Structured products issuance $500 million for week; big $100 million Chevron-linked deal eyed

By Emma Trincal

New York, Oct. 27 – Structured products agents priced $500 million in 154 deals last week, helped by BofA Finance LLC’s $100 million cash-settled seven-year equity-linked notes on Chevron Corp., according to data compiled by Prospect News.

It was a week dominated by positive earnings news pushing both the Dow Jones industrial average and the S&P 500 index to new record highs.

A total of $201 million of single-stock deals was priced, including the big Chevron deal. Without counting it, stocks made for 25% of total sales.

Earnings

“For us, earnings season is an optimal time to show and to buy structured notes because that’s when volatility is higher,” a broker said.

“If you’ve been looking for notes on Google lately, the pricing wasn’t so great. But if you bought notes on Monday, you saw heightened volatility and much better terms and that’s because the earnings came out on Tuesday.

“So, if you have conviction on a stock and can handle the uncertainty around the company’s results, earnings are a good time to buy notes.”

For the most part, companies posted robust results, beating expectations, and driving the market higher for now.

“Earnings were definitely on radar,” he said.

A market participant agreed that pricing is possibly enhanced during earnings. But it did not necessarily have an impact on demand.

“It’s sort of a mixed picture,” he said.

“On the one hand, you get better coupons, lower barriers. But people who buy structured notes are not stock or options traders. They may not feel comfortable making investment decisions during those uncertain times.”

$100 million deal

BofA’s offering on Chevron (Cusip: 09709UTW8) is one of those synthetic convertible plays, which typically come in larger sizes than a typical structured note on equity.

The deal priced on Oct. 18. BofA Securities, Inc., the agent, did not receive any selling commission.

The payout at maturity will be the greater of par and the alternative settlement amount, which itself is defined as the product of $1,000 times the quotient of the final stock price divided by the 112.1% threshold price.

For investors to make a profit at maturity, the stock will have to appreciate by more than 12.1%.

“It looks like it could be a corporate deal,” said a market participant.

“Sometimes institutional investors use equity derivatives for certain purposes rather than buying the stock outright.

“But I can’t be sure it’s not retail. The only time you know something is not retail is when the notes are less than one-year. Retail investors don’t want the short-term capital gain tax treatment while it’s not such a hot issue for institutions. But this one is a seven-year. It’s unclear. The fact that it has zero fee could simply mean it’s a fee-based advisory deal.”

Top stock deals

Morgan Stanley Finance LLC priced another deal on Chevron. This time the $12.9 million issue was a classic contingent income autocallable.

The 10.05% annual contingent coupon is paid each quarter if the stock is at or above a 75% barrier. The tenor is three years.

The deal priced on Oct. 18, nearly two weeks ahead of the company’s third-quarter earnings announcement on Oct. 29. Chevron pays a 4.7% dividend yield, which helps pricing.

Other sizable single-stock deals included Morgan Stanley’s $12.07 million of three-year contingent income autocalls linked to vaccine-maker Moderna, Inc. The 10.3% annual contingent coupon is based on a 55% downside threshold.

The deal also priced on Oct. 18, two days before the Food and Drug Administration authorized Moderna’s Covid vaccine booster shots.

Another reasonably sized single-stock deal was Goldman Sachs Group, Inc.’s $10.28 million of contingent income autocallable notes tied to DocuSign, Inc.

The cloud-based software company’s next earnings release is not before Dec. 2. But the stock displays a high volatility of 40%.

This underlying stock is popular. A total of 116 offerings linked to it as a single stock have priced this year totaling $195 million. Most of those deals have been issued and distributed by UBS. But GS Finance brought to market and sold the largest ones, including two deals in June at $29.65 million and $23.82 million.

Last week’s offering though was distributed by Morgan Stanley. The three-year note pays a 9.5% contingent coupon based on a 70% downside threshold.

Inflation still a risk

While earnings dominated the news last week, investors did not completely ignore other major issues, mainly inflation and the upcoming Fed taper. The economy continues to endure supply chain imbalances and labor shortages, which have pushed prices and rates higher.

“Fed and inflation go hand in hand,” the broker said.

Bank of America’s global fund manager survey released last week showed that inflation is now seen as the number one risk by 48% of the surveyed managers. China was second (23%) and Covid-19, third.

“Inflation is still a major concern for investors,” he said.

