Structured notes tally hits all-time high at $78.35 billion, and the year is not over

By Emma Trincal

New York, Nov. 24 – As the end of the year nears, issuance of structured notes has already hit an all-time high with $78.35 billion in 20,719 deals through mid-November. That’s 30% more than the notional sales during the same period last year, according to data compiled by Prospect News.

It is also more than the $72.7 billion notional amount sold in the entire year of 2020, the best on record since 2004, when Prospect News began collecting data.

With only a few more weeks remaining before Dec. 31, the only unknown is how much bigger this year’s activity will turn out to be compared to last year.

In nearly 18 years, the U.S. structured notes market has priced $0.679 trillion in 145,714 deals.

Shining years

The best years after 2021 and 2020 are recent years, a sign that the market is still maturing.

After 2020, the third best year was 2018 with $56.77 billion followed by 2019 with $53.11 billion. Closely behind, the year 2017 showed $52 billion in sales. One has to go back to 2008 to find the next best yearly tally with $50.52 billion.

The deal count has been consistently growing year after year. Last year reached a peak with 22,551 deals.

It’s a tally that’s only 1,832 greater than what issuers have already priced this year through mid-November.

Since the industry prices an average of approximately 2,000 deals a month, the likelihood of 2021 also breaking a record in terms of number of deals is high.

It is also more predictable: since 2004, there has not been any year in which the deal count was lower than in the previous year.

Autocalls

One of the main drivers behind the year’s growth has been the rolls of notes called this year in a rising stock market. Agents sold $44.52 billion of autocallable contingent coupon notes this year, or 56.8% of the total. They also priced $4.42 billion in snowballs, bringing the total for income notes to nearly $49 billion.

In market shares, this structure type now accounts for 62.5% of total sales, not quite two-thirds of the market but increasingly close. It’s a substantial increase in market share from 44% during the same period last year.

In dollar amounts, sales of autocalls rose 53% from last year’s $32 billion.

Meanwhile growth products issuance has plateaued. Sales of leveraged products amounted to $16.2 billion this year through mid-November compared to $15.6 billion during that time last year, a 3.8% increase.

More stocks

Overall, equity-linked deals as a percentage of total sales remained stable: 85% this year versus 89% a year ago. But in terms of issuance volume, those products rose nearly 24% to $66.48 billion from $53.7 billion.

One of the biggest trends observed this year has been the surge in single stock underliers. The tally for notes tied to this asset class is up 70% to $16.9 billion from $9.95 billion last year. As a percentage of the total, stocks have seen their market share rise from 16.5% a year ago to 21.6% this year.

“Nearly a quarter of this market is tied to single stocks. This is the direct result of progresses in customization. People design their own deals at lower notional. They do trades that represent only a portion of their book of business,” a sellsider said.

Exchange-traded funds are an even faster-growing asset class. Those deals continued to represent a relatively small share of the market (less than 10% this year versus 6.6% last year). But the growth in dollar amount is impressive with $7.53 billion this year versus $4 billion a year ago, an 88% jump.

Indexes, rates

While equity indexes remained by far the top asset class, their expansion has not been striking, with a notional increase of only 10% to $44 billion from $39.93 billion. Meanwhile their penetration rate has declined this year to 53% from two-thirds a year ago.

“The story line of the year is the continued rise, expansion of these income notes to include single stock underliers and not just indices,” the sellsider said.

Bond market volatility spurred by inflationary pressures has generated increased demand for interest rate-linked notes this year even if the asset class continued to be a tiny segment of the market with a 1.3% share.

Sales of rate notes has reached $1.022 billion, a 40% increase from last year’s $735 million.

Interest-rate products with a structured coupon but no underlier, such as step-up notes, step-down notes, fixed-to-floating notes and capped floaters, are not included in the overall totals.

Commodities-linked notes sales have nearly vanished, making for 0.5% of the total in $420 million. Some predict that rising prices may motivate advisers to seek hedges against inflation via commodities. But commodities issuance has been in decline for a number of years, leaving some sources skeptical about such forecast.

Big deals

The top three months this year have been June, February and March with notional sales of $8.55 billion, $8.48 billion and $8.17 billion, respectively.

Last year, December was the best month, followed by March and February, the two worst months for the market due to a pandemic-induced sell-off, which precipitated the S&P 500 index’s 35% decline.

Connecting the dots between issuance flows and market conditions can be an artificial exercise, said the sellsider.

“It’s tempting to try and explain everything based on what the market is doing. But the monthly analysis is sort of random. There are many different factors at play. You can’t really draw any definite conclusions,” he said.

Issuers priced three big offerings of more than $100 million this year. BofA Securities Inc. was the agent on those deals. The products were very similar – 14-month notes on the S&P 500 index giving investors three times upside exposure up to a cap and no downside protection.

Barclays Bank plc priced the top one in August for $137.6 million with a 10.72% cap.

Toronto-Dominion Bank issued in April the second-largest one for $120.59 million with an 11.61% cap.

Finally in September BofA Finance LLC brought to market the third top deal of this kind. The $110.99 million issue featured notes capped at 11.73%.

© 2015 Prospect News.
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