By Yakob Peterseil
Structured notes worth hundreds of millions of dollars are effectively trading in distressed territory, often with just weeks or months left until they mature, according to data compiled by Bloomberg.
Take a $7.3 million offering from JPMorgan Chase & Co. The product tied to the VanEck Vectors Oil Services exchange-traded fund had a face value of $10 at issuance in 2015. It last traded at just 85 cents, meaning it’s on course to saddle holders with a 92% loss at its due date on May 14.
A spokesperson for JPMorgan declined to comment.
These types of unsecured debt instruments were issued by banks in droves in the bull market as investors starved for yield flocked to their double-digit coupons.
“Oil-linked structured notes were hit the hardest out of all the structured products” in recent market turmoil, said Tiago Fernandes, global head of sales at WallStreetDocs, a data and technology provider. He reckons these instruments have lost 50% of their value on average — worse than the losses incurred by most structured products tied to the stock market.
In the first two months of this year, banks sold over $200 million of notes tied to ETFs like the SPDR S&P Oil & Gas Exploration & Production product and the U.S. Oil Fund, as well as directly to crude oil futures.
The JPMorgan note tracked a VanEck fund that was trading at roughly $38 when it was issued. The latter closed Tuesday at just $4.50.
Vows to pump more crude are colliding with a historic slump in demand, as large chunks of the global economy grind to a halt due to the spreading coronavirus. A gauge of implied swings for oil soared to a record last month, as prices were whipsawed by President Donald Trump’s remarks that he could get involved in the standoff between Saudi Arabia and Russia.
Structured instruments often carry complex jargon like “trigger autocallable optimization securities” and “contingent coupon callable yield notes.”
A typical one is sold to retail investors via an independent financial adviser or large wealth management firm. If the price of the linked asset trades at or above its starting level, the notes are called and investors receive a hefty coupon. But if the underlying drops, the product can continue until maturity without paying another coupon.
If the price declines enough, it can breach a barrier where the investor starts suffering one-for-one losses all the way to zero.
Speculators in oil ETFs can relate to this type of pain.
Credit Suisse announced last week that buyers of a triple-leveraged oil note would receive $0 if they tried to redeem the securities after the energy crash. A slew of other crude products have shuttered, leaving investors nursing eye-watering losses.
As for the structured securities, there’s still time for prices to recover before some of these notes come due. OPEC+ ministers are gathering Thursday in a virtual meeting to hammer out a deal to end their price war and cut output.
But the clock is ticking. Fernandes at WallStreetDocs reckons Brent oil futures would have to rise to between $40 and $42 a barrel compared with just $32 currently in order for these instruments to recover.
“The concern here is that these products mostly have short-term maturities,” he said.