Structured products tally for month $1.66 billion; heavy bid on fixed-to-floaters, single-stocks

By Emma Trincal

New York, June 21 – Structured products agents sold $1.66 billion in 351 deals during the first two weeks of June with notable interest seen for fixed-to-floating notes as well as sizable single-stock issues, according to data compiled by Prospect News.

The Federal Reserve paused rate hikes last week for the first time in 15 months but gave a mixed message indicating that more rate increases may be necessary in the future to tame inflation. The stock market rallied with the S&P 500 index gaining 2.6% on the week and the Nasdaq rising 3.3%.

But for investors betting on more interest rate hikes ahead, fixed-to-floating rate deals are an attractive opportunity as evidenced by the large size of some of those offerings.

RBC, JPMorgan

This month’s top deal was Royal Bank of Canada’s $89.05 million of three-year fixed-to-floating rate notes.

The notes will pay a quarterly fixed coupon at 6.5% per year for the first year. After that, it will accrue at an annual rate of two-Year U.S. Dollar SOFR ICE swap rate plus 90 basis points. The payout at maturity will be par plus any accrued interest. RBC Capital Markets LLC is the agent.

Another large deal was brought to market this month by JPMorgan Chase Financial Co. LLC in $70 million 15-month fixed-to-floating rate notes. Interest will be fixed at 7.25% for the first three months. The variable rate is the one-year U.S. dollar SOFR ICE swap rate plus 45 bps.

“Investors seek protection when they expect rates to continue to rise. Those are alternatives to plain-vanilla bonds for the typical fixed-income investor who needs the principal-protection,” a sellsider said.

Proceed with caution

A market participant agreed.

“People who think rates will go up a little bit longer may have a point. After all, the Fed may have paused last week, but they said they will continue to hike if they have to,” he said.

“The problem is that it’s a trade that’s very exposed to a recession. If there is any drop in GDP or a slowdown in hiring, the Fed will jump in and cut rates, because that’s what they do. Your fixed-to-float will blow up in that case.”

Fixed-to-floating rate notes issuance amounted to 10% of the volume for the month through June 16, according to the data.

This market participant said the current interest in fixed-to-floating rate notes reminded him of the past popularity of steepeners, which express bets on a widening spread between the longer and shorter part of the yield curve. Those deals are no longer pricing as new issues.

“People were betting that the yield curve would steepen, and the opposite happened. We’re at historical records of inversion. These steepeners really blew up. They’re now trading 50 cents on a dollar. Now that the curve is so inverted, they’re probably worth doing especially at those bargain prices on the secondary,” this market participant said.

Stocks

June has been a good month for notes tied to stocks.

Single stocks and baskets of stocks have accounted for over 20% of the month’s notional or $343 million, which contrasts with the 12% average market share for this asset class year to date.

“It’s the appetite for some names but it’s also pricing. Volatility is at a one-year low. It’s hard to get attractive pricing on indices,” the sellsider said.

Volatility as measured by the VIX index hit a one-year low at 13.10 on June 21.

The top stock deal this month was UBS AG, London Branch’s $36.05 million of three-year contingent income autocallable notes with memory coupon linked to Bank of America Corp.’s stock.

The notes will pay a contingent quarterly coupon at an annual rate of 11% based on a 60% coupon barrier.

The notes are automatically callable on any quarterly determination date.

Morgan Stanley Wealth Management is the dealer.

Another larger deal on a financial stock was Bank of Nova Scotia’s $15.1 million of Phoenix autocallables on Blackstone Inc.

But overall, investors’ appetite centered on technology stocks, especially those perceived to be leading the AI bandwagon. Underlying stocks for offerings in excess of $10 million included Apple Inc., Tesla, Inc., Microsoft Corp. and Nvidia Corp.

Microsoft series

Activity around one specific name was particularly noticeable with two agents pricing $10 million deals on Microsoft. Those issues had common characteristics: one-year tenor, autocallable contingent coupon with memory and geared buffers.

JPMorgan priced $10 million on the behalf of Barclays Bank plc and another $10 million issued by its own JPMorgan Chase Financial with 12% and 14% contingent coupons, respectively. The geared buffers were at 20% and 15%, respectively.

Separately, Morgan Stanley priced two other deals of $10 million each on the behalf of Citigroup Global Markets Holdings Inc. The coupons were 14.82% and 16.1% and, in both cases, the geared buffer was at 15%.

“Microsoft is one of the well-recognized names. It’s part of the AI story. It’s what drives interest. The stock has had a strong run, but maybe issuers have been able to pick up some volatility,” the sellsider said.

“The sweet spot is when you can combine a blue-chip name like Microsoft with a double-digit coupon and a decent barrier.”

The $10 million trades priced on the first week of June. On Friday, Microsoft’s share price hit an all-time high at $351.47.

“There’s a little bit of mania in the market,” the market participant said.

“People are pouring into the same names, driven by this AI craze. Microsoft is part of the AI craze.

“They’re just focusing on the trend. They’re chasing the stock in a different way than buying the stock itself.

“This reminds me of ARKK in 2021. Everybody was buying notes on ARKK at the time until it blew up.”

He was referring to the ticker for the ARK Innovation ETF, whose value rose nearly five-fold from March 2020 to February 2021 before dropping more than 80% by the end of last year.

Equity indexes

As always, equity indexes were the top underlying with $977 million this month, or 59% of total sales.

Single indexes prevailed with $562 million followed by $383 million in worst-of index offerings. The rest came from weighted baskets.

The largest worst-of and also top equity trade for the month came from Morgan Stanley Finance LLC, which sold $76.25 million of one-year 10.6% callable fixed income notes tied to the worst performing of the Nasdaq-100 index, the S&P 500 index and the Russell 2000 index. Interest is paid monthly.

The notes are issuer callable quarterly after six months.

The barrier at maturity is at 70% of initial price.

The top trade on a single index was a leveraged buffered note on the S&P 500 index also sold by Morgan Stanley for $50.38 million. If offered 1.5 times leverage on the S&P 500 with a 51.6% cap and a 22.5% downside buffer.

Hybrid catapult

The top digital note was a hybrid including a one-time autocall at the end of the first year, a feature that is usually used to create uncapped leveraged payout at maturity for newer trades called “catapults.”

In this digital version of the so-called “catapult,” JPMorgan Chase Financial priced $42.85 million of two-year autocallable buffered equity notes on the S&P 500 index. At the end of the first year, the notes can be automatically called with a call premium of 8.15% if the index closes at or above its initial level. At maturity, the digital payout is 16.3% and protection is a 10% geared buffer.

Digital bid

Digital products issuance was significant this month reaching a 12% market share, which nearly equaled the penetration rate of leveraged notes.

For the market participant, pricing was one of the main drivers behind the pickup in digital issuance.

“There’s a huge shift toward calls versus puts. Option market participants are now buying tons of calls, so they’ve become relatively more expensive,” he said.

The “skew” probably is having a positive impact on digital call options pricing, he said.

“With more expensive calls, you get more premium, which gives investors higher digital payouts,” he said.

The sellsider suggested that demand for digital notes was a response to current market conditions.

“While bulls and bears can both be very vocal, overall, people are just more cautious. They’re trying to be opportunistic and probably don’t expect big moves either way,” he said.

“Since the market has already gone up a lot, they don’t expect a huge rally. They have a range bound outlook.”

The top agent so far this month is Morgan Stanley with 53 deals totaling $499 million, or 30.1% of the total.

It is followed by JPMorgan and UBS.

JPMorgan Chase Financial is the No. 1 issuer this month with 63 deals totaling $364 million, a 22% share.

© 2015 Prospect News.
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