Structured products issuance up 8.4% for year to date, but early signs of slowdown seen

By Emma Trincal

New York, May 26 – Agents have priced $31.30 billion of structured notes through May 21 this year versus $28.88 billion a year ago, an 8.4% increase, according to preliminary data compiled by Prospect News. The number of offerings however is relatively flat so far at 8,721, up from 8,588, a 1.5% increase. But figures both for sales and deal count are subject to upward revisions.

January remained the most active month in volume with $8.09 billion. It was followed by March, which showed a $7.85 billion tally. Preliminary data indicates that April with $6.31 billion is for now the weakest month but not far from February’s tally at $6.90 billion.

Tumultuous April

“The tech sector incurred a significant correction in April even if the broader market had a good month,” said Samuel Rosenberg, managing partner at Lutetia Capital.

“Outside of the FANG stocks, which did very well during that time, many growth stocks like Tesla suffered quite a bit as a result of growing concerns about inflation.

“Since then, we’ve seen a greater rotation from growth to traditional value stocks. People have been rebalancing their portfolios,” he said.

The CBOE Nasdaq Market Volatility index, which measures the near-term volatility conveyed by Nasdaq-100 index options, surged 62% from April 16 to May 12.

“It’s true that when volatility spikes, some investors want to place tactical bets in search of higher coupons since income products are short volatility,” he said.

“But volatility is not the main factor when you buy a note. Delta is. You want to benefit from volatility but not at the risk of being delivered the stock.

“That scares everyone.”

Down and up

Agents last week priced 99 offerings totaling $178 million, a number that is still preliminary. Updated figures for the previous week give $766 million in 154 offerings.

“A lot of clients are right now sitting on the sidelines. It could be that people think the market is overvalued,” a sellsider said.

The stock market was choppy, down in the first half of the week then up toward the end, leaving the S&P 500 index nearly flat.

The market continued to be preoccupied with inflation, but the 10-year Treasury did not move much. The release of the Federal Reserve minutes talking for the first time about the possibility of tapering asset purchases was news, which apparently the market had already priced in.

The real pressure on asset prices came from cryptocurrencies, which dropped 30% on Wednesday.

“There was no big moment last week, not so much news compared to past weeks when everybody was talking about inflation and rising interest rates,” said Rosenberg.

“The only big move was crypto, which dropped 50% from its all-time high. It was the talk of the town and yet, it did not have a contagion effect on equity prices and volatility. It didn’t play out on structured products sales since there are very few structured products tied to crypto given the regulatory constraints.”

But the event may have been a distraction.

“Perhaps everybody was paying attention to Bitcoin, not making any particular move either in equity or structured products,” he said.

Bid on single stocks

The lack of direction in the market may have contributed to a switch from equity indexes to single stocks, as those represented 52% and 32% of total sales last week, respectively. On a year-to-date basis, stocks account for only 21% of total sales and equity indexes 58%.

There were 89 stock-linked notes offerings totaling $57 million.

Investors bought the recovery story using names such as Boeing Co., Carnival Corp., United Airlines Holdings, Inc., Southwest Airlines Co. and Alcoa Corp.

The energy sector was down last week leaving open some tactical bets on Apache Corp. and Schlumberger NV.

Mega tech and growth stocks continued to call attention with Tesla, Inc., Facebook, Inc., Apple Inc., Amazon.com, Inc. Alphabet Inc., Nvidia Corp. being as usual the most common names.

Financial names such as Citigroup Inc., Capital One Financial Corp., Citizens Financial Group, Inc. and Barclays plc were also common underliers.

The average size of those deals was $640,000. But a larger one contributed to the overall volume in this asset class coming from Toronto-Dominion Bank’s $10 million of autocallable buffered notes with memory on Biogen Inc.

“It’s good to see more stocks,” a market participant said.

“Stocks are more exciting especially when you see a variety of sectors, not just big tech.

“Retail is a homogeneous group and index deals tend to be the same over and over. You don’t see a lot of unusual ideas. That’s why I prefer the custom business.”

Big index deal

Not surprisingly all stock-linked notes offerings were income products with a call feature. This structure dominated the flow.

There were fewer equity-index-linked notes offerings – six in total – but the average size for this category was $15.5 million. This in part was due to a block trade in excess of $50 million.

UBS AG, London Branch priced $51.54 million of trigger callable contingent yield notes with daily coupon observation due Feb. 23, 2024 linked to the worst performing of the Nasdaq-100 index, the Russell 2000 index and the S&P 500 index.

The notes pay a quarterly contingent coupon at an annual rate of 9.48% based on a 70% coupon barrier and are callable quarterly.

The principal repayment barrier at maturity is 60% of the initial price.

Autocallable contingent coupon notes with or without memory represented more than 80% of total sales last week. Leverage, with a market share of 5%, was unusually weak. The gap compared to the year-to-date average was significant. Autocalls account for nearly two-thirds of this year’s issuance volume versus 20% for leverage.

“The autocall is just the product that investors and advisers know. It’s the go-to product at this stage,” said Rosenberg.

Steepener in sight

For a change, last week saw the pricing of a relatively large rate offering in the form of a steepener.

Those deals are popular as secondaries but not as common as new issues, according to the data.

Citigroup Global Markets Holdings Inc. priced $25.38 million of 10-year callable fixed-to-floating rate leveraged CMS spread notes.

The interest rate is 4% for the first year. After that, it will accrue at a rate of 3.25 times the 30-year Constant Maturity Swap rate minus the five-year CMS rate, subject to a maximum of 8% and a floor of 1%. Interest will be payable quarterly. The notes are callable after one year on any interest payment date.

The payout at maturity will be par.

The top agent last week was UBS with $109 million in 93 deals, a 61.3% share. It was followed by Citigroup and Goldman Sachs.

UBS AG, London Branch was the No. 1 issuer with 92 deals totaling $101 million. UBS was also the top issuer during the previous week.

For the year, Morgan Stanley Finance LLC tops with $4.54 billion in 836 deals, a 14.5% of the total.

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