Structured products issuance $580 million for week amid volatility spurred by Fed, Covid-19

By Emma Trincal

New York, Dec. 22 – Structured products agents priced $580 million in 258 deals in the second week of the month, according to preliminary data compiled by Prospect News. Stocks tumbled in reaction to the Federal Reserve’s announced plans to hike interest rates three times next year while the spread of the Omicron Covid-19 variant continued to raise concerns about economic growth, pushing the Nasdaq-100 index more than 3% lower while the S&P 500 index dropped nearly 2% on the week.

BofA Securities did not yet come to market. It’s unclear whether the wirehouse will price its deals during this shortened holiday week or next week, the last of the year.

Best year ever

As the end of the year is upon us, the industry can cheer a record year. Agents have priced $87.4 billion through Dec. 17, a 27.55% increase from $68.53 billion a year ago.

Figures for December are still incomplete due to lags between pricing and filing dates for offerings. It is therefore safe to assume that the year will be close to $90 million and perhaps more. Last year’s record tally for the entire period was $72.7 billion.

“I’m optimistic for the year to come,” said a sellsider.

“Even if the market goes down and deals don’t get called, there will be enough investors adopting the product fort the first time to lead to higher notional growth.

“At this point more and more advisers understand the benefits of structured products for their portfolios. Previous apprehensions have been demystified, like for instance ‘structured products are illiquid’ or ‘notes are sold, not bought.’

“People understand the value proposition of this asset class.

“A flat or even down market will be a call for action.”

Small deals, big deals

The deal count rose to a lesser degree than notional sales this year. A total of 23,566 offerings priced through Dec. 17, up 10.4% from last year’s 21,340.

But the number of larger deals whose size surpassed $50 million was lower this year than last year at 70 versus 97, respectively.

“The reduction of the number of large deals probably coincides with the fact that you see fewer big wirehouse trades, big calendar offerings because that’s usually where those larger trades come from,” the sellsider said.

“It’s aligned with a greater trend. We’re seeing increased demand for customization. More deals are one-off.”

But the year 2021 may have been a transition year, he noted, because customization should, at least in theory, have reduced the average deal size. According to Prospect News’ data, it has not been the case. The average size rose to $3.71 million this year from $3.21 million in 2020.

This could be partly the result of issuance volume jumping at a much faster clip than the deal count. But this sellsider predicts a reversal of the trend next year.

“As the customization trend continues to progress, I think we’re going to see the average notional trade going down next year, not up,” he said.

Raymond James’ Best Picks

Updated data for the week preceding last week (ending on Dec. 10) showed $1.8 billion in 342 deals.

This week saw the pricing of a pair of notable trades.

At the end of each year, Raymond James distributes a deal tied to its analysts’ Best Picks for the upcoming year. Up until this year, Bank of Montreal was the issuer for those “Best Picks” deals, which used to be highly popular.

In December 2016 for instance, Bank of Montreal priced $250 million of one-year notes linked to a basket of 17 equally weighted stocks selected as Raymond James Analysts’ Best Picks for 2017, followed by a second one in January for $310.24 million.

This year Royal Bank of Canada was the issuer on the notes tied to Raymond James’ selected picks for 2022, pricing one issue for $61.54 million and a second one for $28.87 million.

Those products offer no optionality. But they provide direct exposure to the research-oriented basket with a participation rate slightly lower than 100% – 97.8% on the larger deal and 99.05% on the second one. Investors however get exposure to the dividends at the that participation rate.

“Those deals have been very popular because it’s a way to give investors direct access to Raymond James research,” said the sellsider.

“Those notes are only being bought internally. Raymond James brokers sell them to deploy the equity research to their own clients. They’ve done very well,” said the sellsider.

Canadian issuers

Canadian issuers were present last week in mid-size deals. According to the filings those trades did not occur under the BofA Securities platform.

Toronto-Dominion Bank for instance priced $26.42 million of 13-month digital notes linked to the S&P 500 index. If the final level of the index is greater than or equal to 85% of the initial level, investors will receive 6.02%. Otherwise, they will lose 1.1765% for every 1% index decline beyond 15%.

TD Securities (USA) LLC is the agent.

TD Securities (USA) priced another 13-month digital deal on the behalf of TD Bank for $21.83 million. The notes are linked to the Euro Stoxx Banks index. The digital payout is 7.67% based on an 80% strike with a 20% geared buffer.

BMO Capital Markets Corp. sold $24.8 million on the behalf of Bank of Montreal in a $24.8 million issue of five-year autocall linked to the worst of the S&P 500 index, the Dow Jones industrial average and the Russell 2000 index. The notes pay a contingent monthly coupon of 7.2% per year based on a coupon barrier of 60%.

Quadruple witching

As central banks last week signaled a winding down of their accommodative policies and Covid spread spurred fears of lockdowns, volatility rose, especially on Friday. The market swings were exacerbated by the expiration of stock options, index options, stock futures and index futures – a quarterly event known as “quadruple witching.”

Volatility was elevated enough to allow for the pricing of income-oriented products on indexes without having to pick up extra premium in single stocks.

Equity indexes made for 63% of the total versus 27% for stocks, while autocallable notes represented 58% of the total notional compared to 18% for leverage.

Old World

Investors expressed a notable interest for the Euro Stoxx 50 index.

Some issuers, including Royal Bank of Canada, Morgan Stanley Finance LLC and Citigroup Global Markets Holdings Inc., priced deals on the Euro Stoxx 50 alone.

Alternatively, some offerings were priced on unequally weighted baskets of international equity indexes overweight the Euro Stoxx 50 index. The Euro Stoxx Banks index was also seen.

“I definitely noticed more deals on the Euro Stoxx. I’m not sure why. It could be because of a potential divergence in monetary policies. They’re not about to curb bond purchases as fast as us or to hike rates as aggressively. People may perceive fewer headwinds in Europe,” said the sellsider.

Tesla, Amazon.com

On the stock side, the largest offerings were related to tech stocks.

JPMorgan Chase Financial Co. LLC priced $12.85 million of two-year autocallables on Tesla, Inc. paying a 17.7% annual contingent coupon on a 50% coupon barrier with an identical downside threshold strike at maturity.

RBC also priced a $6.41 million autocallable deal on Amazon.com, Inc.

“Inflation is not good news for tech stocks, and it showed last week with the Nasdaq taking a beating,” said the sellsider.

“I think we’re going to see more volatility in December. It’s been an interesting month so far with the Fed tightening, Covid spreading, inflation rising and the Build Back Better talks stalling.

“There are many reasons to expect volatility as we’re going into 2022.”

But he did not see any reasons to be concerned about the sector.

“Tech has been doing so well in the past two years that having a pullback is nothing out of the ordinary,” he said.

Autocalls top

Autocalls are expected to remain the top structure in 2022. Their market share this year has been 63% of total issuance volume. With increased volatility, coupon rates and barrier levels can be improved. Most market participant expect the autocall trend to remain in place.

“Clients need income for retirement. Despite the Fed’s rate hikes, interest rates will remain historically low. Unless we fall into a bear market, valuations are likely to continue to be high. People’s priorities are not going to be growth. It’s going to be income,” a market participant said.

The top agent last week was UBS with $154 million in 154 deals, or 26.6% of the total.

It was followed by Morgan Stanley with $90 million in 20 offerings, a 15.5% share.

UBS AG, London Branch was the No. 1 issuer with $86 million in 144 deals, or 14.9% of the total issuance volume.

The year-to-date top issuer is Barclays Bank plc with $11.86 billion in 1,9997 offerings.

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