The US structured note industry has seen a significant increase in the number of callable or autocallable structured retail products launched over the past few months.
Since 1 July, there have been 78 structured notes that due to strike which feature callable payoffs, according to the SRP database. In addition, there is one callable certificate of deposit from Harris Bank linked to the Dow Jones Select Dividend Index.
US Issuers include Barclays Capital, Bank of America, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley and UBS, among others. Citigroup, which is offering a duo of callable structured notes in August, has taken to distinguishing its notes by dubbing those not sporting a callable feature 'non-callable', while Credit Suisse has registered more than two dozen callable notes, some of which are bearish callables.
The US industry appears to be taking its cue from the European market which has found favor with yield enhancing products such as callable or autocallable notes. These notes give investors the chance to earn a high coupon from a note that is linked to the performance of an underlying. "Callables have become popular because they are providing quick returns in short periods," said one structured products industry participant.
But the issuer retains control and may - or must in the case of autocallables -- call the note and pay back investors at a predetermined time. Citi is offering two callable notes that will price this month: a Fixed Coupon Mandatorily Callable Notes Based Upon the Shares of the iShare MSCI Brazil Index Fund, and Callable Notes with Contingent Coupon Based on the Performance of the S&P 500 Index.
Callable notes "allow investors to take a tactical view of the market, which had pulled back earlier in the year. There is strong demand for yield right now," Nick Parcharidis, MD, head of Americas sales at Citi Retail Structured Products told SRP. Most investors aren't looking to take a long-term view of the market at current, he said. "Issuers can offer clients investments that offer yield tied to markets that have pulled back. These callables allow clients to complement plain vanilla yield investments," he added.
"For issuers, of course, adding a callable feature enables them to offer an enhanced coupon or yield and so makes the product look more attractive to investors," said Dr. Robert Benson, MD of Arete Consulting in London.
"Autocallables aren't for all investors, but the latest offerings have been popular as an opportunity to attain above market returns compared to low yielding vanilla investments," said Keith Styrcula, chairman of the US Structured Products Association.