Structured products issuance up 68% for year to date; bid on bank stocks, big bear trade eyed

By Emma Trincal

New York, May 20 – Agents priced $390 million of structured notes in the tumultuous market week ended Friday, leaving the month’s tally through May 15 nearly the same as last month at $1.465 billion versus $1.526 billion in the first half of April, according to data compiled by Prospect News.

Figures are subject to upward revisions as more data is collected.

A total of 476 deals printed through May 15 versus 583 last month.

Volume remains considerably higher than a year ago so far in 2020 at $27.69 billion, a 67.6% increase from $16.52 billion. The number of offerings jumped by nearly 50% to 8,078 from 5,411.

“We’re seeing a lot of offerings in the market right now,” said a distributor.

“Banks have moved toward rolling subscription calendars. Now instead of marketing their deals throughout the month they have two-week marketing periods.

“I don’t know that they’re getting more notional as a result but certainly it seems like they have more available products.

“This is a new trend and it started last month.”

Bear hug

A big block trade overshadowed last week’s flow: BofA Finance LLC’s $71.5 million Bear Strategic Accelerated autocallable deal on the S&P 500 index.

The timing for this deal may have reflected sentiment. The S&P 500 index finished the week down 2.25%.

The notes, which were sold by Bank of America, will be called at a premium of 25.37% per year if the closing level of the index is less than or equal to its starting value on any of three quarterly observation dates after six months.

If the notes are not called, investors will lose 1% for each 1% gain in the index.

Autocalls prevail

More than ever, the appetite for autocallables remains a strong trend with 57% of the overall volume falling into that category while leverage accounted for only 20% of last week’s tally. Obviously though, the $71 million autocall skewed the balance. But sources insist that investors’ main preoccupation with yield remains the dominant trend and will be for some time.

“People want income. They’re starving for yield. In this volatile market, what’s the incentive for growth products? I see no reason to think that the bid on income-oriented products is not going to persist for a while,” the distributor said.

No crystal ball

As the market continues to grapple with the effect of the Covid-19 pandemic, the ups-and-downs of the averages make it hard to see a clear trend ahead.

“We’re in uncharted territory. The market uncertainty speaks to why people want income,” he noted.

As a result, investors are playing short-term and betting on range bound moves.

“People really have no idea of what the market is going to be like in three months, six months or a year,” said a market participant.

“It’s only been a couple of months that everything changed with Covid-19 and the lockdowns.

“Now the economy is reopening but we don’t really know how things are going to pan out, like how you’re going to take the subway, be at the office or out to a restaurant.

“It’s way too soon to have any kind of visibility.”

Heavy bid on ETFs

While equity indexes were still the top underlying asset last week with 63% of the total issued, exchange-traded funds made a big push, catching an 18% share.

ETFs so far this year have accounted for less than 5% of total volume.

ETFs allow investors to deploy tactical plays on specific sectors or asset classes.

Several small deals were tied to metals via equity ETFs on gold miners, such as VanEck Vectors Gold Miners ETF or commodities via the iShares Silver Trust and the SPDR Gold Trust.

UBS AG offered a $10 million deal on the Invesco QQQ Trust, Series 1, a broad exposure to the fund tracking the tech-heavy Nasdaq-100 index.

No. 2 deal

But banking was perhaps the most popular underlying sector.

HSBC USA Inc. last week priced the second largest deal in $40.97 million of 18-month digital notes linked to the SPDR S&P Bank ETF.

If the ETF finishes at or above its 80% threshold level, the payout at maturity will be par plus the digital percentage of 21.3%.

Otherwise, investors will lose 1.25% for each 1% decline beyond the buffer.

Bank appeal

Stocks accounted for 18% of total sales: 14% in single names and 4% in worst-of.

Plays on single stocks were frequently based on bank shares. Ten offerings came out linked to Bank of America Corp., five tied to JPMorgan Chase & Co. and four to Citigroup Inc.

“It’s not surprising,” said the distributor.

“Banks are down a lot. They haven’t rebounded to the same extent of other sectors of the economy. Big banks have been hit but also regional banks.”

The SPDR S&P Bank ETF is down 38% for the year compared to a 14% decline for the S&P 500 index.

From its February high to its bottom in March, the ETF lost 52%, a more drastic drop than the S&P 500 index down 35% during that time. Since the lows of March, the bank fund has only recouped 8% of its pre sell-off price of February versus a 35% gain for the S&P 500 index.

A small deal exemplifies the amount of possible premium extracted from a single bank stock. UBS AG, London Branch priced last week $685,000 of three-month reverse convertibles linked to Citigroup paying a fixed coupon of 15.68% per annum based on a 67% European barrier at maturity.

Undervalued banks

“I think for some investors the bank sell-off is overdone. People still remember 2008, but since then, the recapitalization of the big banks has been impressive. They shouldn’t run into the same problems,” the distributor said.

“Due to the volatility compression we’ve had since the rebound, a lot of major indices are not giving such attractive terms. So, this is a sector where you can monetize the volatility and get very good returns.”

Low interest rates have also been a drag on banks’ earnings.

While the Federal Reserve Bank has indicated it does not seek to push for negative interest rates, investors are expecting that it will happen sooner or later.

An industry source expressed his concern.

“It’s not just investors who face the challenge of reinvesting at lower rates or at negative rates like in Europe,” he said.

“Think of an insurance company that needs a safe investment but can’t find enough yield.

“Or think of European banks. They have to eat the cost of negative interest rates. All you have to do is look at the stock performance of European banks.

“Negative interest rates are a catastrophic situation.”

When expectations are negative on a given sector, volatility increases and higher yield opportunities emerge, said the distributor.

Tactical bets

Covid-19 themes continued to flourish as well. For example, Tyson Foods, Inc. was the single underlier on six different deals.

“We’re seeing a lot more people choosing strong names or names they think will do well,” said the distributor.

Technology stocks as always were the most widespread. This included the usual suspects such as Alphabet Inc., Amazon.com, Inc. and Apple Inc. but also Advanced Micro Devices, Inc. and Micron Technology, Inc.

Broad market exposure

But the underlying asset class of choice for worst-of deals is still equity indexes. Those deals made for nearly 75% of the $45 million worth of issuance volume seen last week.

“We see an increase in the number of worst-of that have three U.S. indices for instance not just the S&P and the Russell, but the S&P, the Russell and the Dow or the S&P, the Russell and Nasdaq,” said the distributor.

This was part of a general trend.

“We see a shift from a narrow scope of underliers into a wider one.

“People are moving into a wider pool of assets. They may combine two U.S. indices with a third one or add a more specific ETF, an international or sector ETF for instance.”

Last week’s top two agents were JPMorgan and BofA Securities with approximately $79 million each.

JPMorgan priced 53 deals and BofA, two.

Morgan Stanley with $54 million in 12 deals was next.

The top issuer was BofA Finance LLC with its two deals totaling $79 million.

For the year, Barclays Bank plc tops with $3.98 billion in 787 deals, a 14.4% share.

© 2015 Prospect News.
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