Weekly structured notes tally $292 million amid Nvidia-induced stock market mania

By Emma Trincal

New York, Feb. 28 – Structured notes issuance was uneventful last week with only $292 million in 34 deals, according to preliminary data compiled by Prospect News, in sharp contrast with the buoyant rally in the equity market almost entirely driven by one stock. Blowout earnings from Nvidia Corp. released on Wednesday sparked a rally pushing the S&P 500 index and the Dow Jones industrial average to new record highs.

The share price of Nvidia itself jumped 16% on Thursday sending the chipmaker's stock to a $2 trillion market capitalization.

The S&P 500 index gained 1.7% on the week.

Market’s turbocharger

The AI-based enthusiasm seemed to have replaced the focus on rate cuts as a main driving force behind rallies, said Steve Sosnick, chief Strategist at Interactive Brokers.

“Nvidia and other key large-cap technology stocks are driving the bus. It’s hard to imagine them having a larger role on the market psyche than the Fed, but it seems to be the case,” he said.

“It’s NVDA’s market, and we’re all living in it.”

But the new momentum is not without dangers.

“A thing that has me a little concerned is the foaming-at-the-mouth enthusiasm for anything related to Artificial Intelligence,” said Jerry Verseput, president of Veripax Wealth Management, in his latest note to clients.

“The AI craze is looking a lot like the dot-com craze, although I have to admit that AI companies like Nvidia are making a lot more money than Pet.com.”

The next big story

Will the “craze” around Nvidia lead the stock to become one of the most popular single stocks used as an underlier in the same league as Microsoft Corp. and Amazon.com, Inc.?

It has not been the case so far, but market participants expect the AI chipmaker to move up in the rankings.

Among the so-called “Magnificent Seven” stocks, Nvidia is only the fourth top underlier with $102 million in 38 deals, according to the data. That’s below Tesla Inc. ($120 million), Amazon ($227 million) and Microsoft whose numbers have recently been inflated by a behemoth deal priced at $794 million.

“Unless something negative comes along, we should see a lot more deals on Nvidia,” a sellsider said.

“It’s a combination of the stock performing well, the media attention and the high volatility of the name.”

The implied volatility of Nvidia is 44%, just below that of Tesla at 49%. Meta Platform, Inc. and Amazon have implied volatilities of 31% and 22%, respectively.

Microsoft’s reign

Microsoft is the top stock among all single name underliers, the data showed.

That first ranking was helped by Barclays Bank plc pricing earlier this month a $794.12 million synthetic convertible deal (or “cash-settled equity-linked notes”) linked to the software giant.

The deal raised the notional amount of notes linked to Microsoft to $1.023 billion for the year.

The Barclays deal belongs to a hybrid category of structured notes, sellsiders often designate as “synthetic convertibles.” Linked to single stocks they typically display monster sizes and mimic convertible bond payouts.

The Barclays notes pay a 1% annual rate, which is enough to cover the 0.74% dividend yield of the stock. A participation is offered at maturity above a 129.5% threshold.

“It’s definitely a structured product because its return is tied to the performance of a stock,” said the sellsider.

Excluding the $794 million deal, Microsoft is the second largest underlier among all single names with $229 million followed by Amazon’s $227 million.

Although rarely used, Regeneron Pharmaceuticals, Inc. has become the top underlying stock of the year by virtue of Morgan Stanley Finance LLC bringing earlier this month another cash-settled deal for $305 million.

Year to date

Those heavyweight issues have an obvious impact on issuance volume.

Sales for the month through Feb. 23 amounted to $4.57 billion in 628 offerings. While this tally includes the Regeneron and Microsoft issues, February’s tally remained weaker than the $6 billion priced during the same period in January. One factor is the lag between when deals get filed with the Securities and Exchange Commission and when they get added to the database.

To be sure, February’s weak tally contrasted with the view of sellsiders interviewed by Prospect News who were upbeat about this month’s business.

“Both January and February are extremely strong for us. This month is just as strong as January. It’s certainly due to a lot of replacing of autocalls that are getting taken out,” the sellsider said.

“We’re doing a large volume of snowballs and catapults,” he noted.

Catapults are leveraged notes, which incorporate a one-time autocall early on in the life of the security.

Snowballs are autocalls that pay a call premium in place of a coupon.

Issuance volume for the year remained positive. Agents sold $14.47 billion in 2,707 deals, an 8.5% increase from $13.34 billion in 3,704 offerings a year ago.

BofA’s $35 million

The top deal last week was BofA Finance LLC’s $35 million of five-year autocallables linked to the least performing of the Nasdaq-100 index, the Russell 2000 index and the S&P 500 index.

The notes pay a quarterly contingent coupon of 8.55% per year based on a 70% coupon barrier, which is at the same strike as the barrier at maturity. UBS Financial Services Inc. and BofA Securities, Inc. are the agents.

While the terms – coupon size, long-term tenor, worst-of payout – would not seem eye-popping to most fiduciaries, the pricing was accurate, said the sellsider.

“That’s where these indices are pricing,” he said.

“Volatility is lower. Indices are higher. Even though rates are still elevated, volatility has come in a lot. The coupon looks normal to me given the market environment. Rates we’re seeing on indices right now are on the 8%’s.”

More from last week

On the growth side, UBS AG, London Branch priced $29 million of one-year notes on the S&P 500 index paying 1.5x the index gain up to a 12.375% cap with a 10% geared buffer on the downside. iCapital Markets LLC acted as dealer.

BofA Finance priced the top single stock offering last week with $15.25 million of 14-months on Amazon.com, Inc. The payout at maturity is triple any stock gain, subject to a maximum return of 30.9% with full downside exposure.

UBS issued the top ETF deal with $10 million linked to the SPDR S&P Biotech ETF. The one-year notes pay a 16.65% contingent coupon with memory and offer a 15% geared buffer. Morgan Stanley Wealth Management is the dealer.

$50 million floating

Previous deals issued earlier this month, which were not previously reported, included Royal Bank of Canada’s $50 million of three-year fixed-to-floating rate notes. The first-year teaser rate is 5.75% followed by a variable rate of two-Year U.S. Dollar SOFR ICE swap rate plus 60 basis points. The offering is the largest rate-linked issue so far this year. Prospect News in its rate category excludes lightly structured plain-vanilla bonds with no underliers.

According to this methodology issuance of rate-linked notes has considerably declined this year to $346 million from $1.39 billion.

Another earlier issue came from Citigroup Global Markets Holdings Inc. with $44.73 million of two-year uncapped digital notes on the Euro Stoxx 50 index. The notes pay a digital payout of 28.56%. Investors are fully exposed to losses.

UBS was the top agent last week with $85 million sold in 10 deals, or 29% of the total.

It was followed by Morgan Stanley and BofA Securities.

The No. 1 issuer was UBS AG, London Branch bringing to market 11 deals totaling $88 million, a 30.2% share.

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