First week of 2022 debuts with $160 million of structured products sales amid market sell-off

By Emma Trincal

New York, Jan. 12 – Structured products issuance volume picked up slowly in the first week of the year while stocks, especially large-cap growth stocks, tumbled.

Agents priced $160 million in 86 deals last week on the heels of $1.19 billion sold during the final week of last year in 268 offerings, according to preliminary data compiled by Prospect News.

The Nasdaq-100 index lost 4.5% on the week on concerns over the Federal Reserve’s intention to accelerate the pace of its monetary policy tightening, which was confirmed in its December meeting’s minutes released on Wednesday.

The expected reduction of the Fed’s balance sheet contributed to a rise in Treasury yields, which negatively impacted growth stocks. Less interest-rates sensitive parts of the market fared better, prompting a rotation out of tech into value stocks. The Dow Jones industrial average for instance only dropped 0.3% on the week.

A decline in the stock market may help issuance volume as the expected volatility spike brings more premium to income notes, which make for more than 60% of total notional sales.

“There tends to be a lag between a sell-off and the time we see an increase in deals and volume. So, it’s too soon to tell,” a sellsider said.

“Last week though, we launched 40 customized deals, more than we’ve ever seen. It was a mix of single stocks and ETFs with a majority of index trades.”

Growth to value rotation

Investors’ strategies and picks in the structured notes space do not necessarily reflect the behavior seen in the equity market, sources said.

“Ultimately, the trend of income-oriented notes on tech names will continue,” said Matt Rosenberg, director at Halo Investing.

“Last week’s heavy tech selling has pushed investors to switch to value stocks, but that’s what’s happening in the stock market. It’s not necessarily what you’re going to see in structured notes. Value stocks are certainly relevant. But I don’t know to which extent it’s going to be a big driver behind structured notes issuance.”

The sellsider agreed.

Tech bid to persist

“With the existing volatility in the Nasdaq, I think we’ll see a pickup in tech names,” said the sellsider.

The use of technology stocks in notes is already prevalent. But the trend may be even more visible in the coming weeks.

“The market may be waiting to see if the sell-off will continue,” said Rosenberg.

“We had the inflation numbers this morning. A CPI up 7% year over year, its biggest growth in 40 years, that’s big news. It typically makes tech-heavy stocks more vulnerable, more volatile.”

Rising rates increase the discount of the present value of a company’s future earnings, which in turns put a downward pressure on the stock price. For companies in the technology sector with longer-term earnings, the impact of higher yields on valuations is worse.

“I continue to see tech names as the underlying of choice for autocalls,” said Rosenberg.

“When you see a switch to value, it’s probably more of a shift from income to leveraged payoffs.

“As far as income notes are concerned, it’s still a growth-oriented market.”

Popular underliers

Case in point: Barclays Bank plc on Friday issued $47 million of three-year autocallables linked to Tesla, Inc. paying a 15.3% annual contingent coupon on a quarterly basis with a 50% coupon barrier and 50% final barrier level. The notes are autocallable on any quarterly observation date. Morgan Stanley is the agent.

Other tech underlying stocks seen last week included Nvidia Corp. along with the usual suspects: Apple Inc., Microsoft Corp. and Amazon.com, Inc.

More sporadically, issuers priced some value-oriented small offerings on names such as Enphase Energy, Inc., Wynn Resorts, Ltd. and Boeing Co.

“We’ll continue to see a lot of single stocks in the market because they give such higher yields,” said the sellsider.

While the majority of autocallables are linked to equity indexes (via worst-of payoffs), the highest-yielding ones are based on stocks.

“Even if the market becomes much more volatile, making the optics of index autocalls better, single stocks are not going away. You would be asking for a lot of changes in the market for that to happen,” he said.

No energy

While investors in the equity markets tend to crowd outperforming sectors, buyers of structured notes are more focused on capturing high yields than participating in gains, at least for now.

