Structured products agents sell $365 million of notes during week amid massive tech sell-off

By Emma Trincal

New York, Sept. 9 – Structured products issuance volume held up well in the first week of September ahead of the Labor Day holiday weekend despite a stock market rout, which saw tech mega-stocks plunge on Thursday and raised questions about the resilience of the tech-based market recovery.

Agents sold $365 million of structured notes in 218 deals in the week ended Sept. 4, according to preliminary data compiled by Prospect News.

The previous week, which closed the books for August, showed $1.69 billion in 493 deals, according to updated data.

August

The tally for August gave this month fifth place with $4.86 billion, behind June and the top three months of the first quarter. The worst months so far have been April and May, according to the data.

“It’s hard to say why August ended up being a good month for this time of the year,” a structurer said.

“It was a record month for stocks, that’s for sure. I heard a lot of investors say: we don’t need buffers. And look what happened last week.”

Rocky week

The bullish momentum in the market turned abruptly on Thursday, which saw a massive sell-off in technology stocks, followed by a second day of decline for half of Friday although the market recovered some of the losses later on that day.

Thursday was the worst market drop since June led by the blue-chip technology giants.

“Friday was a real roller coaster. The market dropped. then went right back up. We ask clients: are you sure you want to get in a note without a buffer?” he said.

The CBOE VIX index, which measures volatility, rose as high as 38 on Friday.

“If this is not the time for structured notes, I don’t know what is,” he said.

“It would be crazy to get in the market without having any kind of downside protection. This timing is right for structured products.”

For the year, issuance volume rose 42% to $46.66 billion through Sept. 4 from $32.84 billion last year. The deal count increased to 14,398 deals from 10,713, an increase of more than a third.

“We’re still up a lot from last year. But growth is slowing down a little bit,” he noted.

Three months ago, the year-to-date volume was 60% higher than last year, the data showed.

Last week’s tech correction was expected but still took many by surprise given the sharp drop on Thursday.

The shares of Amazon.com Inc. shed 10.3% for the week, Microsoft Corp. lost 7.6% and Apple Inc. dropped 3.1%.

The Nasdaq Composite index had its worst week since March, dropping nearly 400 points on the week, a 3.3% decline to 11,417.32. At the end of the week, however, the Nasdaq was still 25% higher for the year.

The correction was across the board with all other U.S. benchmarks down for the week.

Recovery on pause

For some, too much complacency explained the sudden sell-off. The market had hit unsustainable all-time highs as investors poured into mega tech stocks fueling the recovery trade for five months. Others saw profit-taking in the pullback arguing that the market was due for a correction.

“If the tech bubble burst, it’s not going to be a structured products problem. It’s going to be a market problem,” said a sellsider.

“The market is going to suck if it happens and structured products too of course since they’re a byproduct of that.”

The structurer spotted bearish signs before last week.

“Anytime people are trying to justify the high multiples of Apple or Tesla, anytime I hear on CNBC: ‘this time is different,’ I know that almost immediately the market is going to take a dive.”

Derivatives at the rescue

For this structurer, derivatives show their full potential in this type of environment. They may be used two-fold.

“When the market starts to show signs of volatility there are a whole host of solutions that we investment bankers can offer through the use of derivatives. It depends really on your type of problem,” he said.

“If you have fresh money to invest, you should buy structured notes for the protection. It’s a no-brainer.

“On the other hand, if your money is tied up in shares, if you’ve made 85% on Apple and the position just gave back 10%, you might want to get out. But you can’t really unless you’re willing to get killed with taxes on capital gains. That’s when some derivatives contracts can help... collars for instance.”

A collar is a protective options strategy consisting of being long an asset while buying a put and simultaneously selling a call.

The short call position generates a premium. It is the equivalent of capping the upside. The premium is used to buy the put, which is similar to a buffer.

“The structured notes and the options are two different uses of derivatives. I don’t think one hurts the other though, at the contrary... the more familiar people get with options, the more using structured notes to build a new position will make sense. It’s the same mindset. You just use those strategies for different purposes,” the structurer said.

Sector bets

Predicting what types of structured notes will become the most popular is challenging at this juncture, he said.

“Buffers, of course, even leverage will make sense. If you know how to use leverage, it can be a defensive strategy.

“My personal view is that we’ll see changes not so much in the structures but in the types of underlying.

“I would think sectors ETFs should become more popular because the world is bifurcating between the ‘have’ and the ‘have not.”

“Some businesses, especially online businesses, are doing well while other businesses are not coming back.

“People will be more inclined to pick the winners and stay away from the losers, not with stocks but with sectors.”

Uncertainty

The market is unpredictable right now, said Matt Rosenberg, head of trading and strategic initiatives at Halo Investing.

