Structured notes issuance drops 15.3% for year so far; chances of a pickup narrow with holidays

By Emma Trincal

New York, Nov. 27 – Structured notes issuance for the year was at $43.02 billion, a 15.3% drop from last year’s $50.80 billion pace, according to preliminary data compiled by Prospect News.

Most of the data for the week ended Nov. 22 was not posted on the Securities and Exchange Commission website, creating a lag for that week.

To be on the safe side, Prospect News picked year-to-date figures through Nov. 15 versus last year.

Week before Thanksgiving

Issuance flows were light in the week ended Nov. 22 as Bank of America had not filed its monthly calendar offerings yet, according to the SEC website. That is not to say the top agent was not closing the month on that particular week, sources said.

But preliminary data showed only 104 deals totaling $163 million on the week ended Nov. 22.

“I’m pretty sure that’s when they priced,” a sellsider said by press time on Wednesday, Nov. 27.

Bank of America, the top U.S. agent, which boosts notional sales figures each month when it brings to market its monthly calendar offerings, tends to price on the final week of the month but early enough to ensure settlement within the same month. Sources said that BofA probably priced most of its large trades on Nov. 22 for settlement just before the Thanksgiving weekend, which would explain the abnormally thin flow at press time.

Meanwhile, JPMorgan will settle most of its deals on Black Friday, having done the bulk of its pricing on Monday, Nov. 25, the sellsider said.

Trend reversal

A look at issuance data, month by month, revealed a reverse from typical seasonal trends observed in previous years.

Usually, the top months are January and February, which was far from being the case in 2019. Out of the first 10 months of the year, January ranked eighth and February, 10th. The norm was disrupted this year due to the market sell-off of last year’s fourth quarter culminating in a short-term crash around Christmas.

In sharp contrast with the traditional pattern, the two biggest months this year were May with $4.96 billion followed by August with $4.77 billion. October was the third best month with $4.61 billion. In 2018, May’s volume was in the fifth position, August’s eight and October’s ranked 10th.

“After the market was down late last year, notes didn’t get called in the beginning of this year, a period when banks tend to do most of their business,” the sellsider said.

“People were reluctant to invest in risky securities at the time. This is part of the reason why volume is down on the Street.

“Our firm had a bad first quarter. We had a great everything since then. In fact, if you exclude first quarter, we had a better year.”

Last quarter

Since November’s data is incomplete, in part as a result of BofA’s late execution, a look at volume from Nov. 1 to Nov. 15 suggests a slight month-over-month uptick: sales amounted to $1.53 billion in the first half of November versus $1.39 billion in October.

We’ll stay the course for the remainder of the year,” a market participant said. We might be poised for an uptick in December. This is the time when people are meeting with their advisers to check their asset mix, implement tax-loss harvesting strategies and rebalance their portfolio.”

Others are not so optimistic.

“November and December are the two worst months for issuance. Fewer people are engaged in the market. It’s because it’s the beginning of the holidays. Most of the investments are deployed in the first two months of the New Year,” the sellsider said.

“But this year we’re having a better November compared to October, at least for us.”

Toppish market

Equity markets weakened slightly last week, but after a six-week rally with the major indexes hitting several times in a row new record closing highs. The S&P 500 index finished the week down 0.3%.

When stock prices keep on climbing, investors tend to be tempted to invest directly in the stock market, the market participant said. This combined with a feel of the holidays approaching may have contributed to push issuance volume downward.

CIBC’s digital

The top deal in the week ended Nov. 22, according to the preliminary data, was what is known as an “in-the-money” digital note. Simply put, the digital is paid as long as the underlying closes above a barrier situated below the initial price (the stock is “in-the-money” as above the barrier strike) as opposed to having to close above initial price, increasing the chances of earning the fixed payout.

Canadian Imperial Bank of Commerce priced $10.4 million of 18-month digital notes linked to the Nasdaq-100 index. The notes offer a 10% geared buffer with a 1.11 multiple. If the payout is at or greater than negative 10%, investors will receive 9.7% at maturity.

“Those in-the-money digitals are one of the top trades for us,” the sellsider said.

“Let’s stay in the marketplace. I don’t expect the market to reach new highs. But as long as it doesn’t drop below a certain level on the downside, I’ll get paid some equity-like return to take on that risk.”

Steepener with autocall

The second deal was an interest-rate-linked offering, with an unusual twist: the use of an autocall on a leveraged steepener to cap the amount of interest paid throughout the term. The issuer, Royal Bank of Canada, priced $10 million of 15-year redeemable leveraged steepener notes linked to the 30-year Constant Maturity Swap rate and the five-year CMS.

The interest rate is 3.75% for the first two years. In years three through 15, the interest rate will be 10 times the spread of the 30-year CMS rate over the five-year CMS rate, subject to a minimum of zero and a maximum of 5% per year. Interest is payable annually.

The payout at maturity will be par.

On any annual interest payment date beginning in November 2022, the notes will be automatically called if the amount of interest to be paid on that interest payment date, taken together with all prior interest payments, will exceed a total return of 12% of par.

UBS was the top agent last week, according to the preliminary and likely to be revised data. It sold $55 million in 59 deals, or 33.9% of the total.

© 2015 Prospect News.
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