As an example, notes on the top-performing energy sector were not seen last week, according to the available data.

And yet, the Energy Select Sector SPDR fund rose more than 10% last week and returned 53% in 2021.

“We’ll see more energy-based notes just because it’s a sector that has the potential to combat inflation,” said Rosenberg.

“With the posturing of Russia at the border of Ukraine and the crisis in Kazakhstan, there is plenty of potential for more volatility around oil. Investors are likely to increase their exposure to energy in structured notes.”

Leverage

Recently, a few more leveraged notes deals have been spotted anecdotally.

“It’s not surprising to see more interest for enhanced return notes at this time of the year. It’s January and people are rebalancing their portfolios, trying to pick the right allocations and sectors,” said Rosenberg.

A push in leveraged notes issuance may not be a lasting trend, however.

“We used to have a more even split between autocalls and leverage, at least before March 2020,” said the sellsider.

“There is demand for it. It’s just a function of does it price out OK. People have lost interest in leverage because of the terms. But as the market evolves and terms become attractive again, you could see leverage coming back.”

January call

The stock market kicked off the year with more uncertainty, which may pose a risk, said Rosenberg.

“The Fed was the key driver for last week’s sell-off. The minutes released on Wednesday showed they’re definitely going to hike rates and taper their bond-buying. It makes people nervous about the economy.

“Meanwhile, you have Omicron at its peak disrupting schools and spreading fast. So many people have Covid. What does it do to people’s mental state? No one wants to be sick. It’s a social challenge and it’s also a market challenge. All those changes in everyday life will continue to be an issue.

“Ultimately though, the current market sell-off is a Fed story.

“I expect more volatility in the coming weeks,” he said.

Discretion to call

More volatility, if accompanied by a severe pullback in the stock market, may be bad news for notes with an automatic call feature.

“You don’t want the market to drop so much that deals don’t get called anymore,” he said.

“On the other hand, more banks have offered issuer calls last year. In a rising interest rates environment, issuer calls may be a big help because banks may not want to call the notes.”

“Another hope is that banks may not be as flush in deposit this year as they’ve been over the past couple of years.

“If liquidity begins to dry up, maybe banks will want to see more deposits, which would help as well.”

The excess liquidity in the banking system has been the result of trillions of dollars in stimulus money combined with households’ tendency to save more during the pandemic, he explained.

Big deals

Among some of the deals of the final week of December, which were not previously reported, Morgan Stanley Finance LLC priced $39 million of 0% securities due March 30, 2027 linked to the S&P 500 index.

The payoff structure is relatively complex even if this type of product has been seen over the past few months in relatively large sizes and offered by a number of different issuers. This one had the particularity of being tied to the S&P 500 index unlike most previous ones, linked to the Dow Jones industrial average.

The payout in these structures varies around different strikes.

In the case of this $39 million deal, the 130%, 100% and 90% strikes involved a combination of leveraged, buffered and digital payoffs depending on where and between which strikes the final index price fell into. The notes are capped at 81% on the upside and buffered at 10% on the downside.

Another large offering during that week was Barclays Bank’s $31.88 million of three-year autocallables linked to Tesla.

The notes pay a quarterly contingent coupon of 15.05% per year if the stock finishes at or above a 50% coupon barrier for that period. The notes are automatically called on any quarterly observation date if the stock is at or above its initial price. The barrier at maturity is 50%.

Morgan Stanley Wealth Management is the dealer.

The top agent for that week was Morgan Stanley with $225 million in 34 deals, or 18.9% of the total. It was followed by Goldman Sachs and Citigroup.

Last week’s top agent was also Morgan Stanley, according to the preliminary figures showing at least $52 million, or a third of the total. It was followed by UBS and Goldman Sachs.

Those figures are preliminary and subject to changes.

Last year’s tally was the best on record.

Agents sold $93.8 billion, a 29% jump in volume from the previous record of $72.7 billion in 2020, according to the most recent update.

© 2015 Prospect News.
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