“We don’t know what’s going to happen in the near future. What’s going to happen with the state of Covid and a potential vaccine? Can I fly this fall? Who’s going to be the next president? And the economy? Is the spending power going to wane now that we’ve been a month without a relief package? What about the loss of 11 million jobs?”

“I wish I would have a crystal ball,” he said.

But most investors remain optimistic, he said.

“We know the Fed isn’t done supporting the economy and they will continue whoever wins the Elections.

“We might see a market trading sideways, some choppiness, which is really good for structured notes,” Rosenberg said.

“It’s a compelling case to get protection in the portfolio and a decent income stream.”

More volatility supports better coupons and lower barriers as the premiums rise.

The CBOE Volatility index hit an intraday high of 38.28 on Friday. It was trading in the low 20s last month.

Rosenberg was optimistic about the coming couple of months.

“September and October will likely be big months just because of the Elections,” he said.

“It’s obviously positive for notes issuance. Income notes hopefully will start pricing better.”

FAANG’s resilience

Technology stocks continued to be under heavy selling pressure on Tuesday after the Labor Day weekend while they started to recover on Wednesday.

But with last week’s market rout, the question remains open: is the robust recovery trade led by mega-cap technology stocks about to end if the sector loses its momentum? And what about the large volume of notes linked to the “FAANG” stocks?

The acronym FAANG refers to the best-performing technology companies: Facebook, Amazon, Apple, Netflix and Google’s parent company, Alphabet.

“It’s not the end of the FAANG trade, far from it,” said Rosenberg.

“Tech will continue to be the catalyst that will push the market higher. We may see a retracement. But stocks like Amazon or Apple have profits that back up their P/E.”

“We may see more profit-taking. The SoftBank headlines, the Robinhood mania might continue to spook the market.

“But Apple is up so far 4.75% today. And what tech stocks lost for a couple of sessions hasn’t done much to dent their gains on the year.”

The Japanese conglomerate SoftBank purchased billions of dollars in call options in major tech names like Tesla and Amazon, reported the Financial Times last week, spurring the heavy sell-off.

The Robinhood App is a trading platform used by retail investors, which has been blamed for unusual levels of speculation due to the lack of experience of its users.

More volatility could give income-oriented index-linked notes a boost, according to Rosenberg.

While equity index remains the top underlying asset class week after week, the issuance volume of stocks-linked notes rose slightly this summer to solve the low volatility issue.

“I think indices will creep back up. People had to do stocks because income notes on indices were not very compelling even with worst-of. Now that volatility is rising, we may see renewed interest in the indices,” he said.

Top deals

The top deal last week allowed investors to enjoy uncapped leveraged returns on a single index providing investors accepted an extended maturity.

Barclays Bank plc priced $33.88 million of six-years leveraged notes linked to the S&P 500 Value index.

If the final index level is greater than the initial index level, the payout at maturity will be par plus 150% of the index return. If the index finishes negative, the structure offers a 70% barrier.

Morgan Stanley Wealth Management handled distribution.

“People are looking at value versus growth,” said Rosenberg.

“Growth has outperformed a lot for a long time. It’s the biggest spread ever seen in history. For people who think value is going to make a comeback, the opportunity to get leverage could be compelling.”

Fixed rate

Credit Suisse AG, London Branch brought the second deal in $31.77 million of four-year 4.17% autocallable coupon buffered securities linked to the S&P 500 index.

Interest is payable semiannually.

The notes will be called at par plus the coupon if the index closes at or above the initial level on any semiannual call observation date after one year.

The payout at maturity will be par unless the index closes below the 80% buffer, in which case investors will lose 1.25% for each 1% loss beyond the buffer.

Credit Suisse Securities (USA) LLC is the agent.

Worst-of on ETFs

In a $15.14 million deal, Citigroup Global Markets Holdings Inc. offered a sector play via an autocallable contingent coupon structure tied to sector ETFs – the SPDR S&P Bank ETF, the Technology Select Sector SPDR fund and the SPDR S&P Biotech ETF.

Each quarter, the two-year notes pay a contingent coupon at the rate of 10% per year if the least-performing ETF closes at or above its coupon barrier value, 64.25% of its initial share price.

The notes will be automatically called at par above initial price.

The payout at maturity will be par unless any ETF breaches the 64.25% barrier, in which case, investors will be exposed to the loss of the worst-performing ETF from its initial share price.

Morgan Stanley was the top agent last week with $124 million in 39 deals, or 34% of the total.

It was followed by Credit Suisse and JPMorgan.

Credit Suisse AG, London Branch was the No. 1 issuer with $75 million in 134 offerings, a 20.4% share.

For the year, Barclays Bank plc took the top slot issuing $6.91 billion in 1,426 deals, or 14.8% of the total notional volume.

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