Structured products weekly tally $341 million; floating-rate notes, leveraged CDs eyed

By Emma Trincal

New York, Sept. 20 – Structured products agents priced $341 million in 102 deals in the second week of September, a month known to be dangerous for stocks but has so far only moved range bound.

After a high on July 27 putting a four-and-a-half-month rally on pause, the S&P 500 index dropped on Aug. 18 and has moved directionless since. The uncertainty makes the case for structured notes although terms remained sluggish due to deeply depressed volatility levels, sources said.

Issuance volume has been supported by notes being automatically called. During the rally from March to July, the S&P 500 surged 21%.

August was the best month of the year with $8.92 billion in 1,662 deals, according to updated data compiled by Prospect News.

“Once upon a time, the summer was a slow season. We haven’t experienced it this time,” a sellsider said.

$100 million floating

A pair of $50 million issues of floating-rate notes brought to market by JPMorgan Chase Financial Co. LLC contributed to inflate last week’s tally.

The 13-month notes were both linked to the one-year U.S. Dollar SOFR ICE swap rate with a spread of 70 basis points and 73 bps, respectively, monthly interest payments and principal-protection.

“We almost bought these notes,” said Ken Nuttall, chief investment officer of BlackDiamond Wealth Management.

“It’s a cash replacement, a way to get extra juice from T-Bills. You take some credit risk, but you get a higher rate than a CD. We also like the liquidity.”

Fixed-to-floating rate issues have been more popular this year totaling $3.93 billion in 81 deals, according to Prospect News data. Floating-rate notes on the other hand accounted for only $198 million in 19 offerings. Overall, the volume of rate-linked note issuance soared 140% year to date to $4.27 billion from $1.78 billion.

“If you think rates are going to remain high for a while, doing floating notes makes a lot of sense,” said Nuttall.

Diversity of structures

Rates rose last week with the release of the inflation report showing higher inflation in August driven by higher oil prices.

“Inflation is not easing enough for the Fed to abandon their hawkish stance,” said Edward Moya, senior market analyst at multi-asset trading firm Oanda.

Last week’s structure mix was well balanced between autocalls (31% of the total), floating-rate notes (29%) and leverage (23%).

The rest included digital notes and absolute returns, which the sellsider said are in high demand.

“A lot of people see the market moving sideways. That’s the market you want to strike products on. In-the-money digitals have become very popular for us, absolute return too. They’re now very common,” the sellsider said.

CDs in demand

The bid on leveraged notes remains strong especially among bullish advisers trying to do away with caps. Market conditions are making those terms more possible, this sellsider said.

“Volatility is very low. Call options are cheap. A lot can be priced uncapped while previously you couldn’t.

“What we’ve been doing are leveraged CDs uncapped on high-yielding indices. Those CDs do very well. Retail investors are looking for it,” he said.

As an example, his firm has priced several CDs linked to the Euro Stoxx 50 index whose dividend yield of 3.17% is twice as high as S&P’s 1.58%.

Prospect News does not track market-linked CDs. Its focus is on structured notes registered with the Securities and Exchange Commission.

But with higher interest rates, CDs have become more widespread, sources said. A renewed focus on creditworthiness is also key.

“Retail clients like the FDIC insurance. FDIC really sells the product,” he said.

“Everyone is still a little shaky since the regional bank crisis back in March. The UBS/Credit Suisse merger was a shock. In the aftermath of the Lehman collapse, people were preoccupied with default risk but then little by little it stopped being front and center. Now credit quality is important again. That’s why we’re seeing so many people buying market-linked CDs.”

BMO’s top equity deal

One notable leveraged deal last week was Bank of Montreal’s $30 million of 13-month notes linked to the S&P 500 index paying 3x the upside up to a 13.6% cap with full downside exposure.

While the structure has the attributes of a typical BofA Accelerated Return Note, the issue was not sold within the wirehouse franchise but instead distributed by BMO Capital Markets Corp. and sold to a regional third-party broker-dealer, according to a source.

The offering was Bank of Montreal’s No 1. equity deal for the year as well as its third largest in size during that time, the data showed.

Oil bandwagon

Oil futures contracts have gained some traction as underliers.

The recent crude oil rally has led to a few bigger deals than average on this commodity.

WTI crude oil prices have jumped more than 26% over the past three months and trading Wednesday at $91 per barrel.

Brent is up more than 30% during the period, settling at $94 per barrel.

Decisions from Russia and Saudi Arabia to cut output through the end of the year gave more momentum to the bullish trend.

“A lot of people are very concerned about the price of oil. It’s been going up gradually. We’re trying to structure some notes allowing investors to capitalize on oil going up to $100,” the sellsider said.

A relatively good-sized oil note came out last week. UBS AG, London Branch’s $9.09 million of three-year autocalls on Brent crude oil futures contract.

The notes pay a quarterly coupon at the annual rate of 12.5% if the asset closes above the 60% coupon barrier on the related observation date. The autocall observation occurs quarterly after six months and the final barrier is set at 60%.

“Banks will put together whatever they can sell,” said Jerry Verseput, president of Veripax Wealth Management.

“When people see an uptrend, like the price of oil right now, they feel they’re going to miss out, they want a note and by the time they buy it, it’s probably too late.”

The sellsider said his bank has been pricing commodities notes on the Bloomberg Commodity index.

“It’s broadly diversified and if inflation continues to rise, it’s a good hedge. We’ve had some success doing principal-protected notes on commodities,” he said.

Structuring challenges

The search for diversification across other asset classes than equity, such as rates and commodities, may partially be the result of the declining quality of equity structures.

Issuers continue to struggle with the lack of volatility. The VIX index dropped to a one-year low of 12.68 on Friday.

“Terms of income structured products are not exciting these days,” said Nuttall.

“We see 80% barriers with several indices, sometimes weird indices like biotech. We see that with stocks too. You can get very high coupons but it’s going to be on three very volatile, uncorrelated stocks.”

Volatility may be compressed, but uncertainty continues to prevail, which means demand for structured notes is still strong.

“People don’t know which way the market is going. They continue to ask for downside protection and leverage,” he said.

The top agent last week was JPMorgan with 12 deals totaling $131 million, or 38% of the total.

It was followed by UBS and Citigroup.

JPMorgan Chase Financial Co. was the No. 1 issuer also with $131 million in 12 offerings.

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