Structured products issuance $356 million for week; $70 million cash-settled deal eyed

By Emma Trincal

New York, Dec. 21 – Structured products agents priced $356 million in 81 deals in the week ended Dec. 16, according to preliminary data compiled by Prospect News, but volume was inflated by a single trade: a $70 million cash-settled equity linked notes offering tied to Shell plc.

Cash-settled equity-linked notes offerings are the largest equity products in the U.S. market. They are sometimes considered as a hybrid between structured notes and reverse convertible bonds, sources said.

Shell bet

BofA Finance LLC priced $70 million of three-year cash-settled equity-linked notes linked to the shares of Shell early last week.

The payout at maturity will be the greater of par of $1,000 and the alternative settlement amount. The alternative settlement amount is the product of $1,000 times the quotient of the final stock price divided by the 117.5% threshold price. Investors will not receive any positive return at maturity unless the stock appreciates by more than 17.5%.

BofA Securities, Inc. is the underwriter.

Hybrid securities

“This is definitely a structured note even though it has a very different kind of payout. But anything tied to the performance of equity is a structured product,” said Mark Dueholm, chief fixed-income trader at Landolt Securities.

Even experts in the structured products industry are not always familiar with the intricacies of these deals.

“This looks like someone with a big position on the stock,” a market participant said.

“It’s probably a customized trade possibly for some kind of tax arbitrage. It suggests something similar to a forward.

“You don’t get paid unless the stock goes up 17.5%. The 17.5% is close to the funding rate of the bank, at least, that’s a guess.

“In any event, these are huge trades. I wouldn’t call that a structured note. I know it’s technically a structured note, but not normally what I think a retail person would buy.”

Not small

The BofA cash-settled offering was the smallest of the year in this category, according to the data.

In May BofA Finance priced the largest one for $530.45 million. It was a five-year cash-settled deal linked to Merck & Co., Inc.

In June, JPMorgan Chase Financial Co. LLC priced another one for $368.25 million linked to Boeing Co.

Morgan Stanley Finance LLC did another one last month for $205 million, which referenced the stock of JPMorgan Chase & Co.

Top deals

The top deal of the year outside of the cash-settled category was HSBC USA Inc.’s $146.5 million issue of leveraged notes on the S&P 500 index sold by BofA Securities in September. The typical 14-month Accelerated Return Notes offering paid three-times the upside up to a cap without any downside protection.

Without considering cash-settled notes, leveraged products are the top deals in general, and this year was no exception. In January, BofA Securities priced the second-largest one on the behalf of Royal Bank of Canada for $140 million.

Struggling market

It was a quiet week for structured notes but not for the stock market, which tumbled as fears of a looming recession worsened.

The S&P 500 index fell by 2.1% and the Nasdaq dropped 2.7% for a second-straight week of losses. While the Federal Open Market Committee hiked the Fed Funds rate by 50 basis points as anticipated instead of 75 bps as in recent rate hikes, the Federal Reserve adopted a hawkish tone targeting a higher-than-expected 5.1% rate in the future.

“There is this tug-of-war between the Fed and the market,” said Dueholm.

“The Fed is telling the market over and over that they’re going to raise rates more and for a longer period of time, and the market doesn’t buy it.

“They think the Fed is going to have to blink because the economy will suffer too much. And each time the Fed keeps throwing cold water on those expectations.

“Meanwhile the forward-looking bond market is betting on a recession. This is why the stock market is struggling and that’s why there is this big inversion on the yield curve.”

Stocks

Last week’s proportion of stock-linked notes as 26.5% of the total sold was skewed due to the $70 million BofA cash-settled deal on Shell. If one does not include this mega-deal, stocks represented 13% of the volume this month, which coincided with the average market share for the year.

Single stock underliers used this month in deals over $10 million were Home Depot, Inc., Mastercard Inc. and Deere & Co.

For the year, the top stock deal was HSBC USA’s $51.23 million of autocallable notes on Tesla, Inc. paying a quarterly contingent coupon of 23% a year. The deal priced in June.

In volume, sales of stock-linked notes for the year have dropped 46% to $10.8 billion from $20 billion.

Leverage

Issuance of leveraged notes with barriers or buffers was up 20.5% this year to $14.67 billion from $12.17 billion.

“I’m not surprised,” said the market participant.

“With the market down 18%, people are focusing on growth again.

“Of course, it depends on the client. Many people need the income. But with the discount we have in the market, it makes sense to focus on the upside, especially if you can get uncapped leverage.”

Leveraging down

Geared buffers were seen among a number of deals last week, suggesting investors’ growing adoption of the feature.

Canadian Imperial Bank of Commerce for instance priced $20.86 million of 0% capped leveraged buffered notes due Feb. 12, 2025 tied to the S&P 500 index. The upside payout is 2.1 times the gain capped at 32.445%.

Investors will receive par if the index falls by up to 20% and will lose 1.25% for each 1% decline beyond 20%.

Separately Morgan Stanley Finance sold $19.11 million of digital notes due Sept. 25, 2024 on the S&P 500 index. If the final index level is greater than or equal to 80% of the initial level, the payout at maturity will be par plus 18%. The downside is protected by a 20% geared buffer with a 1.25 multiple.

“We don’t particularly like geared buffers because we’re relatively conservative,” said Dueholm.

“But they’re becoming popular with some people and that makes sense. A geared buffer will protect you better than a trigger all things being equal.”

Inflation expectations

On the rate side, JPMorgan Chase Financial priced last week a pair of floating-rate note offerings linked to the Consumer Price index. One with a four-year duration sold for $7.88 million, the other, a two-year issue for $2.5 million.

CPI-linked notes are designed as a hedge against inflation, said Jerry Verseput, president of Veripax Wealth Management. He would refrain from pitching those notes for that very reason.

“I wouldn’t want to bet on inflation rising when the Fed is doing everything they can to bring it down. Don’t fight the Fed,” he said.

Year down 12.4%

Issuance volume for the year through Dec. 16 was at $84.1 billion in 20,051 deals, a 12.4% drop from $95.97 billion in 29,029 offerings a year ago.

“I’m actually surprised we did that much. I would have expected to see less volume because the market was down,” said Dueholm.

“It’s been a very bad year. This market has done poorly. Investors should be more interested in structured notes in this environment but probably weren’t.

“The rate market has blown up with the inversion of the yield curve. It has destroyed steepeners, it has destroyed non-inversion notes.

“And on the equity side, it hasn’t been pretty either.”

The top agent last week was BofA Securities with $88 million in eight offerings or 24.6% of the total, reflecting the size of its $70 million cash-settled deal.

It was followed by Morgan Stanley and UBS.

BofA Finance was the top issuer with four deals totaling $76 million, a 21.3% share.

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