Structured notes tally for week $494 million; stocks, ETFs strong amid low volatility

By Emma Trincal

New York, March 13 – Agents priced $494 million of structured notes in 73 deals in the week ended Friday, according to preliminary data compiled by Prospect News.

The focus was on single stocks and ETFs, which combined made for a third of total sales. While indexes remain by far the dominant asset class, the continued depressed volatility has pushed investors to seek riskier assets either in companies or sectors.

Twenty-seven deals linked to single stocks were brought to market last week, accounting for 24% of total sales.

The market share for this asset class on a year-to-date basis is around 15%, excluding two atypical and oversized offerings issued last month in the form of synthetic convertibles also known as cash-settled notes. The first one was Barclays Bank plc’s $794 million linked to Microsoft Corp.; the other, Morgan Stanley Finance LLC’s $305 million tied to Regeneron Pharmaceuticals, Inc. While technically those securities are structured notes since their performance is linked to an equity asset, some traders consider them as convertible bonds.

Single stock underliers

Last week’s stock-linked issues amounted to $118 million.

“The volatility you’re getting in the broad indices is too low to give you decent coupons on some of the most popular structures like the Phoenix autocalls. It makes sense to focus more on individual names,” a market participant said.

The VIX this year has been trading in a 12 to 15 range except when it jumped near 18 last month due to a higher inflation reading. Most days, the VIX has not exceeded 13.

Two Magnificent

If the Magnificent Seven contributed to dampening overall market volatility, those growth stocks remain popular for income note investors. Two of such high-flyers were spotted last week in deals larger than average for the asset class.

Citigroup Global Markets Holdings Inc. issued three deals on Microsoft totaling $49 million.

Two of those paid a 10.65% contingent coupon, the third one, 10.5%. The notes offered a 20% downside protection on a one-year maturity. The deals priced early in the week at a time when Microsoft faced selling pressure.

Separately, issuers priced two sizable offerings on another “Magnificent Seven.”

UBS AG, London Branch did $20 million of six-month buffered Phoenix autocalls with memory tied to Tesla, Inc. The monthly contingent coupon was 12.95%, the coupon barrier, 65%, the autocall, observed monthly and the barrier at maturity, also set at 65%. The deal struck on Monday as a Bloomberg report announced a 19% year-over-year decline of Tesla shipments from China, which pushed the stock 6% lower, giving buyers a good entry point.

Two days later, Citigroup priced another Tesla note of $10 million at an even lower closing price.

Nvidia lagging

“People are getting more tactical about timing their trades in individual names. It’s probably what we’ve seen last week,” the market participant said.

The most popular of the “Magnificent” appeared in only one deal, according to the preliminary data.

It was GS Finance Corp.’s $6.2 million of one-year Phoenix autocallables on Nvidia Corp. paying a 14.6% contingent coupon with the barriers at 65%.

The volatility of the name (implied at 68.82%) also helps. On Wednesday at mid-afternoon, the stock dropped more than 12%.

“I think we’re going to see more Nvidia notes very soon,” the market participant said.

Getting worse

Indexes accounted for 65% of last week’s notional sales with $321 million in 34 deals. The volume was relatively balanced between worst-of structures, which were used in callables, and single indexes designed for leverage and digitals.

Some market participants are beginning to feel the constraints of low volatility in the pricing, hence terms of worst-of.

“Even though rates have come down, we’re still struggling with Treasuries that offer a safer alternative with principal protection, guaranteed income, no calls, no equity exposure,” an industry source said.

“Overall coupons on worst-of are really low. Because volatility is so compressed, you don’t get compensated enough over the risk.”

Biotech buzz

Exchange-traded funds accounted for more than 8% of last week’s notional, or $41 million in five deals.

The most popular underlying fund was the SPDR S&P Biotech ETF (ticker: XBI) used in three deals for a total of $22.22 million. The issuers were Barclays and UBS.

“XBI is pseudo tech. It’s kind of a tech play. The price of the fund has moved quite a lot,” said the market participant.

Since October, the ETF has jumped more than 50%. The implied volatility of XBI is about 33%.

The next crisis

Another example of potential upcoming deals would include notes tied to the SPDR S&P Regional Banking ETF (ticker: “KRE”).

The underlying has been popular after the banking crisis a year ago, which generated an explosion in volatility followed by a speedy recovery.

New signs of turmoil have recently appeared around New York Community Bancorp, whose share price has plummeted by 64% this year. A $1 billion financing package was put together last week by top investors, helping contain further bleeding.

But so far, there has not been contagion on the regional bank ETF, which is down 6% for the year.

The weighting of New York Community Bank in the SPDR S&P Regional Banking ETF is only 1.41%.

“Regional banks are having difficulties in this spread environment. KRE is a play on Fed cuts. There’s volatility there, and we should see more action in the sector,” the market participant said.

The industry source agreed.

“Banks are a sector to look at. We may see a bit of pick up in volatility and some notes on banks may be priced a bit nicer. Last year’s big story was KRE. It was a great underlier,” this source said.

“But you still have to be cautious. Commercial real estate could be a real concern.”

Month, year

Recent updates for the monthly data revealed that February sales are slowly catching up with January numbers.

Agents last month sold nearly $9 billion in 1,403 deals versus $10 billion in January in 2,155 offerings. The bulky figures for January are in large part the result of the two big synthetic convertible trades on stocks mentioned earlier.

In the past two months, income notes have jumped 52% from last year to $10.11 billion from $6.66 billion.

Sales of leveraged products are up 38% to $3.73 billion from $2.70 billion.

Issuance volume for the year has increased by 13.2% to $19.64 billion from $17.35 billion. These figures include last week. During that time, the deal count dropped to 3,679 from 4,956. The data remains preliminary and will be revised upward as more deals get added to the tally.

Top deal

Barclays Bank priced last week’s top deal in $39.69 million of callable notes with daily coupon observation due Sept. 10, 2027 linked to the worst performing of the Euro Stoxx 50 index, the Russell 2000 index and the S&P 500 index. The 10.25% coupon is paid quarterly based on an American barrier of 70%. The notes are callable quarterly. The barrier at maturity is 60%.

UBS Financial Services Inc. and Barclays are the agents.

Last week’s top agent was UBS with $227 million sold in 28 deals, or 46% of the total.

It was followed by Citigroup and Morgan Stanley.

The No. 1 issuer was UBS AG, London Branch, which brought to market 23 offerings totaling $124 million, a 25.2% share.

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