Banks are selling a record amount of U.S. structured notes tied to the stocks of fast-growing, volatile technology companies such as Facebook and Twitter. As Bloomberg Briefs reports, [9] sales of securities linked to Facebook soared to $457.6 million this year, more than double the $204.2 million issued during the same period of 2013. Bloomberg notes that investors are flocking to products tied to social media companies, where more volatile share prices help banks improve structured-note terms that have been hurt by low interest rates... and issuers are "trying to put shiny objects in front of the client," as the BTFD mentality gets increased leverage (and downside risk). Investors have purchased $1.88 billion of structured notes linked to the 10 most popular technology stocks so far this year - 31% more than the same period in 2013 - and $32.7bn equity- and commodity-linked notes this year alone (up ~10% YoY). As we warned last week, counterparty risks are rising. [10]
[11]
While we showed the payoff structures of various notes last week, [10]Morgan Stanley sold $13.9 million of notes linked to the S&P GSC Brent Crude Index. The 20-month securities, issued Dec. 10, pay 1.5 times the gains of that index, and proportionate losses if the gauge declines, with all principal at risk, according to a prospectus filed with the U.S. Securities and Exchange Commission.
The 7 most actively traded equity-linked structured notes this week were all energy-related...
[12]
And by way of example - this is the performance of the most-actively traded equity-linked structured note this week... 50% capita loss in 4 months
[13]
Europeans love these deals...
Spanish buyers of structured products are sacrificing capital protection and accepting longer maturities as they chase returns amid record-low interest rates.
Maturities of three to four years were common in past years, but "we are now quoting seven years" for products that pay above-market coupons, said Alfonso de Miguel, head of global structured solutions at Banco Bilbao Vizcaya Argentaria SA in Madrid. At Banco Santander SA, terms have risen as high as eight years, according to a Madrid-based spokesman for the bank.
...
Societe Generale is selling more capital-at-risk products that tie returns to the worst-performing of several assets, Munoz said. The bank is also improving terms by offering more notes that include "knock in" options that can leave an investor with potentially steep losses if a price barrier is breached.
Credit risk is rising - counterparty contagion fears rise as structured notes are typically unsecured debt. That leaves buyers in danger if the issuer fails, as happened with Lehman Brothers Holdings Inc.
[14]
Who is the biggest issuer of equity-linked structured notes...
[15]
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As we concluded previously, [10]
In the mid 2000s, it was massive one-way levered bets on "house prices will never go down again." When the cracks started to appear, the mark-to-market losses in derivatives led to forced liquidations and snowballed systemically. In the mid 2010s, it is massively levered one-way asymmetric bets on "stocks or commodity prices [oil] will never go down much for long ever again."
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And of course, no one will talk about this (or suggest it is "contained" until the loss of capital collapses some big name fund).