“While investors expect the Fed to taper next week, the dot plot for a rate hike is moving up. The futures market is now pricing the first hike sooner than September and as early as June 2022.”

This has led some investors last week to place protective bets against inflation. One classic way is through commodities, which was seen last week, this asset class accounting for 8% of total sales versus 0.6% for the year-to-date average.

Commodities picking up

JPMorgan for instance priced on the behalf of Morgan Stanley two digital deals of $20 million each linked to Brent crude oil futures contracts.

The structures were identical, featuring a one-year term, a 14% digital payout paid if the underlying closes at or above a 70% trigger at maturity.

Another example of direct exposure was GS Finance Corp.’s $19.02 million of 18-month callable contingent coupon notes linked to the shares of iShares Silver Trust. The 19% annualized contingent coupon is payable quarterly if the ETF is at or above an 86% barrier, which is at the same level as the barrier at maturity.

Commodity exposure was also achieved indirectly through equity, for instance with the two Chevron-linked offerings.

“People are certainly trying to hedge against inflation,” the broker said.

“Energy markets are in vogue. Metals are in demand. Some see in the way gold is underperforming a new opportunity. We may have more commodity deals than before as the inflation story continues to be front and center.”

The next new thing

A renewed interest in commodities could even come from the emergence of a new and “hot” asset class, he added.

Last week saw the launch of the first U.S. Bitcoin-linked ETF offering investors an opportunity to gain exposure to Bitcoin futures contracts. The launch opens the door to cryptocurrency-based structured notes, he said.

“We’ve been waiting for this. It will be interesting to see who will be the first issuer to offer a Bitcoin note.

“There’s been such a big run up in this market. If deals are priced on this new ETF, will people use it as a hedge? Will they use it as an alternative to gold?

“Each time you create a new underlying asset, you present new ways of investing in a trend, new potential for issuance,” he said.

He predicted the issuance of notes on the new Bitcoin ETF.

“It’s going to happen and soon,” he said.

Steepener

Another way to profit from inflation and higher yields is through steepener notes. GS Finance priced one such deal last week in a $16.4 million issue of 10-year notes linked to the difference between the 30-year and the two-year CMS rates levered four times. The product offers a 4% teaser rate on the first year, followed by the floater rate capped at 8% with a 1% floor. Principal is fully protected.

New cyber security index

On the index side, JPMorgan Chase Financial Co. LLC brought to market a couple of small deals linked to a new proprietary index – the J.P. Morgan Quest Cyber Security index.

The index was developed and is maintained by J.P. Morgan Securities plc, also the agent for the notes.

Solactive AG is the index sponsor. The index went live on Oct. 8. JPMorgan priced two deals, one for $1 million and the other for $2 million. Both were the first to use this underlying.

The index provides exposure to large-, mid- and small-cap companies in developed markets that may have ties to the cyber security industry. The index uses a natural-language algorithmic analysis of news articles and press releases performed by RavenPack International SL.

“People want exposure to cybersecurity stocks, but they want to do so via indices or baskets,” said the broker.

“Using a well-known index provider like Solactive to implement a methodology, throwing news item to see what’s moving the share prices is based on the same concept as meme stocks that are driven by social media. Information has an input on price. I wouldn’t sell this for a mass audience but it’s certainly an innovative index.”

Year, month tallies

Updated volume for the week of Oct. 11, prior to last week, showed a $1 billion tally in 217 deals.

Totals for October are too soon to evaluate as data remain preliminary.

Revised monthly data revealed that the top month this year was June with $8.55 billion followed by February with $8.48 billion.

Last year’s top months were December and March.

The year 2021 is exceptional, according to the data, which goes back to 2004.

This year’s tally through Oct. 22 is now at $71.95 billion versus $56.23 billion last year, a 28% jump.

The full calendar year of 2020, which was the best year on record, was $72.7 billion.

“It looks extremely good and it’s encouraging. Obviously, we’re just about to break a record,” said the market participant.

“The stock market is up more than 20% this year. It goes to show that structured products can be in demand when stocks are at all-time highs. People want alternatives with less downside risk, they want more defined payout, something that’s not as simple as a stock moving up or down.”

The top agent last week was UBS with $128 million in 106 deals, or 26.7% of the total.

It was followed by BofA Securities and JPMorgan.

Morgan Stanley Finance was the No. 1 issuer with $114 million in 12 offerings, a 22.85% share.

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