Structured products issuance $481 million for week; $93 million BofA deal eyed

By Emma Trincal

New York, April 26 – Agents priced $481 million of structured products in the week ended Friday in 70 deals in a lackluster week for equities despite a busy earnings calendar.

Updated figures for the previous week showed $1.37 billion sold in 307 deals, according to data compiled by Prospect News.

Of interest was the big size of an equity-linked notes deal issued by BofA Finance LLC for more than $93 million.

This deal was part of a pair of 12-month autocallables linked to the worst of the Nasdaq-100 index, Russell 2000 index and S&P 500 index.

Two big deals

The $93.39 million deal pays on a monthly basis an 11.01% fixed coupon with a 70% barrier at maturity. The monthly autocall can be triggered above initial price on any monthly observation date after six months.

In the second deal, which priced at $36.16 million, the notes pay a higher fixed coupon of 13.55%. The barrier level remains set at 70%.

Both deals priced on April 19 and carried an identical fee of 0.25%.

The main difference between the two issues, which explained the difference in coupon rates, was the additional risk introduced in the second one by an American barrier at maturity. American barriers can be observed on any trading day, which increases the probability of a knock-out.

Stock underliers

The mix of underlying asset classes and structure types was relatively average last week.

Equity indexes with $327 million in 40 deals made for 68% of the issuance tally. Stocks represented 11% of the total in 19 deals totaling $51 million. The issuance volume of stock-linked notes was slightly lighter than average despite last week’s earnings. But earnings reports were mostly from banks, and big tech earnings, which tend to move the market more significantly, were not expected until this week. Some stock deals were relatively large in size for this asset class.

For instance, Morgan Stanley priced on the behalf of UBS AG, London Branch $17.64 million of contingent income autocallable securities due Oct. 22, 2026 tied to Blackstone Group Inc. The contingent coupon was 18% based on a 65% barrier.

Meanwhile Bank of Montreal issued two autocallable offerings on Charles Schwab Corp., the largest one for $10.25 million.

Both Schwab and Blackstone released their first-quarter earnings results last week.

“During earnings season, stocks are more volatile, so pricing may have been attractive,” a structurer said.

“Blackstone had a lot of difficulties with its commercial real estate funds.”

Earlier this month, Blackstone closed its $30.4 billion Blackstone Real Estate Partners X, a global real estate fund.

“And Schwab has been negatively impacted by last month’s banking turmoil. They have a bank, and they make a lot of money on interest rate spreads. With their deposits shrinking after the collapse of SVB, they’ve been under scrutiny,” the structurer said.

No sector bet

ETF underliers took a 20% market share in last week’s issuance volume, the data showed.

But ETFs last week were proxies for equity indexes. All of the notes in this category of underlying were tied to either the SPDR S&P 500 ETF Trust or the Invesco QQQ trust, series 1, which track the S&P 500 index and the Nasdaq-100 index, respectively. Investors apparently gave up on sector plays.

Mark Dueholm, chief fixed-income trader at Landolt Securities, explained the appeal of the broader markets.

“It usually comes from the client. Most underwriters talk to their clients and that’s how deals get done,” he said.

But this did not really explain the important use of ETFs tracking broader indexes.

From an asset allocation standpoint, the difference is slim between a note tied to the index or linked to the index fund, he said.

“It’s probably because the issuer might find it easier to hedge the trade with the ETF rather than the broader index.”

Phoenixes reign

Autocalls accounted for 80% of sales last week. Agents priced 55 such offerings totaling $384 million.

Most of those deals were autocallable contingent coupon notes (or “Phoenix” autocalls).

One exception, structured as a snowball, was Citigroup Global Markets Holdings Inc.’s $28.94 million of five-year buffered autocallables linked to the S&P 500 index.

The quarterly autocall after one year pays a cumulative premium of 10.25% a year. The call level is set at 90%.

At maturity, if the notes are not called, investors would benefit from a 15% geared buffer with a 1.1765 multiple.

A tale of two markets

Despite a flurry of earnings last week, the stock market ended relatively flat, and volatility as measured by the VIX continued to collapse, hitting a one-year low on Wednesday at 16.17.

This muted volatility continued to puzzle market participants given last month’s bank runs, the earnings season underway and the uncertainty around the Fed’s future moves.

Dueholm attributed this anomaly in part to the discrepancy between bond traders and investors.

“The stock market and the bond market are at odds with each other,” he said.

“The two-year Treasury is going all over the place.

“Early last month the two-year yield was 5.08%. A month ago, it was at 3.55%. Today, it’s at 3.90%. The two-year is extremely volatile since it’s a proxy for what the Fed is going to do.

“The bond market is pricing a recession. They think the Fed is going to cut rates. If they don’t cut rates, the two-year Treasury will climb to make up for the gap with the Fed Funds rate. As of now, the 3.9% yield is way too low compared to the 5% Fed Funds rate.”

But the stock market’s outlook is not as straightforward.

“It’s hard to figure out what the stock market is thinking but it shouldn’t be so calm. I guess they think that the economy will be fine and that rates might go down,” he said.

Since the regional banking turmoil, a month ago, the VIX has been stuck in a range between 16 and 20.

Term structure

The structurer said that VIX levels have a limited impact on the pricing of structured notes as the volatility gauge is an indicator of the very short-term volatility. The CBOE VIX index measures the 30-day market volatility of the option prices of the S&P 500 index.

“Most structures, autocalls and buffered notes with caps have nine-month to two-year maturities or even longer,” he said.

“They’re priced based on long-term volatility, the 12-month to two-year volatility. And long-term volatility is pretty stable. It doesn’t go up or down as much as the VIX. So, it doesn’t really affect pricing,” he said.

For this structurer, a decline in pricing conditions, if any, was relative.

“Pricing is a bit challenged compared to a month ago or two months ago,” he said.

“But compared to a year ago, pricing is just amazing because rates are high. You don’t necessarily need so much rates to go higher. You just need their level to be high. That’s how you get better structures.”

The top agent last week was BofA Securities Inc. with $173 million priced in 14 deals, a 29% share.

It was followed by Citigroup and UBS.

The No. 1 issuer was BofA Finance, bringing to market 13 deals totaling $157 million, nearly a third of the total.

© 2015 Prospect News.
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