Structured products tally $771 million for week; $103 million synthetic convertible eyed

By Emma Trincal

New York, Nov. 8 – With $771 million priced in 117 deals, structured products agents scored a good week for the start of a month, according to data compiled by Prospect News.

Part of the flow came from a synthetic convertible note tied to a single stock. Those hybrid notes are categorized as structured products for their reference to an equity asset but show the characteristics of a convertible bond, sources said.

Big hybrid

The offering was Morgan Stanley Finance LLC’s $102.66 million of three-year cash-settled equity-linked notes tied to RTX Corp.

The notes are issued at premium and pay a rate of 2.5% per annum on a semiannual basis. The payout at maturity is based on an exchange price relative to the underlying price.

“I’ve seen them every now and then. They’re usually pretty big. These notes are done by convertible bond shops. Maybe they do it because there’s not an active convertible market for the stock. In any case, these are very specialized notes. They’re not that common,” said Brady Beals, director, sales and product origination at Luma Financial Technologies.

High volume, low vol.

“If you strip out the convertible deal, the issuance volume last week was soft,” a market participant said.

Beals disagreed.

“I’m surprised we had that much given the market rally. It may have been deals that were previously locked in,” he said.

The stock market had its best week of the year. The S&P 500 index climbed 5.9% and the Nasdaq rose 6.6% as the Federal Reserve left interest rates unchanged. A weaker-than-expected job report reinforced expectations that the Fed was done with its rate hike cycle. It led to a drop in bond yields, which added to the bullish sentiment causing volatility to drop sharply.

The VIX index started the week above 21 and ended on Friday below 15.

“It’s not great to do notes when volatility drops like this obviously. If you do customized deals, they get struck and issued the same day. So usually, you’re just not going to have that much activity when the stock market rallies,” he said.

Indexes, country ETFs

Equity indexes made for 80% of the tally last week. Worst-of notes were not in vogue, at least not as large offerings.

The bulk of index-linked notes issuance came from large S&P-based buffered digitals issues.

ETF-linked notes were missing from the picture last week, making a little bit over 1% of the total, which is unusually low.

Of interest was the recent use by GS Finance Corp. of buffered notes tied to country-specific ETFs.

On Oct. 27, this issuer priced a $2.56 million deal on the iShares MSCI India ETF, an underlying last seen in January 2022 in a Barclays note. On the same day, GS Finance brought to market another $2.56 million offering linked to the iShares MSCI Mexico ETF. This underlying had not been used since September 2020.

Leverage down

Leverage issuance made for 18% of total volume.

For the year through Nov. 3, leveraged issuance has dropped 20% to $16 billion from $20 billion, according to the data.

“We’re seeing fewer leveraged notes because people don’t expect huge returns. What’s the point of having 150% uncapped if the market is not going up that much or even goes down,” said the market participant.

Those lower return expectations come from persisting concerns about the economy.

“Historically, when the Fed stops raising rates, the economy tends to enter a recession,” he said.

The top leveraged note was Bank of Nova Scotia’s $67.52 million of securities due Feb. 6, 2025 linked to the S&P 500 index. The payout was 3x the index gain up to a 19.56% cap. The downside was not protected. Scotia Capital (USA) Inc. was the underwriter with Goldman Sachs & Co. LLC acting as a dealer.

“The size, the structure, the S&P-linked only. It’s interesting. It really sounds like a BofA deal to me,” said Beals.

Autocalls vs. cash

Autocallables made for 23% of the total with $179 million in 55 deals. But no large deal was spotted in this category.

“Clients are not enamored with income notes because they can do so well sitting in cash now,” the market participant said.

“The 5% rate or better you’re going to collect from cash or T-bills is really hurting the 8% or 9% coupon you get taking equity risk.”

A shift in growth

Digitals continued to push as a leading structure as they topped the list of deals in size. Agents priced 14 of them totaling $227 million.

The market participant argued that digital notes are increasingly popular because they fit a common market outlook.

“Digitals don’t offer a ton of upside. But they’re the perfect instrument in a less bullish environment. In the growth space, I’m seeing a shift from uncapped leverage into digitals,” he said.

Top digital deals

Scotiabank priced the top digital offering on the S&P 500 index for $90.57 million. It was also the second-largest for the week after the synthetic convertible trade.

If the index finishes at or above its 90% threshold level, the payout at maturity will be 17.7%; otherwise, investors will lose 1.1111% for each 1% decline beyond 10%.

Morgan Stanley also priced $39.37 million of two-year digitals, which again referenced the S&P 500 index. The digital strike was 80%, the payout 16.54% and the geared buffer, 20%.

Finally Canadian Imperial Bank of Commerce priced another S&P-linked digital offering for $33.58 million.

Year down 3%

Issuance volume dropped 3% for the year through Nov. 3 to $79.34 billion from $81.79 billion a year ago.

The deal count fell by 22.8% to 19,174 from 24,839.

Morgan Stanley was the top agent last week with $259 million in 20 deals, or 33.6% of the total.

It was followed by Goldman Sachs and JPMorgan.

The No. 1 issuer was Bank of Nova Scotia, bringing to market seven offerings totaling $208 million, a 27% share.

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