Structured notes issuance for week tops $1 billion amid stock market rally, BofA push

By Emma Trincal

New York, Feb. 1 – Several factors concurred to prop up structured notes issuance volume in the Jan. 23 week, including action from BofA Securities, the pricing of a large cash-settled note offering and a solid stock market performance. Agents priced $1.02 billion in 184 deals in the week ended Friday, according to preliminary data compiled by Prospect News.

BofA Securities hit the market with $379 million in 31 deals, capturing 37% of the weekly volume.

Three-quarters of BofA’s notional sales came from notes tied to a single underlier as opposed to a worst-of.

The agent’s largest deal was from Canadian Imperial Bank of Commerce, $47.82 million of two-year leveraged notes on the S&P 500 index paying at maturity 2x the index gain, up to a 22.93% cap.

The structure provides a 10% buffer on the downside.

The S&P 500 index not surprisingly was the most common single underlier.

The largest deals were leveraged notes, but BofA also used the S&P 500 index as the basis of a couple of autocallable market-linked step-up notes in the $20 million size, which also offer participation at maturity.

The Energy Select Sector SPDR ETF remained a popular underlying given the 64% positive return of this asset last year. The sector is now among the least performing, but still in the green.

HSBC USA Inc. priced a $26.7 million leveraged note on the Energy Select Sector SPDR ETF, which was distributed by BofA.

Other single underliers, which BofA used in its inventory, included the Russell 2000 index, the Dow Jones industrial average, the Euro Stoxx 50 index and even copper in a $3.64 million leveraged deal issued by Canadian Imperial Bank of Commerce.

Big convertible deal

The top deal for last week was one of those hybrid notes with the features of a convertible bond. Those deals pop up from time to time in big notional size with exposure to a single stock.

To give an idea of their size JPMorgan Chase Financial Co. LLC in the spring of 2018 priced $600 million of five-year cash-settled equity-linked notes linked to Voya Financial, Inc. Last week’s deal was smaller in size.

Morgan Stanley Finance LLC priced $64.3 million of five-year cash-settled equity-linked notes tied to L3Harris Technologies, Inc. A 0.25% per year interest rate is paid quarterly.

At maturity, the payout is par unless the stock appreciates by more than 13.75%, in which case the note pays the exchange ratio multiplied by an averaging price determined at maturity.

“It looks like a convertible bond. Whatever it is, is it’s way too complex for retail investors,” said Mark Dueholm, chief fixed-income trader at Landolt Securities.

The deal priced on Jan. 23, three days ahead of the company’s earnings announcement.

Playing offense on defense

L3Harris Technologies is an aerospace and defense technology company, which provides multi-mission intelligence, surveillance, and reconnaissance systems.

Defense was a big theme last week. In addition to this L3Harris deal, issuers priced deals on a defense ETF, which is not commonly used in structured notes. One of those deals was significant in size.

Bank of Nova Scotia priced $32.16 million of 14-month leveraged notes on the iShares U.S. Aerospace & Defense ETF. The payout is triple any fund gain up to 18.5%. There is no downside protection.

BofA Finance LLC priced another 3x leveraged issue on the same fund for $19.48 million in a 15-month note capped at 17.5% with no downside protection. BofA Securities, Inc. distributed both offerings.

Earlier this year, issuers such as Barclays Bank plc priced autocallable worst-of notes on Lockheed Martin Corp., Northrop Grumman Corp. and Raytheon Technologies Corp.

“Advisers and their clients are talking about defense a lot lately because of the war in Ukraine,” a sellsider said. “With billions of dollars in government spending, people are buying defense stocks. But the process takes so long. A lot of those defense stocks are high-tech and right now, a lot of the spending comes from infantry. There is a momentum in that sector though. Investors want to bet on Ukraine. That’s what it is.”

Mark Dueholm at Landolt Securities agreed.

“Some clients think defense is a good play. They think Ukraine is probably going to be at war for a long time and that the defense establishment in the United States should do pretty well for the next few years,” he said.

The iShares U.S. Aerospace & Defense ETF posted a 52-week high on Feb. 1.

“People tend to repeat the same mistake: they buy when it’s high and they tend to sell at a low. It’s human nature,” said Dueholm.

Indexes, leverage

The asset class distribution last week gave priority to equity indexes versus stocks with the former representing two-thirds of total sales versus 21% for ETFs and 11% for stocks.

Leveraged notes issuance pushed to 30% of the total, in part due to the significant presence of BofA, which tends to price many such products. Autocall volume made for 42% of total notional. Most autocalls were worst-of notes on indexes while the bulk of leveraged issuance came from single underliers.

Always feeling good

Another factor helping issuance last week was a vibrant stock market with the S&P 500 index gaining 2.5% and the Nasdaq climbing 4.3% on the week.

A better-than-expected GDP report lessened recession fears while earnings reports were not as bad as expected.

But the picture was somewhat mixed with some earnings such as Intel Corp. disappointing and the fear of more tightening persisting.

It remains unclear why the market rallied so much last week. For the year, the Nasdaq is up 11%.

“Economics is not mathematics. It’s not engineering. Every time an economic report is released people want to find something in it to justify their own conclusions. Investors want to have it both ways,” the sellsider said.

“Earnings are up. It’s good news. It means we’re not going to have a recession.

“Earnings are below expectations. Good news again. The Fed is not going to raise rates.”

Inverted curve

Dueholm said the bond market is more pessimistic than the stock market in general.

“People are starting to believe in a soft landing. The hope is that the Fed will raise rates in a way that’s not going to kill the economy,” he said.

“Any positive news on the economy or negative on inflation and the market is up.

Personally, I think the market is underestimating how much the Fed is going to hike interest rates. In addition to that, while the stock market went down last year, we’re not really undervalued compared to historical standards.

“I wouldn’t buy equities right now.”

Volume for the year and month through Jan. 27 is down 31% to $3.96 billion in 777 deals from $5.73 billion in 1,161 deals during the same period in December, according to the data. Figures for January however remain preliminary and will be revised upward.

“It’s a slow start, but from a percentage perspective that 31% decline may lead to the wrong conclusion,” the sellsider said.

“It’s just a small period of time that doesn’t even include the full month of January. We’re only down three-quarters of a billion dollars. That’s why I prefer to look at trailing.”

Trailing 12 months numbers from Jan. 28, 2022 to Jan. 27 show a 13.1% decline from the previous 12 months to $87.52 billion from $100.69 billion.

Bears are watching

Dueholm was not very optimistic for the months ahead.

“Our structured products business is way down since last year. It doesn’t appear to be improving this year so far,” he said.

“Risk-free rates are now so attractive a lot of people don’t see the need to take on the risk of structured products when they can get a 5% CD risk-free.”

Dueholm caters to conservative investors who buy rate-linked notes for the most part.

“A lot of people are more bearish than they were a year ago. Certainly, the bond market is,” he noted.

“The one-month T-Bill rates are 100 basis points higher than the 30-year note.

“That’s a big recession indicator.

“For the equity market, the glass is half full while for the bond market it’s more like the glass is half empty.

“The bond market is more pessimistic.”

The top agent last week after BofA Securities was UBS with $178 million in 49 deals, or 17.5% of the total.

The top issuer was Bank of Nova Scotia with 14 deals totaling $169 million, a 16.6% share.

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