Structured products deal count down 43% year to date; commodities, rates notes eyed

By Emma Trincal

New York, April 20 – Notional sales of structured notes year to date through April 14 dropped 15.9% to $23.19 billion from $27.58 billion last year, according to preliminary data compiled by Prospect News. A lesser-known trend is the steep decline in the number of offerings, which fell by 43% during the same period to 4,709 from 8,284.

“It’s hard to see where the industry is heading,” a market participant said.

“Automation has allowed a greater number of smaller deals to come out. At the same time as the industry consolidates, I think the real trend looking forward is going to be the reverse: fewer and bigger offerings.”

Fewer issuers

He attributed the current decrease in the number of deals to two main factors.

“Number one reason: Barclays [is] out of the picture,” he said.

Barclays announced last month that it had suspended sales and issuances of structured notes as well as two ETNs due to the bank’s exceeding the capacity of its registered shelf for a period of approximately one year. A rescission offer will be the next step before the bank may resume issuance through a new shelf. Its last trade priced on March 7.

“Wells Fargo hasn’t done anything for a while. BofA is doing less. We have Barclays out and some of the other banks not issuing as much,” he added.

The market is another factor behind the smaller number of deals.

“The market is down this year. The S&P is negative. The Nasdaq is still in correction mode. So, deals don’t get called,” he said.

“Even issuer callable notes, banks are not calling them.

“Since half of this market is yield notes, they’re not getting reissued.”

Consolidation

But this market participant sees the declining deal count as a short-term trend.

“Over time, I am convinced we’ll see the exact opposite. We’re going to see fewer deals of much bigger size,” he said.

At the root of his conviction: the way the industry is consolidating.

“Structured notes are like the Wild West right now. But as assets begin to flow into separately managed accounts and funds, when this happens, ticket sizes will be larger but fewer.

“That is the trend.”

In a separately managed account, a money manager oversees a pool of securities from several investors.

The pool of asset is held in separate accounts allowing them to keep their assets separate while the management is centralized.

By a thousand cuts

Volatility has been another factor behind issuance and deal count trends this year, according to this market participant.

“When the market is down, it’s not only income notes that don’t get called. Growth notes suffer as well,” he said.

“Leveraged notes don’t get called by definition. But when the market is up, as the notes gain in value, savvy financial advisers close the note and restrike it with a newer barrier. Now they can’t do that,” he said.

Finally, the stock market itself does not help. While the averages have declined, the decline has been slow, and volatility as measured by the VIX has held up. The VIX hit a 52-week high at the end of January at 38.94. It jumped again at nearly the same level on Feb. 24 when Russia invaded Ukraine. But the index’s 200-day moving average has been around 15 for most of the year.

In comparison, the VIX in March 2020 during the Covid-induced sell-off spiked to 85.

“A market that’s slowly going down while the VIX remains low is not a good thing for issuance,” he said.

“The terms are not appealing, and sentiment turns negative. It’s death by a 1,000 paper cuts.

“What you want is a straight line down and a soaring VIX like in March 2020. That’s when advisers rush to get notes because the terms and entry levels are too good to miss.”

Two bigger deals

Last week saw $245 million of structured notes sold in 107 deals. These figures will be revised upward as more deals get filed with the Securities and Exchange Commission, especially in a shortened holiday week. The market was closed on Friday in observance of Good Friday.

Updated data for the previous week revealed $962 million in 268 offerings.

During that first week of April, issuers priced a couple of larger deals, which were not reported before.

One was GS Finance Corp.’s $46.94 million of six-year dual directional notes linked to the S&P 500 Value index. The payout provides 1.2 times leverage on the upside with a 75% barrier on the downside above which investors get the absolute return of the index decline.

The dealer was Morgan Stanley Wealth Management.

In addition, Morgan Stanley Finance LLC priced $36.08 million of three-year contingent income autocallable notes linked to Tesla, Inc.

The quarterly contingent coupon is 17.4% a year based on a 50% coupon barrier. The notes are automatically called on any quarterly observation date. At maturity, the downside threshold is 50% of the initial price.

Tesla

The notes priced on April 8 prior to Tesla’s chief executive Elon Musk announcing on April 14 his plans to take over Twitter Inc. The share price dropped on that day and has trended lower since. On Wednesday’s mid-afternoon session, the share price was down 5% and the implied volatility of the stock rose to 67.65%.

Yet the story did not generate any out of the ordinary interest, perhaps as the news broke prior to the holiday.

Only seven small Tesla deals priced last week for a total of $2.47 million.

“The headlines may help but incrementally. I don’t think advisers are going to rush on Tesla notes just because of the news,” the market participant said.

Rates notes back

Last week’s noteworthy deals did not fit into the classic equity category.

Rates products reappeared.

“With the 10-year Treasury close to 3%, rates are going to be a very important topic of conversation,” the market participant said.

Royal Bank of Canada priced last week $21.85 million of three-year floating-rate notes linked to the two-year U.S. dollar SOFR ICE swap rate.

The interest rate is the reference rate plus 45 basis points. The payout at maturity will be par.

“RBC has been very active in the floating rates space. They’re doing a decent job,” a trader said.

RBC Capital Markets, LLC, the underwriter for this deal, is the top agent for interest-rates products with 68% of this market, according to data compiled by Prospect News through March 31.

Credit Suisse AG, London Branch priced another rate product last week with $2.12 million of contingent coupon notes tied to the spread between the 30-year U.S. Dollar SOFR ICE swap rate and the two-year U.S. Dollar SOFR ICE swap rate.

The notes will pay a contingent monthly coupon at an annual rate of 15% if the spread of the 30-year swap rate minus the two-year swap rate is greater than or equal to negative 0.5% on the relevant review date.

“I’m glad to see issuers bringing more rate-linked notes to the market,” the trader said.

“Those products make a lot of sense in this environment.”

Safe commodities

After months, even years of no action, commodities structures are also making a modest comeback. At least three issues came out this month. The similarity of their terms however suggested a reverse inquiry.

Morgan Stanley Finance priced $5.7 million of commodity-linked notes linked to an equally weighted basket of eight commodities – West Texas Intermediate light sweet crude oil futures contracts, Brent crude oil, natural gas futures, corn, soybeans, wheat, copper and zinc.

The payout at maturity will be the basket return with a floor of par.

Morgan Stanley was the agent.

In addition, UBS priced on the behalf of BofA Finance LLC $19.65 million of notes tied to the same basket with an identical maturity. The terms were the same.

Both deals mature in October 2024.

These two issues come on the heel of Citigroup Global Markets Holdings Inc.’s $14.99 million, which priced the previous week. The basket and terms were the same as well. The agent was UBS.

“I have no idea how they can price a principal-protection note on such a short term. That’s incredible,” the market participant said.

UBS was the top agent last week with $58 million in 45 deals, or 24% of the total.

It was followed by Goldman Sachs and Royal Bank of Canada.

The top issuer is GS Finance with $38 million in seven offerings, or 15.5% of the total.

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