Structured notes issuance $214 million for week; VIX not high enough yet for big coupons

By Emma Trincal

New York, July 6 – Agents last week priced $214 million of structured products in 60 deals, according to preliminary data compiled by Prospect News. The previous week was particularly strong with $2.16 billion sold in 263 deals, according to the most recent updated figures.

The S&P 500 index finished the week down 2.2%. On Friday, S&P Dow Jones Indices signaled in a press release that the S&P 500 posted its worst return for the first half of the year since 1970.

Meanwhile, implied volatility as measured by the VIX has moved above 30 only a few times this year and has remained below this resistance level for the most part. Only at the end of January did the VIX rise to 38.94, its 52-week high. As a comparison, the volatility index surged as high as 85 in March 2020 during the bottom of bear market.

A quest for better terms

The relatively contained volatility as the S&P is down more than 20% from its January high and the Nasdaq-100 nearly 30% off its November peak has led some advisers to voice disappointment, according to interviews with Prospect News.

Some are wondering why they are not getting higher coupons or still need to buy worst-of payouts.

A market participant attempted to answer the question.

“Statistically those advisers are not wrong. Volatility and interest rates are the drivers of higher coupons,” he said.

“Statistically also, volatility tends to go up when the market is down. But it’s not always true.

“Volatility as measured by the VIX has gone up but is not that high. The fact that it went up helps a little bit but it’s still not high enough to make a big difference in terms of much higher coupons and better terms.”

In the right place

Steve Sosnick, Interactive Brokers’ chief strategist, commented on recent volatility moves in an e-mail, shedding some light on how traders are pricing volatility.

“VIX seems to be in a 24-30 trading range, continuing to reinforce the idea that this level of volatility will persist as long as central banks continue to have restrictive policies,” he said.

VIX is the market’s best estimate of implied volatility for the S&P 500 index over the coming 30 days, he noted.

“It’s telling us is that traders are not expecting volatility to change markedly from where it’s been recently,” he said.

One slight bump is seen in October futures, which cover the mid-term elections, he added.

But overall, VIX futures suggest that traders are not expecting volatility to increase much in the coming months.

“The market is more or less appropriately pricing volatility,” he said.

The fact that volatility is not spiking is not necessarily a sign of complacency.

“If we were much below 25 in the current environment, then I would say we were on the complacent side,” he said.

On the other hand, if there was capitulation in the stock market, the current levels would be too low in hindsight, he added.

“All things considered, we’re generally in the right place.”

Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments, said that current volatility levels remain much too low to signal a bottom.

“Until VIX is at least double and perhaps triple its current level, then neither the Nasdaq nor the S&P have any possibility of completing their respective 2022 lows,” he said.

Year-to-date decline

Issuance volume for the year through July 1 dropped 16.2% to $42.45 billion from $50.66 billion, according to the data.

Agents priced $91.35 billion from July 2, 2021 to July 1, 2022 compared to $85.79 billion during the previous trailing 12 months, a 6.5% increase.

The deal count dropped 44.3% to 8,431 from 15,148.

“Issuers should be somewhat concerned about the year-to-date decline. It’s the first half of the year already,” the market participant said.

“The trailing numbers confirm the trend. We’re still up except the advance is slightly declining month after month.”

At the beginning of January, the trailing 12-month issuance volume was up 28% from the previous period.

“The first half of this year has been bad. But the first half of this year has been bad for everything,” he said.

“Even though rational investors should look at structured notes when the market is down, not when it’s up, in reality people don’t want to invest in anything. At least our industry is doing much better than crypto.”

Back to basics

Last week saw a return to the more conventional asset class and structure breakdowns.

Autocallables regained their place as the preferred structure making for 62% of the total while leveraged products accounted for 22% of sales. The rest consisted of various products from absolute return to digital notes.

A total of $187 million worth of equity index-linked notes priced last week, an 87% share of total notional. Half of this equity notes tally consisted of worst-of; about 25% of it were notes linked to baskets of equity indexes and the rest was tied to single indexes.

Stocks on the decline

Meanwhile single-stock notes made for only 10% of the total.

The “top” single-stock deal was Morgan Stanley Finance LLC’s $5.09 million of two-year autocallables on Apple Inc. paying a quarterly contingent coupon of 9.81% per year based on a 60% coupon barrier.

The decline of single-stock-linked notes issuance is a notable trend of 2022. It contrasts with the surge seen last year. So far, issuers have priced $6.78 billion of single-stock notes versus $10.91 million a year ago, a 38% decline.

No themes, just the bear

“I have a theory for that. I think it’s because investors no longer have investment themes. They don’t know what stocks to buy,” the market participant said.

“During the pandemic, people were buying stay-at-home companies like Zoom or Amazon. Then came the recovery and they moved to value in what was called the rotation trade. They bought travel or entertainment stocks.

“Today, except perhaps energy, there is no theme.”

The market sell-off was the main culprit adding fear to uncertainty.

“The market is down. Nobody is going to play the bear market. Structured products investors don’t do that,” he said.

To be sure, only a few bear notes have been spotted so far this year, according to Prospect News.

“Every note, whether you’re talking about a Phoenix coupon or a digital, is mildly bullish. Mildly bullish is the backbone of structured products.

“People are not taking big bullish bets. They’re also not betting against the market.

“So, what’s left? You’re not going to buy as many notes tied to tech stocks. Recovery stocks are not that hot anymore. What people do is buy the market and they do it through indices and ETFs.”

CIBC’s $43.74 million deal

Last week’s biggest reported deal was Canadian Imperial Bank of Commerce’s $43.74 million of trigger callable contingent yield notes with daily coupon observation due Dec. 31, 2025 linked to the worst performing of the Nasdaq-100 index, the Russell 2000 index and the S&P 500 index.

The issuer could call the notes on any quarterly observation date.

The 13.83% contingent coupon is paid if each underlier’s closing level is at least 65% of its initial level on every trading day during the quarterly observation period.

The barrier at maturity is 60%.

UBS Financial Services Inc. and UBS Investment Bank are the agents.

“Issuer call, American coupon barrier, worst-of, three indexes... This structure is geared toward maximizing the coupon,” the market participant said.

“It’s not ideal to be called in three months, but at least you get 3.5%. Not bad if you’re hungry for yield.”

The previous week of July 19 saw a big sector bet with Royal Bank of Canada’s $31.44 million of 14-month leveraged notes on the Energy Select Sector index. The payout is 3x the index’s gain up to a 39.9% cap. Investors are fully exposed to the downside.

UBS was the top agent last week with $159 million in 36 deals, or 74.4% of the total.

It was followed by BMO Capital Markets Corp. and RBC Capital Markets, LLC.

The top issuer was Canadian Imperial Bank of Commerce with $60 million in two deals, a 28% share.

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