Structured products weekly tally $750 million; three issuers price $250 million in rate products

By Emma Trincal

New York, Jan. 25 – The shortened week following Martin Luther King Jr. Day turned up with a heavy flow of structured products issuance thanks to four giant rate-linked notes.

Agents priced $750 million in 107 deals, according to preliminary data compiled by Prospect News in the week ended Friday.

The tally included four block trades totaling $250 million consisting of short-term fixed-to-floating rate notes on the U.S. Dollar SOFR ICE.

Rate bets

Citigroup Global Markets Holdings Inc. priced the largest one for $100 million – a 13-month deal linked to the two-year U.S. dollar SOFR ICE swap rate plus 80 basis points, subject to a floor of 0% payable after the first three month’s fixed rate of 5.3% a year.

Citigroup Global Markets Inc., the agent for this deal, priced another one for $50 million, which was a one-year note tied to the one-year U.S. dollar SOFR ICE swap rate plus 15 bps, subject to a floor of 3%. The teaser rate for the first six months was 5.2% per annum.

Separately, Bank of America Corp. and JPMorgan Chase Financial Co. LLC each issued $50 million of 13-month notes linked to the two-year U.S. Dollar SOFR ICE swap rate. The spread over the underlying rate was 100 bps with the Bank of America deal and 41 bps on the JPMorgan paper. The initial fixed coupon for the first six months was 5% and 6%, respectively.

Yield curve inversion

“Investors get pretty good rates with those structures at the risk of seeing further inversion on the shorter end of the curve,” said a sellsider.

“Right now, the curve is inverted,” he noted.

The 2-Year U.S. Dollar SOFR ICE Swap rate yields 4.18%. The one-month is at 4.52%.

“You’re getting 80 bps above what the market is right now in short-term funding,” he said, commenting on Citi’s $100 million deal.

“Will the two-year rate go down? That’s your risk. You get a chunky coupon upfront but then, if the yield curve stays inverted, your two-year rate will stay lower than the one-month, which is not a good thing. On the other hand, if the two-year goes up, it’s a good deal.”

These rate-linked notes are not typically purchased by retail investors, he noted.

“The buyers are usually companies and big institutions that use them as a way to manage their cash funding,” he said.

Indexes, top structures

Since a third of total volume came from those four big deals, the rest of the tally was skewed toward fixed-to-floating structures in the interest rate category. Discounting the $250 million issued in this group and taking into account the remaining $500 million sold in equity, the top structures were in decreasing order first, autocallables with a 50% market share, then came digitals with an 18% share and leverage making 10% of the $500 million tally.

In terms of asset classes, equity indexes accounted for 78% of total sales (still using the $500 million tally excluding the rate block trades). Stock deals amounted to only $31.5 million in 13 deals, a 6.3% share.

Stock deals

The top offering tied to a stock was Barclays Bank plc’s $10.44 million. The three-and-a-half-year note will pay a 17.5% annualized contingent coupon based on a 65% coupon barrier observed quarterly.

The securities will be called automatically at par at or above the initial level on any quarterly review date.

At maturity, the principal repayment barrier is 65%.

Barclays is the agent, and Morgan Stanley Wealth Management is the dealer.

Bank of Montreal priced another deal on Blackstone for $1.44 million. The 13-month notes pay a fixed 13.7% annualized rate. The monthly autocall kicks in after six months. The barrier at maturity is 60%.

Single stock issuance has been thin since last year. But signs are emerging that tech stocks may be up for a comeback depending on the performance of the Nasdaq-100 index, sources said.

Tech recovery

For the year, the Nasdaq has gained 7%, outperforming the S&P 500 index, which is up 3.8%.

The January rally was on pause last week with the S&P 500 index losing 0.7% as disappointing fourth-quarter earnings revived recession fears.

The picture was mixed with an encouraging December Producer Price Index, suggesting a slowdown in inflation, which gave the market a fresh opportunity to expect rate cuts next year or even this year.

Despite the uncertainty, big tech stocks snapped back last week, pushing the Nasdaq 2.7% higher for the week. The rebound in big tech names was triggered by Netflix’s better-than-expected earnings released on Friday.

“I can’t predict if the Nasdaq will continue to rally this year after losing a third of its value in 2022,” the sellsider said.

“Right now, people are still concerned about tech risks. So many big tech names got pounded last year.

“I think we’ll start to see notes tied to those high-flying stocks only if the Nasdaq’s recovery persists. People got burned. It will take some time before we see more notes tied to those stocks.”

Interest rates

The future direction of interest rates is one of the most difficult calls to make in the market right now, he said.

Some believe that inflation will persist, leading to higher rates and a bearish bond market.

Others anticipate rates to fall, especially if the Federal Reserve continues to raise rates to the point of weakening the economy. This may signal the return of the bond bull market.

Which way will interest rates go?

“It’s the question everybody is asking right now,” the sellsider said.

After rising substantially most of last year, rates have come down since the fall, he noted.

The yield on two-year Treasuries has fallen 60 bps from 4.73% in November to 4.13%.

The 10-year yielded 4.29% in October but dropped to 3.45% currently, an 84 bps decline.

“I’m biased toward the view that rates will stabilize,” he said.

He said he would use a combination of growth notes in equity and rate products as hedges against inflation.

“I would position my portfolio with notes trying to capture the upside opportunity – I’m thinking of buffered notes and if possible uncapped leveraged notes – while putting on some rate hedges with the types of fixed-to-floating deals that priced last week. If rates go up, you get a bigger payout.

“So, for equity: downside protection with as much leverage as possible and on the rate side, floating rates tied to the two-year,” he said.

Metals, Latin America

Andrew Valentine Pool, main trader at Regatta Research & Money Management, said he looks for niches for his clients while remaining focused on the U.S. market.

“Rates are lower and I’m not sure why,” he said.

“Is it because people are not able to borrow at those levels? I imagine that if you’re a car dealership seeing that cars aren’t selling you’ve got to cut rates. Now is it why rates are lower than three months ago? I am not sure.”

Inflation may progress differently across different sectors, he said.

“Inflation will subside in discretionary consumer goods, items such as high-end vacations for instance. But I can see it slowing down in other areas,” he said.

Niche underliers

Pool likes to use “niche” assets for his notes when he sees value.

As an example, he likes metals and precious metals.

“I personally like copper, steel and aluminum ETFs because those base metals are correlated to economic growth.

He said he buys and looks for notes linked to the SPDR S&P Metals and Mining ETF.

“I like metals more than gold. Gold is an inflation hedge and if inflation is slowing what kind of hedge would that be?” he said.

In general, Pool is relatively optimistic about sales of structured notes looking forward.

“Clients have limited return expectations. If they can anticipate a predetermined amount of return with limited chances of losing money, they’re going to go for it,” he said.

Last week saw a slight pickup in international equity note issuance with the pricing of five deals totaling $46 million.

Three of those notes were linked to an unequally weighted basket of indexes including the Euro Stoxx 50, the Nikkei 225 or alternatively the Topix, the FTSE 100, the Swiss Market and the S&P/ASX 200.

Toronto-Dominion Bank priced an $11.9 million deal on the Euro Stoxx 50 index.

“International is not bad. Personally, I have a positive bias toward Latin America. But you get more opportunities if you stay in the domestic market. You get more underliers, more buffers, more upside,” he said.

Citigroup was the top agent last week with $222 million in 24 deals, or 30% of the $750 million tally, which incorporates the four large rate offerings. It was followed by UBS and Bank of America.

The top issuer was Citigroup Global Markets Holdings with $270 million in 30 deals, or 36% of the total.

© 2015 Prospect News.
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