Structured products issuance $907 million for week; volume for year down 12.5%

By Emma Trincal

New York, Dec. 7 – Structured products agents sold $907 million in 132 deals in the week coming off the Thanksgiving holidays as the stock market finished positive on the hope that that the Federal Reserve would soon slow down the pace of its rate increases after Fed chair Jerome Powell spoke on Wednesday.

On the week, the S&P 500 index gained 1.1% and the Nasdaq, 2.1%.

Big fixed-to-floater

Rates issuance totaled $51 million with Citigroup Global Markets Holdings Inc. pricing $50 million of one-year fixed-to-floating rate notes.

The interest rate was 6% for the first six months, then converted to the two-year U.S. Dollar SOFR ICE swap rate plus 65 basis points, subject to a floor of 3.5%.

The payout at maturity will be par.

Royal Bank of Canada priced another floating-rate product on the same index. It was a $1.5 million deal sold by UBS.

Low VIX

While volatility has increased allowing for improved pricing, sources said that many of the better terms come from higher rates, which has led to a pick-up in the issuance of principal-protected notes offerings.

Volatility itself as measured by the VIX remains subdued. While many market participants are bullish for next year expecting the tightening cycle to end soon, others are less optimistic.

“The VIX touched 18.95 a half hour before Friday's close, marking its lowest point since April 5, 2022,” noted Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments.

“This sends an ominous signal of overcomplacency.”

Volatility noise

A structurer explained that a low VIX does not necessarily equate with a market uptrend.

“Usually there is an inverse correlation between the VIX and the S&P. But a correlation is just a correlation. It’s not 100%. Traditionally it’s been 70% to 80%.

“So just because the VIX is low doesn’t mean the market has to be up every day. Volatility can go up and down. It has some noise and that’s pretty visible lately. Call it volatility of volatility.

“All we know is that at some point, the VIX is going to spike. We just don’t know when. But when it happens, it usually means a crash.

“I’m not making a bearish call. It’s just how the market works,” the structurer said.

Diversity of structures

The breakdown in structures last week was more even than usual. Autocallables represented only 30% of the total against 42% for the year-to-date average. Last year, this type of product made for two-thirds of the market.

Leverage last week captured about a quarter of total issuance volume, a majority of which (15%) with buffers or barriers and the rest (9%) with full downside risk exposure. The rest was split between fixed-to-floaters, absolute return and digital notes.

Big single-index trades

As always but even more so last week, equity-index-linked notes prevailed, catching 81% of total issuance volume. The asset class also included the largest deals in size, such as the top four issues, which all priced in excess of $30 million.

More deals were structured on a single index than worst-of. It was the case with the top three offerings.

The first one followed the model of BofA’s Accelerated Return Notes but was distributed by UBS.

HSBC USA Inc. priced $39.47 million of 14-month notes tied to the S&P 500 index paying triple index gain up to a 22.05% cap. Investors were fully exposed to any index decline.

Some advisers interviewed by Prospect News believe that such highly levered notes are riskier due to their short duration and lack of downside protection. But the structurer had a different opinion.

“There’s no downside protection, but the leverage gives you similar effects,” he said.

“If you have $1 million to invest, you can put approximately $333,000 in the notes and $666,000 in very safe assets such as cash or short-term Treasuries. Buffers are not an absolute protection. If two-thirds of your notional is in cash, this is pretty close to absolute protection,” he said.

“Buffer or three-time leverage with no protection...none of these two styles is better than the other. But just because you don’t have a buffer doesn’t mean you can’t get some level of safety. It’s up to you and how you allocate the rest of your notional.”

The next deal was a digital, a type of product that tends to be larger in size. It was Citigroup Global Markets Holdings’ $37.66 million of 13-month trigger jump securities linked to the S&P 500 index.

If the return of the index is at or above an 80% trigger level, investors will receive a 12% digital return.

“Sometimes the digital is uncapped. But you couldn’t do that over such a short-term note and without using a worst-of,” the structurer said.

Digitals, PPNs

UBS was the distributor for the top three digital notes with the No. 1 issued by JPMorgan Chase Financial Co. LLC for $26 million. The absolute return was paid under the condition that the S&P 500 index stay within a range on a daily observation during the one-year and nine month holding period.

Higher interest rates have given issuers much more leeway to price fully principal-protected notes (PPNs), and more issues have been priced in this category. The size of HSBC USA’s $34.7 million of two-year notes linked to the S&P 500 index was an illustration of this relatively new trend.

The payout at maturity will be par if the index is negative or par plus any gain in the index, subject to a cap of 15.45%. Morgan Stanley Wealth Management acted as dealer.

A tale of two coupons

Separately UBS AG, London Branch priced for $32.07 million an unusual short-term deal tied to the Dow Jones industrial average, the Russell 2000 index and the S&P 500 index. A variable coupon was payable in three months and at maturity based on how the worst-of index priced in relation to a trigger level set at par. Below the trigger, investors received the minimum rate of 4.5% per year. Above it, they captured the maximum coupon of 7.75%.

“Some people play that game. They’re hungry for yield and this one is a little bit different,” the structurer said.

“The minimum coupon is close to what you would get with a T-bill, but you have the opportunity to earn much more. Your principal is at risk and it’s a worst-of, which are two negatives. At the same time, you’re putting your money only for six months and you have a 30% geared buffer.”

Year to date

Volume for the year through Dec. 2 is down 12.5% to $80.67 billion from $92.19 billion, an $11.5 billion difference. Data for December will be revised upward as not every deal has been filed with the Securities and Exchange Commission by press time. However, since Dec. 2, only four more weeks remain to fill the gap, half of which during the holiday season.

“We’ll be down this year. That’s my crystal ball,” the structurer said.

The top agent last week was UBS with 37 deals totaling $245 million, or 27% of the total. It was followed by Citigroup and Morgan Stanley.

The top issuer was Citigroup Global Markets Holdings bringing to market $267 million in 24 deals, a 29.5% share.

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