Weekly structured products tally $702 million; top deal of the year prices for $490 million

By Emma Trincal

New York, Aug. 30 – Agents sold $702 million of structured products in 48 deals last week, the bulk of which came from one giant deal, which was the largest in size this year, according to data compiled by Prospect News.

Barclays Bank plc was the issuer of this $490.05 million synthetic convertible offering tied to Alphabet Inc. The 4% synthetic convertible notes due Aug. 28, 2026 will pay interest monthly. The payout at maturity will be in cash or shares at the holder’s option and will be based on a convertible formula.

Top 2023 deal

This deal was not the biggest one to price ever. In 2016, GS Finance sold $1.07 billion of leveraged notes on a basket of international equity indexes.

Usually notes on single stocks do not turn out to be so large, except for this category of synthetic convertibles, which are a hybrid of convertible bonds and structured notes. An example and the biggest sized deal dating back to 2004 when Prospect News began to collect data was UBS AG’s $2 billion of 22% mandatory exchangeable notes linked to Time Warner, Inc. The synthetic convertible note was issued as a private placement in 2006.

Other mega offerings so far this year – yet smaller than the Barclays deal – were rate products.

In February, two fixed-to-floating rate deals on the two-Year U.S. Dollar SOFR ICE swap rate were issued by Royal Bank of Canada and Toronto-Dominion Bank for $381.73 million and $250 million, respectively.

“People like fixed-to-floating when rates are rising. You can get very strong bids on those products,” said Mark Dueholm, chief fixed-income trader at Landolt Securities.

Going without a net

One characteristic seen last week was the significant number of deals without downside protection. For some, it reflected increased bullishness on the part of investors.

For instance, Citigroup Global Markets Holdings Inc. priced $29.58 million of snowballs due Jan. 3, 2028 tied to an unequally weighted basket of five international equity indexes representing the euro zone, Japan, the U.K., Switzerland and Australia. The notes are automatically callable annually if the basket is flat or up with a call premium of 11.4% per year yielding a potential maximum return of 45.6% at the end. Investors are fully exposed to losses at maturity.

“To do a snowball without any downside protection doesn’t make sense to me, especially when you have a long tenor like this,” said Dueholm.

“Perhaps people think that diversification across those different indices will spread out the risk. But world markets usually go in tandem. Or perhaps they think that over the course of four-and-a-half years the market is not going to be down much, if at all. Still. Your upside is capped. You don’t even have the leverage. I don’t see the point.”

Tradeoff

In most cases, the absence of downside protection reflects the uncapping of the upside especially with short tenors. Such was the case for the second largest deal of last week brought to market by Royal Bank of Canada in a $49.47 million issue of 13-month notes tied to a similar unequally weighted international equity basket. The gains were levered at a rate of 1.76x with no cap. Another type of tradeoff consists of capping the upside in order to boost the leverage over a short tenor.

This formula is routinely used by BofA Securities. One example last week was BofA Finance LLC’s $47.73 million of 14-month Accelerated Return Notes linked to the Energy Select Sector SPDR fund. The notes pay triple any ETF gain, up to a 30.51% cap with full exposure to market losses.

AI bandwagon

“People are extremely bullish right now as suggested by their willingness to use a note wrapper without the downside protection,” said Dasale Arachi, head of U.K. distribution at Hilbert Investment Solutions.

Last week equity market was particularly strong for mega cap stocks.

While the S&P 500 index and the Dow Jones industrial average finished flat, the Nasdaq jumped 2.3%. It is up nearly 30% for the year.

“I think AI continues to be a big driver behind this rally. Nvidia’s earnings last week were a big catalyst,” said Arachi.

Futures jumped on Wednesday post-market upon the release of Nvidia’s earnings, which strongly beat expectations. Nvidia is perceived as the leader in the AI rally. Its share price has climbed nearly 23% since mid-August.

Issuers this year have priced 143 offerings on this stock totaling $346 million, according to the data.

Regardless of the hype, some sellsiders remain conservative.

“I don’t know why people would want to do any structured note without any barrier or buffer. I’m not that confident on the market. I don’t take a view but buying a structured note while taking 100% of the risk doesn’t make a whole lot of sense to me. Our clients certainly wouldn’t go for it,” said Dueholm.

Most investors get their exposure to AI through single stocks or simply the broad indexes, which are overweight technology, such as the S&P 500 index and the Nasdaq. The use of ETFs is rare. One exception was seen earlier this month with Canadian Imperial Bank of Commerce’s $10.12 million of 14-month ARNs linked to the Global X Robotics & Artificial Intelligence ETF. The payout is three-times any ETF gain, capped at par plus 25.57%. Investors will be exposed to any ETF decline. BofA Securities, Inc. is the underwriter.

Leverage, baskets

Leveraged structures prevailed last week. Taking away the $490 million synthetic trade from last week’s total in order to eliminate the skew, leverage accounted for 55% of the total, or $117 million, versus 43% for autocalls, which totaled $92 million.

For asset classes and without counting the jumbo deal from Barclays, single stocks made for 4% of the total. Equity indexes accounted for 68% of the notional while ETFs were exceptionally strong with 28% of total sales.

Deals tied to weighted baskets of equity indexes and ETF have emerged lately, especially on the international equity space.

These offerings accounted for $2.317 billion this year through Aug. 28, according to data compiled by Prospect News. Thirty percent of that – or $696 million – has priced in the past two months.

Soft landing

After bottoming on Aug. 18, the S&P 500 index has resumed its rally while volatility has begun to retreat again, dropping to 14 now from 19 on Aug. 18.

“The low VIX hurts in one hand, helps on the other,” said a market participant.

“When you structure a note you either buy or sell options, most of the time you do both at the same time. A lower VIX makes the options cheaper, but you often need to sell them to generate some premium. That’s when it becomes a bit tricky.”

Part of the rally may originate from market sentiment regarding the economy. During his speech in Jackson Hole on Friday, Fed chair Jerome Powell did not expressively signal a pause in rate hikes, yet his message was not totally hawkish.

“It was a mixed message because the Fed doesn’t know what it’s going to do. They will look at the data and their reactions will be based on that. People keep on trying to decipher Fed talk, but no one really has a clue. It’s all data-dependent,” said Dueholm.

On the other hand, the market appears more confident about the chances of a soft landing. Earlier last week, the 10-year Treasury yield hit 5.35%, a record high dating back from 2007.

“People are betting on a stronger economy. The market is starting to believe that we’ll be able to avoid a recession. That’s why long-term rates are rising,” said Dueholm.

“It’s a recent shift in perception. Before that, people were expecting a recession. That’s why short-term rates were high and long-term rates low.”

Year so far

Structured notes issuance is improving on a year-to-date basis.

For the first time this year, sales through Aug. 25 surpassed last year’s with $60.351 billion in 13,863 deals, a 1.1% increase from the $59.694 billion issued during the same period in 2022 in 18,485 offerings.

Barclays was the top agent last week with its mega offering and another deal totaling $498 million, or 76% of the total. It was followed by Royal Bank of Canada and Citigroup.

Barclays Bank plc was the No. 1 issuer with three deals totaling $502 million, a 77% share.

© 2015 Prospect News.
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