Structured products weekly tally $480 million amid buoyant equity market setting new record

By Emma Trincal

New York, May 24 – Structured notes issuance was relatively healthy last week as equity investors appeared to ignore the U.S. debt ceiling standoff, pushing the S&P 500 index to a new record high for the year to date, finishing the week with a 1.6% gain.

Agents priced $480 million in 103 deals, according to data compiled by Prospect News. Newly revised figures for the previous week showed a tally of $1.23 billion in 268 deals. For the month to date through May 19, issuers brought to market $2.41 billion in 551 deals, a 5.3% decline from the same period in April, which remained muted and possibly reversed as more deals get filed with the Securities and Exchange Commission by month end.

Debt ceiling

“For many investors in equity, the risk of a default remains technical,” a sellsider said about the surprising stock market rally.

“Most equity investors are ignoring the risk because only a few have exposure to Treasuries. The bond market of course is much more sensitive to what’s happening in Washington. But for equity investors, the focus remains on the economy, the Fed and inflation.”

A structurer agreed.

“I don’t think retail investors who buy structured notes are paying much attention to the debt ceiling negotiations. Available yields, what the Fed does looking forward are more important issues for them.

“We’re in a wait-and-see period. Yes, the market rallied a lot last week. But if you look at the past month, it has only gone up by 1%,” the structurer said.

Issuer calls

Callable structures last week made for 50% of total sales with $242 million in 67 offerings. The volume of issuer call deals represented a third of all callable structures, suggesting a higher level of adoption on the part of investors for those less predictable products.

“We’re seeing investors more and more comfortable with issuer calls,” the structurer said. “You can get a good pickup in yield with them compared to an autocall.”

As an example, he said he recently priced a three-year note showing an extra 1% to 1.5% pickup with the issuer call versus the autocall.

“I think that’s the main reason why you see a push in that direction,” he said.

Equal weight

Most of the year-to-date equity market gains come from the mega-cap, tech stocks. Despite strong rallies like last week’s, the S&P 500 index has only gained 7% for the year while the Nasdaq has climbed by nearly 18%.

The S&P 500 index itself owed its growth to seven top holdings making for 26% of the index, including Apple Inc., Microsoft Corp., Amazon.com, Inc. and Alphabet Inc.

Some investors have expressed concerns about the overly concentrated benchmark, the sellsider noted.

This has led issuers to recently offer more notes linked to the S&P 500 Equal Weight index. While small in size, those deals have come up more often. Last week Barclays Bank plc and Toronto-Dominion Bank each priced one issue.

“We’ve seen a few of those Equal Weight as there is a concern about the excessive concentration of mega-cap stocks in the S&P,” the structurer said.

“The S&P 500 Equal Weight has not performed as well as the S&P. But some investors will take a lower return if it’s better suited for their risk appetite.”

In some instances, investors sought to use the equal weight concept to bet on a specific sector. This was the case with Canadian Imperial Bank of Commerce’s $18.88 million of 13-month notes linked to the S&P 500 Equal Weight Energy index, which also came last week.

ETFs, stocks

While ETF underliers continued to reflect the broader market through the use of the Invesco QQQ Trust (Nasdaq-100 index) and the SPDR S&P 500 ETF, the distribution of single-stock-linked notes was sector-specific by virtue of the type of stocks used in deals.

Agents priced $80 million of ETF-linked notes in nine offerings, or 17% of total sales. All offerings but one were tied to the ETFs replicating the S&P 500 index and the Nasdaq-100.

On the other hand, investors buying notes on single stocks focused on tech and financials.

“The bulk of the market performance comes from tech. There is a very high dispersion in sectors. Not only tech, but energy stocks or financials have their own performance patterns,” the sellsider said.

A third of the stock-linked notes volume came from tech names such as Advanced Micro Devices, Inc., ON Semiconductor Corp., Marvell Technology, Inc., Advanced Micro Devices, Inc., Amazon.com, Inc., Microsoft Corp., Apple Inc., Micron Technology, Inc. and Palo Alto Networks, Inc.

Most of the other deals reflected bids on the financial sector, including brokerage names such as Fidelity National Information Services, Inc. and Charles Schwab Corp.

Picking winners

Both big tech and regional banks were the top performers last week. The SPDR S&P Regional Banking ETF (“KRE”), which plummeted in March due to the failures of Silicon Valley Bank and Signature Bank, has staged a rally, jumping 10% last week. The fund, however, has yet to recover from its sell-off.

“Market participants are expressing their views. When a sector is extremely volatile like tech, they want to link that sector to monetize volatility,” the sellsider said.

“Sometimes – and KRE is a perfect example – the sector is so oversold... investors jump in to buy the dips.”

Issuance of single stock-linked notes, however, has suffered a 50% decline this year to $3.13 billion from $6.24 billion a year ago.

This month, the tally for stocks is $243 million, a 24% drop from April.

“Part of it is because a lot of investors got burned last year especially in the tech sector,” the structurer said.

Technology as measured by the Technology Select Sector SPDR ETF dropped nearly 28% in 2022 versus 19.4% for the S&P 500 index.

Eight-, 12-year paper

The average tenor last week was 2⅓ years.

Surprisingly, Morgan Stanley Finance LLC priced two longer-dated deals tied to the S&P 500 index each for $15 million. The payout was uncapped leveraged return with a 50% barrier at maturity.

One issue was an eight-year note with 1.46x leverage; the second was a 12-year product with a 1.66 multiple on the upside.

“It’s pretty unusual for an equity note to go that long,” the sellsider said.

“I suppose it was a one-off. You can definitely get better terms with those types of tenors. There is more funding over the long-term.”

Typically, long-term equity-linked notes are bought by large institutions, he added.

“But that’s not the case apparently. Institutions hedge the downside themselves. They don’t do barriers. They do one-to-one. Also, the size suggests it’s not a big institution but most likely, retail,” he said.

Deals

Last week’s top deals were not that large, according to the preliminary data.

The first one sold by UBS was Barclays Bank plc’s $23.26 million of two-year callable notes with daily coupon observation on the Dow Jones industrial average, the S&P 500 index and the Russell 2000 index. The contingent quarterly coupon was 10.1% and the barrier, 70%.

The notes were issuer callable, and the barrier at maturity was set at 60%.

Issuers are becoming more creative in the structuring of some deals. One of them last week priced a dual directional at-the-money digital note with full principal protection.

It was Citigroup Global Markets Holdings Inc.’s $20.89 million of two-year notes linked to the S&P 500 index, which paid a 6.25% call premium if the notes were called on a unique call date after one year. At maturity, the index, if flat or up, triggered the payment of a 10% digital. On the downside, investors received the absolute value of the index return up to 15%. If the decline exceeded 15%, they would get par.

Year to date

Issuance volume for the year through May 19 is at nearly $31 billion, a 16% drop from last year’s $37 billion.

But there is still room for progress, according to the structurer.

“There is cash on the sidelines waiting to be deployed. If the market continues to trade range bound as it has so far this month, we’ll see a pickup in yield products. Those structures work well in a sideways market. You can get an attractive yield if the market is flat or even down,” he said.

Last week’s top agent was UBS with $107 million sold in 26 deals, or 22.2% of the total.

It was followed by Morgan Stanley and JPMorgan.

The No. 1 issuer was JPMorgan Chase Financial Co. LLC, which brought to market 18 offerings totaling $75 million, a 15.6% share.

© 2015 Prospect News.
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