Structured notes issuance $570 million for week; low volatility spurs worst-of, callable deals

By Emma Trincal

New York, June 24 – It was a solid week for structured notes sales with $570 million priced in 138 deals, according to preliminary data compiled by Prospect News.

Meanwhile the S&P 500 index shed 1.9% despite a surge in retail sales as rising Covid-19 cases in some states fueled concerns of a second wave of the pandemic.

As always, issuers adjusted to the low volatility levels by introducing multi-asset underliers and in some cases as seen last week, discretionary calls for income-oriented notes.

The month through June 19 is flat from May to $2.305 billion from $2.315 billion. The deal count of 719 was slightly lower than 855 notes last month.

“Based on flows and feedback I get, advisers are not committing to structured notes,” said a distributor.

“They’re waiting for a market correction. They feel prices are too high. The downside protection is not enough.”

The S&P 500 index was up 42% from its March 23 low at the end of last week.

Commenting on the Dow Jones industrial average plunging 800 points on Wednesday morning, he said: “Good. We need that too. The market can’t go up all the time.”

Month, year

Flows this month through June 19 are two-thirds higher than a year ago, which saw the pricing of $1.383 billion during that same time. This may be because June 2019 was the fourth weakest month in volume.

Sales year to date are now at $33.179 billion, a 55.2% increase from last year’s $21.372 billion.

The number of offerings jumped 43% to 9,974 from 6,982.

The solid and positive gap recorded this year may not remain as wide as the year unfolds. Last year saw the business strengthening in the second half after a weak first quarter. November and December were the top months in volume.

Uncertainty

“I’m not so optimistic. A lot of what’s pricing comes from the wirehouses. Morgan Stanley, UBS are up. But the question is: are they getting new customers? Or is it return business?” the distributor said.

“My volume is not up. I’ve seen fantastic offerings recently. Yet, advisers are more fearful.”

Another factor may have led investors with varying risk profiles to avoid structured products.

“A lot of paper was called in May. There’s so much cash available. Investors are reinvesting it in the market because this rally is just exciting for some people. It’s the fear of missing out that’s driving this market.

“But my advisers are a little bit more cautious. They are sitting on the sidelines because the market is too pricey.

“Either way, that’s not a good thing for structured notes.

“Overall, the industry depends on what the big retail platforms are doing. That’s where demand is coming from.”

Others agree: the rally can be scary for some. Meanwhile muted volatility is not helping pricing.

“When rates are low, you need that volatility to maintain good terms on the notes, otherwise you’ll see a continued decay with products looking less and less attractive,” a sellsider said.

UBS’ $85 million deal

Leverage represented about a third of last week’s total volume. Income products, 60% of it.

The exception was a big leveraged capped trade, which was No. 1 in size.

UBS AG, London Branch priced $84.84 million of one-year leveraged notes linked to the S&P 500 index. The payout at maturity will be par plus 150% of any index gain, up to a maximum return of 22.95%. Investors will be exposed to any losses.

“My customers don’t do a lot of leverage, but I know some people like those deals,” the distributor said.

“Protection levels aren’t so great, which is probably why you don’t see as many growth notes as you used to.

“Those who like leverage like the idea of outperforming. I get that. But this one has no downside protection. And it’s only 1.5 times. That’s what the market gives you. That’s what you get.”

Worst-of

Worst-of contingent coupon notes on indexes dominated last week’s flow, which is the common trend.

Indexes made for 77% of total volume.

One particularity seen last week was the presence of issuer calls replacing autocalls in several deals, including block trades.

Barclays Bank plc priced the second largest deal with $45.59 million of contingent income callable securities due June 23, 2022 linked to the least performing of the Dow Jones industrial average, the S&P 500 index and the Russell 2000 index.

Each quarter, the notes pay a contingent coupon at the rate of 15% per year if each index closes at or above its coupon barrier, 70% of its initial level, on every day that quarter.

The notes are callable at par on any quarterly coupon payment date other than the final one.

If each index finishes at or above its downside threshold level, 65% of its initial level, the payout at maturity will be par.

Barclays is the agent. Morgan Stanley Wealth Management is a dealer.

“We do a lot of worst-of, not because that’s what we really choose or want to do but because it gives us much better terms. There’s more risk since you’ve got more than one index, but the pricing more than makes up for the higher risk," a market participant said.

Issuer calls

But when the market keeps on going up and volatility is under check, pricing attractive coupons becomes increasingly challenging even with worst-of. Last week saw a surge in deals with issuer call options, including Barclays’ $45.59 million offering.

“It’s a way to increase those coupons,” an industry source said.

“You see more issuance gravitating toward issuer calls for that reason.”

Morgan Stanley – also on the behalf of Barclays – priced another contingent income callable worst-of deal for $37.5 million linked to the same three indexes – the S&P 500, the Russell 2000 and the Dow Jones industrial average.

Maturing two days earlier than the $45.59 million deal, this one will pay a 17.75% on the same 70% coupon barrier, which is the same level as the barrier at maturity.

Barclays had a busy week. This issuer also priced $30.58 million of three-year contingent yield notes linked to the Dow and the Russell 2000 index. This time the call is automatic. With two indexes rather than three and a non-discretionary call, the coupon was set at 7.75% based on a 70% barrier. But the principal repayment barrier at maturity is more defensive at 50%.

UBS is the agent.

Stocks, digital notes

Single stocks represented 10% of total sales.

Included in this category were two relatively large fixed-coupon notes of $10 million each, one tied to JPMorgan Chase & Co., the other to Boeing Co. Barclays was the issuer for both.

Separately, Credit Suisse AG, London Branch priced $15 million of three-year review notes linked to the least performing of PayPal Holdings, Inc. and Starbucks Corp. shares.

Digital products amounted to $31 million or about 5.5% of the total sold.

The biggest one was Citigroup Global Markets Holdings Inc.’s $19.45 million of 14-month buffered digital securities linked to the Russell 2000 index.

If the final level of the index is greater than or equal to its buffer level, 85% of its initial level, the payout at maturity will be 11.35%. Otherwise, investors will lose 1.1765% for every 1% that the index declines beyond 15%.

This “in-the-money” digital provides some level of payment if the underlying is negative.

Surprisingly, absolute return notes, designed to produce the same effect but on a participation basis, were missing last week.

Morgan Stanley was the top agent last week with $183 million in 18 deals, or 32% of the total.

It was followed by UBS and Citigroup.

The No. 1 issuer was Barclays Bank plc, bringing to market 17 offerings totaling $211 million, a 37% share.

The bank is also the top issuer for the year to date with $4.948 billion in 1,007 deals, or 14.9% of the market.

© 2015 Prospect News.
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