June’s structured products tally in decline; investors stick to indexes, autocalls

By Emma Trincal

New York, June 22 – Amid a severe sell-off, structured products agents last week priced $175 million in 101 deals, according to preliminary data compiled by Prospect News.

A total of $1.78 billion has been issued for the month through June 17, according to updated figures, which represents a 35% decline from $2.74 billion in May. When compared to the sale of $3.22 billion a year ago, the issuance volume is down 45%.

Data however is still preliminary and will be revised upward. Figures including the final days of the month will be more representative in a few weeks.

Persisting volatility

“Last week was quite a week,” said Matt Rosenberg, director at Halo Investing.

The S&P 500 index lost 5.8% during this period, its biggest percentage drop since March 2020. Meanwhile the Nasdaq and the Dow Jones industrial average both shed 4.8%.

The trigger was the Federal Reserve’s hiking rates by 75 basis points on June 15. Two days before, the 10-year Treasury yield fell below the two-year rate, a yield curve inversion, which is seen (especially on this part of the curve) as one of the most reliable indicators of a recession.

The week ended with the S&P 500 index in bear market, down 23.4% from its high of Jan. 3. The sell-off began two months ago, putting the reinvestment of autocallable notes on hold as those have not been called.

Sales of structured notes for the year are down nearly 15% to $38.5 billion through June 17 from $45.2 billion during the same time last year.

Indexes prevail

Equity indexes prevailed last week, accounting for 83% of the total tally. With 2% in ETFs, broadly diversified trades represented 85% of total notional, reducing the market share of single stocks to 15% of the total.

“We’re seeing more index-based structures, more ETFs too,” said Rosenberg.

The “buy the dip” mantra, which has prevailed during the bull market of the last couple of years, may not be as appealing to buyers of structured products.

Big decliners

“There are a bunch of growth names that are down 80% from their highs. I would be curious to see if we have any uptick in structured note issuance tied to names like Peloton for instance,” said Rosenberg.

From its peak of $129.70 in July, the stock has dropped 92% to $10.

No recent autocall deal was seen on the name, according to Prospect News’ preliminary data.

Among commonly used underlying stocks that have incurred declines of approximately 80% since their highs a year ago, a few names emerged, such as Bed Bath & Beyond Inc. (-84%), Roku, Inc. (-81%), DocuSign, Inc. (-80%), Twilio Inc. (-78%) and Zillow Group, Inc. (-75%).

Investors who bought those names a year ago have obviously breached the barrier. But for new money, the entry price and the terms may be tempting, said Rosenberg. However, data from Prospect News does not show any deals referencing those specific names in June or even in May whether investors are shying away from the risk or issuers are finding the pricing of those stocks too hazardous to hedge. Single stocks commonly used in recent autocalls tend to remain concentrated in some industry clusters such as energy, banking, automobiles and semi-conductors (Nvidia Corp.).

More action may be seen next month when the earnings season kicks in, said Brady Beals, director, sales and product origination at Luma Financial Technologies.

“I think there is a correlation between the earnings season and single-stock issuance,” he said.

“We still have 80% of our sales to RIA clients in index-based products. But we definitely see a bit of a spike in single stocks before the earnings when volatility offers more opportunities.”

Autocalls still in favor

Autocallables made for 57% of the total last week. This number is well below last year’s market share (two-thirds of the market) even if it is higher than this year’s 45%.

“There’s still a great deal of interest in autocalls. But sales of new issues are down because notes are not being called. People don’t have the cash available to reinvest in autocalls. So obviously the notional has been stagnant,” said Beals.

Furthermore, investors have become more cautious.

“When we look at new autocall issuance, we see that people have turned a little bit more conservative. There’s a bias toward longer tenors, longer no-call periods.

“They want to lock in better terms for longer periods of time,” he said.

Rosenberg said the bid on autocalls remains strong.

“They’re the product of choice because they remain very appealing. Despite the rise in interest rates, people still want income,” he said.

“The downside is that they might not get called. But folks need those products. If they have money to deploy in the market, anything with a periodic coupon is going to catch their attention.”

Commodities, rates

With higher rates, principal-protected notes (PPNs) should have become readily available. But it hasn’t been the case yet, or at least not with the plain-vanilla types of products.

“Rising rates have opened the door for more creativity in our space,” said Beals.

“During a long period of time, from Covid to this year, the industry was pricing out income notes after income notes.

“Now that rates are a lot higher you would think you could see more principal-protection on growth products.

“But it hasn’t really happened – not on traditional growth notes.”

Instead, issuers have been offering principal-protection in other asset classes than equity. They also have come out with innovative equity-based products, he said.

Several issuers recently have priced two-year deals linked to a basket of commodities with one-to-one uncapped upside and full downside protection.

“More folks want exposure to commodities due to inflation and the rise in oil prices. From a pricing perspective it’s easier to put principal protection on commodities than on equities,” he said.

Rate-linked notes tend to offer full protection by default.

While rate notes are mostly bought for the income, full protection may also explain the success of some deals such as the recent Bank of Montreal $112.89 million issue of three-year floating-rate notes paying the two-year U.S. Dollar SOFR ICE Swap Rate with a floor of 3.2%.

The one-time autocall

In addition to the use of non-equity asset classes, issuers have created new types of payouts to offer PPNs on equity.

A classic example consists of pricing notes with an autocall at the end of the first year. If the notes are not called, investors can get uncapped leverage exposure. With longer tenors than the two-year, issuers have been able to price the 100% protection. Such was the case in May with a $17.8 million five-year offering issued by GS Finance Corp. on the S&P 500 index. Lately though, maturities tend to be shorter (two-year) and the protection comes with barriers.

An example seen last week was HSBC USA Inc.’s $8.35 million of two-year autocallable trigger leveraged notes linked to the S&P 500 index.

After one year, a one-time call allows for the payment of a 13.4% premium.

At maturity, the payout is 1.25 times the gain with a 75% barrier on the downside.

Morgan Stanley Wealth Management distributed the notes.

This product illustrated why fully protected growth notes are not growing as one might expect.

“The sell-off has given rise to conviction trades,” said Beals.

“As we’re already in a bear market, people are comfortable with barriers. They don’t anticipate another 20% or 30% drop in three years from where we are now. Since they need the equity exposure anyway, they go for the better terms.”

Another example of a “creative” structure offering principal-protection is the bear note, also known as “shark note.”

Only a few of these products have emerged of late.

$50 million deal

Last week’s top deal was a snowball.

Morgan Stanley Finance LLC issued $50 million of five-year review notes linked to the lesser performing of the S&P 500 index and the Russell 2000 index.

The notes will be called at par plus a premium of 15.25% per year if each index closes at or above its initial level on any of the first eight semiannual review dates after one year or above 90% of its initial level on the final review date. The 90% threshold is the barrier level.

J.P. Morgan Securities LLC acted as the placement agent.

Snowballs are popular for the memory feature. In this deal, for instance, investors may earn as much as 76.25% if the notes are called on the final review date. Yet, snowballs represent only 10% of the issuance volume of all autocallable and issuer call notes. The remainder consists of autocallable contingent coupon notes, mostly the Phoenix type.

The top agent so far this month is JPMorgan with $365 million in 94 deals, or 20.5% of the total.

It is followed by Morgan Stanley and Citigroup.

Citigroup Global Markets Holdings Inc. is the No. 1 issuer with 65 offerings totaling $333 million, an 18.75% share.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.