc. The sizes of those deals however were tiny ranging from $4 million to $1.3 million.

Same old basket

Another less represented asset class are weighted baskets of indexes. Only one such deal came out last week: Barclays Bank plc’s $2.5 million of leveraged notes tied to a basket consisting of the Stoxx Europe 600 index (67.5% weight), the Nikkei 225 index (25% weight) and the S&P/ASX 200 index (7.5% weight).

“Baskets of indices are always international. I’ve always noticed that. I’m not exactly sure why,” said Beals.

“Correlation is a factor. There is more correlation among U.S. underliers than there is among international benchmarks even if U.S. indices are not exactly the same with small-cap, large-cap and tech-focus exposures.

“There may be some allocation factors as well. Using a basket of international indices can be convenient if you don’t use the indices individually.

“I’ve also noticed that you never see income deals with these international baskets. It’s always point to point.”

A market participant said there is demand for international equity allocation.

“Structured notes are very U.S-centric,” he said.

“I would love to see more notes tied to one international index or ETF as opposed to baskets for diversification purposes. We used to see more notes on emerging markets but not anymore.”

Nearly all international baskets are designed as a proxy for the MSCI EAFE index, according to data compiled by Prospect News. The represented markets are almost always the euro zone, the U.K., Japan, Switzerland and Australia.

Better late than never

Leverage notes issuance made for only 13% of total sales. Within that structure type, the preferred bid continued to be on barrier or buffered notes.

“People are worried right now with the market down 25%. They want to be more defensive and buy buffers and barriers. That makes sense. But it’s when things are going great that you need to buy the downside protection. Last year was the time to do it, not so much today,” an industry source said.

Autocallable notes including snowballs amounted to 58% of the total, in line with the year-to-date average.

Decline in volume

The yearly issuance volume through Oct. 7 continued to fall. Sales are down 15.2% to $64.9 billion from $76.5 billion last year.

“I think we know one big reason: deals didn’t get called this year. Call activity is a big driver. Second big factor: Barclays stepped out of the market for almost half of the year,” he said.

As a result of having issued more than it was allowed to sell, Barclays was obligated to stop selling new securities after March 9. It only returned to the market on Aug. 2.

“There may be the rate factor although I don’t think it carries as much weight,” he said.

“Interest rates are now higher, which may make traditional fixed-income instruments more attractive for some people.”

Piggy backing

The deal count dropped even more drastically this year to 14,521 from 22,982, a 37% decline.

Here again, the reduced number of calls played an essential role, said Beals. But he brought up a lesser-known explanation.

“You would think that with customization and automation, more deals would have come out. That was the whole idea behind fintech: boosting volume with many more deals. After all issuers are able to issue quicker, they can do smaller size deals, they’re better equipped to handle capacity and pricing,” he said.

But technology and transparency had unintended consequences, he added.

“If adviser one creates a deal, say for $3 million, it’s easier for adviser two to see the deal on the platform.

Information is spread quicker and adviser two may decide to tack their own deal onto adviser one deal instead of creating a new one,” he said.

Top issue

Last week’s top offering was a large snowball brought to market by UBS on the behalf of Citigroup Global Markets Holdings Inc. The $50.3 million of five-year step-down trigger autocallable notes are linked to the worst of the S&P 500 index and the Russell 2000 index.

The notes will be automatically called at par plus 16.04% per year if each index closes at or above its initial level on any semiannual observation date after one year.

At maturity, if each index finishes at or above its step-down threshold, 90% of initial level, the notes will be called at par plus 80.2%.

The barrier is 80%.

“Interesting,” said Beals.

“They usually match the barrier with the step down but here, they don’t. You don’t have to step down all the way to the barrier. So, you get 100% back between 80% and 90% and 180% above 90%. The probabilities work for you. You’re more likely to finish between 90% and 100% than between 80% and 90%. I like the structure.”

UBS was the top agent last week with 19 deals totaling $110 million, or 31.6% of the total. It was followed by Goldman Sachs and JPMorgan.

The No. 1 issuer was Citigroup Global Markets Holdings with $82 million brought to market in 15 offerings, a 23.5% share.

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