Structured notes issuance $326 million in first week of December; Canadian issuers lead

By Emma Trincal

New York, Dec. 14 – Structured products agents priced $326 million in 72 deals in the first week of December, with UBS distribution and Canadian issuers on the forefront, according to preliminary data compiled by Prospect News.

The previous week, which followed the Thanksgiving holidays, saw $1.54 billion sold in 295 offerings, according to updated figures. Distribution during that strong week was almost evenly split between Morgan Stanley, UBS and Citigroup.

Earlier, BofA Securities closed its monthly calendar during Thanksgiving week taking on a 45% market share.

Months, year

September was the top month this year with $10.41 billion, according to the latest update. March with $9.53 billion and January’s $8.22 billion marked the second and third best months, respectively.

Issuance volume this year through Dec. 2 amounted to $82 billion, a 12.8% drop from last year’s $94.16 billion.

Many more deals could be accounted for in the next four weeks of December, making it premature to estimate if and by how much the total tally for the year will be lower than last year’s record of $100 billion.

On the other hand, the decline in deal count is not questionable. Issuers inked 19,515 offerings this year through Dec. 2, a 31% decline from 28,432 a year ago.

Structures

Autocallables accounted for only 48% of total notional sales last week. This category includes callable notes with a contingent coupon (Phoenix) and snowballs. Last week’s representation of autocalls was in line with the 43% market share average observed for the year to date.

Leveraged notes accounted for 18% of sales last week. Almost all of those trades featured some form of downside protection either through a barrier or a buffer.

Index-linked notes captured 85% of total notional last week with $277 million in 41 deals.

A breakdown of this underlying asset class revealed the predominance of single index underliers, which made for two thirds of the week’s tally versus 20% for worst-of.

Worst-of structures

“We’ve seen a slight decrease in worst-of this year,” said Brady Beals, director, sales and product origination at Luma Financial Technologies.

“Higher rates, volatility provide better terms. Also, advisers are more selective in their underlier exposure.

“If you consider the typical indexes used in worst-of – the S&P, the Dow, the Russell and the Nasdaq – your exposure is likely to be to the Nasdaq and the Russell. Firms will exclude those two benchmarks as a result.

“It’s not a dramatic shift but overall worst-of are not used as much as before. And when they’re used, you tend to have two indexes versus three.”

Single indexes

Last week’s top five index deals were all structured on one index only. Usually leveraged notes are built on a single index basis and carry more weight, but last week’s growth notes were underrepresented. One factor: BofA’s typical block trades have already priced last month.

The use of single indexes has spread across different structure types, said Beals.

“Single indexes are increasingly digital or growth notes, even income notes,” he said.

The one-time call

A sole underlying index has also been used in a relatively new structure, which includes the following terms – two-year tenor with a one-time autocall after the first year and uncapped upside at maturity if the notes are not called. The participation at maturity tends to be levered. Those products often come with a buffer.

“We did a lot of those notes recently. They’re on the S&P and the call kicks in after one year. Some are short-term, others four to five year. The only issue for the asset allocator is that you don’t know if it’s an income note or a growth note,” said a market participant.

Last week saw the pricing of a couple of similar deals, only the leverage was absent and replaced by an uncapped digital coupon.

In-the-money digital

Toronto-Dominion Bank sold $28.95 million of two-year autocallable buffered index-linked notes linked to the S&P 500 index.

The notes will be automatically called at par plus 11.12% if the index closes at or above 90% of its initial level after one year.

If the notes are not called and the index return is above negative 10%, the payout at maturity will be par plus the greater of the index gain and 22.24%.

There is a 10% geared buffer on the downside.

TD Securities (USA) LLC is the agent.

Canadian Imperial Bank of Commerce brought to market a remake of the notes in $21.65 million of two-year autocallable buffered index-linked notes on the S&P 500 index. The terms were identical except for the call premium slightly lower at 10.7%.

CIBC Capital Markets is the agent.

Income

On the Phoenix autocall front, Canadian issuer Bank of Nova Scotia priced another single index deal in $28.94 million of five-year notes on the S&P 500 index.

The quarterly contingent coupon of 9% per annum is paid at or above a 70% coupon barrier. The quarterly automatic call kicks in after six months and the final barrier is set at 70%.

UBS Financial Services Inc. and Scotia Capital (USA) Inc. are the agents.

UBS priced on the behalf of CIBC a worst-of income offering for $16.65 million. The 3¼-year note is tied to the Nasdaq-100 index, the Russell 2000 index and the S&P 500 index. An American coupon barrier allows for yield enhancement with a contingent quarterly coupon of 15.4% a year paid if the worst-performer closes above its 70% barrier on every trading day during the observation period.

Index funds

Last week’s ETFs were all index trackers such as the SPDR S&P 500 ETF Trust, the Invesco QQQ Trust and the iShares Russell 2000 ETF. There were only a few exceptions for deals under $100,000 using the iShares MSCI Brazil ETF and the SPDR S&P Oil & Gas Exploration & Production ETF.

Stocks hangover

Issuance volume of single-stocks was notably weak last week representing less than 3% of total sales versus 11% for ETFs.

This breakdown contrasted with the year-to-date average of 13% for stocks and 5% for ETFs.

The top single-stock offering was priced at less than $2 million.

Last week’s names were widely diversified away from tech and communication services across different sectors such as financials (Bank of America Corp., Blackstone Group Inc.), materials (United States Steel Corp., Nucor Corp.) and energy (Petroleo Brasileiro SA). Only one deal was tied to Tesla, Inc. It was priced by UBS AG, London Branch for $100,000.

“Tesla was the most heavily used single stock. But its performance had an impact on those stock trades,” said Beals.

The share price of the electric carmaker is down 60% from its Jan. 4 high.

“The Covid trade was also in vogue. But people who had an exposure to Moderna or Peloton got badly hurt. These trades are out. Overall, aside from of oil and gas, there are not a lot of bright spots,” he said.

Peloton Interactive Inc. plummeted 93% from a January 2021 high. Moderna Inc. is 45% off its August 2021 peak.

Last week’s top agent was UBS with 30 deals totaling $87 million, or 27% of the total.

It was followed by Morgan Stanley and TD Securities (USA) LLC.

The No. 1 issuer was Toronto-Dominion Bank, which brought to market $57 million in seven offerings, a 17.4% share.

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