March kicks off with $200 million of structured notes amid Nasdaq correction, recovery signs

By Emma Trincal

New York, March 10 – Structured products agents priced $200 million in 185 deals in the week ended Friday, according to data compiled by Prospect News.

It was a turbulent market for the start of March sending conflicting signals between early signs of a recovery and a continued spike in yields feeding inflation fears and sending technology stocks lower.

Recent updates for the final week of February revealed a $1.43 billion tally, expanding the total notional for February to $5.3 billion, which remains lower than January’s $7.83 billion. Last month’s figures may still be revised upward.

Core objective

Autocallables took precedence with 64% of last week’s total volume. This structure always tops others, but its weight dwarfed leverage whose share was only 10%.

“Most people are looking for income products,” said Matt Rosenberg, director at Halo Investing.

“When volatility is high, it helps pricing, but demand is always there anyway. Income resonates for the widest segment of our market.

When markets are whipsawed, the barrier component of income-oriented notes is even more compelling.

“People want to get a coupon with some downside protection especially when they have a sideways outlook.”

Stocks

Single stocks prevailed last week making for 47% of notional sales. Of interest was the lack of worst-of deals on stocks.

“If you can achieve the same desired outcome with a single stock rather many, why would you pick multiple stocks?

“There’s a correlation between volatility and single-stock deals. There was plenty of vol. last week to allow for the pricing of single underliers,” he said.

Indexes

Equity indexes accounted for more than a third of total sales, and there again, the appetite for worst-of was lower than usual as revealed by the top deals all tied to a single index.

While the S&P 500 remained the benchmark of choice, investors placed bets on the relatively over-heated small cap Russell 2000 index. Small cap stocks and value plays in general were in favor as the market rotated out of tech into finance, energy and sectors expected to benefit from a recovery and higher rates.

To be sure, last week’s headlines were positive for the economy. The February job report was stronger than expected; the Food and Drug Administration authorized the emergency use of Johnson & Johnson’s Covid-19 vaccine; and the House passed a $1.9 trillion stimulus package. These encouraging headlines pushed the Dow Jones industrial average up 1.8% on the week.

Recovery and inflation

If the week was bullish for the Dow, it was not for the Nasdaq, which dropped more than 2%. The culprit was the continued rise of interest rates, which hurts tech and growth stocks as it reduces future earnings expectations.

The Nasdaq briefly entered correction territory last week, down 10% from its mid-February high.

Fears of resurging inflation fed last week’s volatility, pushing up the CBOE Volatility index (VIX) while the 10‐year Treasury yield briefly hit a 1.61% intraday yield before closing the week at 1.55%, which is still 65 basis points above its level at the start of the year.

The VIX at some point rose above 30, well above its 20-25 average, noted Steve Sosnick, chief strategist at Interactive Brokers.

He said that high momentum stocks are likely to put some pressure on the market in the short term, particularly those that are widely held by the ARK Investments funds.

ARK outflows

The actively managed exchange-traded fund, which consists of “disruptive” tech companies (with Tesla, Inc. as the top holding) has been used in 63 notes offerings this year for a total of $134 million. After meteoric gains, the ETF has lost a third of its value since its mid-February high.

“ARK is in the headlines every day,” said Rosenberg.

“You just look at the components. These are not only tech stocks...they’re growth tech stocks. It could be down 30% in the last few weeks and suddenly surge 30% in one week. That’s the nature of disruptive companies.”

Given the sensitivity of tech stocks to rising interest rates, the Nasdaq may continue to lead the market to the downside, according to some analysts.

Healthy volatility

“It’s challenging,” said Rosenberg, whose firm is active in the distribution of autocallables linked to technology stocks.

“Given the $1.9 trillion stimulus, people are trying to get ahead of inflation. But I’m not so much on board with those inflation expectations and fears. Higher yields on the long end will have an impact on housing. But rates are still historically low, and I believe they will remain subdued for a while.

“For us, to see a 10% or 15% retracement of the Nasdaq is not a negative sign for tech.”

“The Nasdaq has dropped lately. But it’s up this week. This market volatility is healthy. It’s a positive.

“As long as there is uncertainty and apprehension about the direction of the market, people will be looking for protection. Good for notes!”

Issuance volume of structured notes for the year through March 5 is $13.34 billion in 3,812 deals versus $15.3 billion in 4,129 offerings a year ago.

On a 12-month trailing basis, the tally is up 15% to $70.26 billion in 22,221 offerings through March 5 versus $61.09 billion in 18,676 deals in the previous 12 months.

Single names

The most common single underlying stocks employed last week were Amazon.com, Inc., Apple Inc., Boeing Co. and Advanced Micro Devices, Inc.

The average size of single-stock-linked notes offerings was half a million dollars. The exception was UBS AG, London Branch’s $23.27 million of three-year autocallable contingent yield notes linked to Apple Inc.

Those notes will pay a contingent quarterly coupon at an annualized rate of 8% if the stock closes at or above its 63.55% coupon barrier on the related quarterly observation date.

The notes will be called at par plus accrued interest if the shares close at or above the initial share price on any quarterly observation date after six months. The downside threshold at maturity is also 63.55%.

In-the-money digitals

The most popular structure seen last week, aside from autocallables, were in-the-money digitals. Some of those deals were larger than usual. The term “in-the-money” refers to a digital payout that strikes below the initial price, giving investors a limited range of alpha on the downside.

As an example, there is Credit Suisse AG, London Branch’s $23.05 million 14-month digital buffered notes linked to the S&P 500 index.

If the index finishes at or above 90% of its initial level, the payout at maturity will be the fixed payment of 8.07%.

Investors will lose 1.1111% for each 1% decline beyond 10%.

Credit Suisse Securities (USA) LLC is the agent.

Separately, UBS priced $18.64 million of digital notes due Nov. 3, 2022 on the Russell 2000 index. The buffer level and strike for a 15.65% digital payout is 90%. The 10% buffer is also geared with a 1.111 multiple.

Those digitals competed with a few absolute return deals but surpassed them in volume.

A structurer said that the bid for absolute return versus in-the-money digitals depend on the market environment and naturally, one’s view.

“If the underlying is down only a little bit, you benefit from the digital,” he said.

“You get a boost instead of a small absolute return participation. So, using one versus the other also depends on your view. But the two structures are sort of cousins. The general theme is the same: you want to play the market on both sides.”

Value

Meanwhile Barclays offered a couple of deals for value-oriented investors even if value stocks are becoming rich.

One was large-cap-oriented with Barclays Bank plc’s $10.87 million of phoenix autocallable notes due Sept. 9, 2022 linked to the S&P 500 Value index. It pays a 9.35% contingent coupon, and the coupon barrier is at 70%.

The notes will pay a contingent quarterly coupon at an annual rate of 9.35% if the index closes at or above its 70%.

The notes are autocallable quarterly. The barrier at maturity is 70%.

In addition, the issuer priced two trigger callable yield notes with fixed coupon on the iShares Russell 2000 ETF for $18.25 million and $8.6 million, respectively.

The top agent last week was UBS with 178 deals totaling $139 million, or 70% of the total.

UBS AG, London Branch was the No. 1 issuer with $112 million in 176 deals.

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