January sales of structured notes at $2.76 billion, beating year-ago level

By Emma Trincal

New York, Jan. 24 – January so far is showing a strong start with structured products issuance volume up 6.7% from a year ago, according to preliminary data compiled by Prospect News. Agents during the first three weeks of the year have priced $2.76 billion in 595 deals compared to $2.59 billion in 754 offerings during the same month last year through Jan. 19.

One factor may be the lackluster volume seen a year ago: January was the third worst month of 2023.

Compared to December, however, this month through Jan. 19 has fallen behind, with a 24% drop from $3.63 billion.

One factor may be the cycle of last month’s sales, which picked up during the pre-holiday period before falling sharply when people went on vacation, the data showed.

Some banks experienced the opposite trend.

“We did far better this month on average relative to the end of last year. Year over year, our sales are flattish,” a sellsider said.

Prospect News’ data remains preliminary, and figures may be upgraded including for December.

Mega cap rally

The New Year is starting on a strong bullish note for equities.

The S&P 500 index recently notched new record highs on Friday as well as Monday and Wednesday this week. Bull markets always impact decisions to buy or not buy structured notes as investors perceive risk in different ways, said the sellsider.

“People are not rushing to the door,” he said, referring to structured notes buyers.

“They’re waiting for a correction. They perceive the market as too high. They’re still holding back.

“Others are piling into stocks, especially big cap stocks. You can’t beat the returns of the S&P right now,” he said.

Forgotten PPNs

Ultra defensive notes typically designed for skittish investors could be priced attractively. Yet they are not visible in the market, he said.

“The only thing that makes sense right now are principal-protected notes. Interest rates are still high, and volatility is still low.”

There has not been any sale of equity-linked leveraged notes with full principal-protection so far this year, according to the data. Prospect News, however, only tracks registered notes, which excludes market-linked certificates of deposits. Last year saw a similar pattern. Principal-protected notes (PPNs) accounted for less than 1% of total sales.

“It’s very difficult to convince a bond guy to let go of his coupon for a hypothetical return in the stock market,” the sellsider said.

Record highs

Not all investors are risk averse. If anything, the current bull market demonstrates exuberance rather than fear, a financial adviser said.

“People are getting a little bit too giddy. It’s starting to feel like January 2022,” he said.

The recent record highs in the S&P 500 index brought back the benchmark above its all-time high level of Jan. 4, 2022, erasing the losses of that year.

The sellsider said that aggressive investors tend to gravitate around autocalls, picking the right timing.

Risk on, risk off

“You have two types of investors: those who want to take risk and those who don’t. The risk-takers stay in equity,” he said.

“They buy autocalls on equity. They look for the right entry. They do worst-of on indices. They also use single stocks.”

The so-called Magnificent Seven have been the most popular underliers.

“They were up last year because they still generate high earnings growth. But the Magnificent Seven are tricky. You can’t do worst-of on seven stocks. So, issuers pick two or three of them,” he said.

As an example, last week’s top stock deal was BofA Finance LLC’s $8.9 million of autocallables tied to the worst of Amazon.com, Inc. and Meta Platforms, Inc.

The other type of investor, the “risk-averse,” may be inclined to shy away from structured notes altogether, the sellsider said.

“The logic for these guys is pretty straightforward: why put your capital at risk for an 8% or 9% coupon when the risk-free rate gives you 5%? For 3% more you take more risk. Many people think it just doesn’t make sense.”

Worst-of

Worst-of notes are making a strong comeback. It was not always the case last year when single asset underliers were in favor for weeks and sometimes months.

Worst-of indexes made for 56% of last week’s tally combining index and ETF underliers, or $100 million out of $170 million.

BofA Finance priced $65 million of such products in 20 offerings. Those notes were mostly tied to indexes rather than ETFs.

Worst-of on single stocks represented 40% of the worst-of notional and weighted baskets of stocks only 4%.

“Volatility is very low. One thing you can do with worst-of is maximize your yield,” said the sellsider.

The VIX index is trading below 13, a level not seen in four years.

But worst-of can only do so much when volatility remains compressed and correlations too high.

“Everybody is trading the broad U.S. market; everybody is pricing notes on the same three or four U.S. indices. This is pushing correlations higher and so traders can’t price aggressively. The higher the correlations, the lower the coupon,” he said.

A worst-of note linked to highly correlated assets makes the trade less risky as a result of the reduced dispersion. The result will be less premium and therefore a lower yield.

They don’t call

Callable income notes hit a high market share last week with 75% of total sales, or $235 million in 80 deals.

Leverage on the other hand remained weak with 13.5% of the total. The rest included digital, dual directional and rate-linked notes.

“Volatility is down. A lot of notes get called. Advisers reinvest the proceeds just to have a security on the statement as opposed to cash,” the adviser said.

Investors are getting more comfortable with issuer calls.

Last week for instance showed that autocalls and issuer calls were sold in equal notional sizes, or $117 million and $118 million, respectively.

“Issuer call is fine,” the adviser said.

“Issuer calls never get called. There have been so many times when I expected the issuer to call, and they never did. You don’t really know why. But you get paid longer.

“With the autocall, there is no way to avoid the call. The market is up. You get called.

“I actually like issuer calls. You get the extra yield, sometimes up to 2% and it gives you a chance to hold the notes longer.”

Negative curve bet

Last week showed an uncommon rate-linked note. It allowed investors to bet on an inverted yield curve over a three-month timeframe. Citigroup Global Markets Holdings Inc. sold $20 million of this unusual trade with principal at risk. The notes pay a fixed return of 16.42% at maturity if the spread between the 10-year U.S. dollar SOFR ICE swap rate and two-year U.S. dollar SOFR ICE remains negative based on its initial level. If not, investors gradually lose some of their principal subject to a minimum payment of $164.20 per $1,000 principal amount.

Last week and before

The top agent last week was BofA Securities with $124 million in 31 offerings, or 39.5% of the total.

It was followed by UBS and Royal Bank of Canada.

BofA Finance was the top issuer.

The week prior to last week was strong with $1.28 billion in 210 offerings, according to the latest updated data.

HSBC Bank plc issued then $45.43 million of three-year autocallable notes linked to the S&P 500 index.

The annual autocall commended a 9.13% annualized premium. Investors were fully exposed to losses at maturity. BofA Securities, Inc. was the agent.

Additionally, Barclays Bank plc issued two sizable autocallable offerings on stocks, one on Microsoft Corp. for $37 million, the other on Blackstone Inc. for $32 million.

© 2015 Prospect News.
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