2023’s preliminary structured notes tally shows $94.3 billion, about on par with prior year

By Emma Trincal

New York, Jan. 17 – The year 2023 turned out to be strong not just for the U.S. stock market but also for structured notes issuance, according to the latest and preliminary data compiled by Prospect News.

Agents sold $94.3 billion in 23,229 deals in 2023, a modest 1% decline in issuance volume from $95.4 billion in 29,628 offerings.

Those figures are likely to be revised upward.

Looking back

“Last year was very good,” a sellsider said.

“It would have been a better year than 2022 if the market had been more stable. The constant talk of recession pushed a lot of people on the sidelines.”

He said he was bullish on equity for this year.

“A lot of the concerns have already been addressed for this year. The Fed is most likely going to lower rates. A lot of notes should be called in the first quarter, which will set up the entire structured note market for a record year.

“A pullback may happen, but that stuff is temporary.

“Don’t fight the Fed. If the Fed indicates they’re going to cut, the market is going to have a strong year,” he said.

Coming calls

Brady Beals, director, sales and product origination at Luma Financial Technologies, was optimistic too, pointing to the short term.

“January should be very strong,” he said.

“There’s money available.

“Income structures issued when the market dropped in January 2022 are going to get called. These are two-year notes, which is a very common tenor for income products.”

Single stocks

Last week’s tally was $308 million. Data however were incomplete and biased toward callable products at the detriment to other structures.

Among the underliers for those notes, the proportion of single stocks was unusually high at 22% compared to 13% for last year.

Based on the available data, ETF underliers also grabbed a high share of 25% versus 8% on average last year.

Morgan Stanley priced on the behalf of Bank of Nova Scotia the top stock deal last week with $16.48 million of three-and-a-half-year contingent income autocallables linked to Amazon.com, Inc.

The 10.95% annualized contingent coupon is paid quarterly based on a 70% coupon barrier, which is equal to the downside threshold at maturity.

Amazon was the most popular underlying stock last year. Issuers sold $1.05 billion of it in 307 notes, which represented 8% of the total notional for single-stock-linked notes.

Still Magnificent

The Magnificent Seven were also the top stock underliers last year. Six of those topped the list of single-stock issuance and accounted for 40% of this underlying asset class volume. After Amazon, the next five top stocks were Tesla, Inc., Alphabet Inc., Microsoft Corp., Nvidia Corp. and Apple Inc.

The last of the “Magnificent,” Meta Platforms, Inc. was only the 12th most used underlying stock.

“I think tech stocks will continue to lead this year. Historically, they’ve always been the large majority of single-stock underliers. They’re volatile, they don’t pay dividends and they’re in the news a lot,” said Beals.

A year ago, analysts were predicting a shift from growth to value, he noted.

“We don’t see rotation as much coming up this year,” he said.

The bid on AI stocks, which drove the tech rally last year, may not be the predominant trend in 2024.

“The appetite for AI may cool down a little bit. But if the Fed cuts rates as expected, tech in general should continue to be strong,” he said.

Crypto unleashed

One of last week’s top stories was the Securities and Exchange Commission’s authorization to launch exchange-traded funds tracking spot Bitcoin. Sources had conflicting views on whether the green light may generate a new generation of notes tied to the controversial asset class.

“It’s unlikely to happen soon,” said the sellsider.

“For one, issuers need the options, they need the liquidity and that’s not going to happen overnight.”

Most issuers will not have appetite for Bitcoin ETFs, he added.

“Bitcoin is very tricky, very volatile and it’s so new. There are a lot of hurdles to deliver deals on those Bitcoin ETFs. It may happen, but I don’t know when. Maybe at the end of the year,” he said.

Beals was more optimistic.

“I’m sure we will see notes on Bitcoin ETFs. Without a doubt. It will be interesting to see if people will utilize it a lot or not,” he said.

“Some issuers, those who tend to price more esoteric stuff, will do it first. Once it gets more traction, other firms will follow suit.”

Crashing down

Two stocks had a rough time last week, both related to the skies.

On Friday, Delta Air Lines lost 9% after lowering its earnings forecast for this year, despite beating expectations.

More publicized was the blowout of the cabin panel of a Boeing’s 737 Max aircraft during a flight on Jan. 5, leading the share price of the airplane manufacturer to plummet the following Monday.

Those big price drops may attract yield hunters who chase volatility to boost coupons for their income note portfolios.

But that’s only if issuers feel comfortable doing it, the sellsider said.

“There’s always interest on the part of advisers for something tanking like that. But it’s a challenge,” he noted.

“You’re dealing with falling knives. You don’t know. My team wouldn’t do those deals. Most issuers would avoid doing those notes. There’s a great risk if the stock rebounds.”

Worst-of American style

Last week saw the pricing of two series of notes, the first one, notable for the size of the offerings, and the second, for the choice of underlier.

The first “series” were worst-of notes on the Nasdaq-100 index, the Russell 2000 index and the S&P 500 index with maturities ranging from 30 to 39 months.

Some of the features used – worst of three indexes, daily observation barrier known as “American” barrier, issuer call and absence of any call protection, are generally employed to boost returns.

On the plus side, the barriers at maturity were set at 60% and the coupons had a memory.

UBS priced on the behalf of Canadian Imperial Bank of Commerce two offerings in this series for $37.5 million and $29 million.

The third deal sized at $30 million was issued by Morgan Stanley Finance LLC. Morgan Stanley was the agent and UBS the dealer.

“I’m surprised they were so successful,” the sellsider said, commenting on the size of those income notes.

“American barriers usually are a non-starter for a lot of clients. And here, the barriers are not very deep. You have to be fairly bullish to do those notes, but if you are that bullish, why capping yourself with these coupons?”

The coupon rates ranged between 10.1% and 11%.

“Clearly somebody liked it.

“We wouldn’t have been able to sell it to any of our existing clients,” the sellsider said.

Biding on biotech

Also of interest was the cluster of four relatively large autocalls on a sector ETF totaling $50 million.

Citigroup Global Markets Holdings Inc. was the issuer and Morgan Stanley Wealth Management the dealer.

The top one priced for $20 million and paid a contingent monthly coupon of 15.6% per year.

All four issues featured a one-year maturity, 80% barrier and memory coupons ranging from 14.2% to 15.6% per annum.

More striking for short-dated notes: all four structures offered a 20% geared buffer.

Those deals came on the heels of UBS AG, London Branch’s $30 million of buffered autocall notes on the same ETF, which Morgan Stanley sold early last month.

“The structure seems fine, but you do need to know the sector. Biotech companies tend to be interest-rate sensitive. An interest rate cut could be bullish for those trades. But you have to kind of know the space. Most people don’t,” the sellsider said.

Beals noticed that most ETF underliers replicate the broader market.

“This is a little bit different. We don’t see a lot of sector ETFs and it always surprises me. I would expect to see more of those this year,” he said.

Last year’s top agent was Morgan Stanley with $19.3 billion in 3,611 deals, or 20.5% of the total.

It was followed by UBS and JPMorgan.

JPMorgan Chase Financial Co. LLC was the No. 1 issuer, bringing to market 4,690 offerings totaling $15 billion, a 16% share.

© 2015 Prospect News.
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