Agents end month with $1.14 billion of structured products; BofA tackles more than half of volume

By Emma Trincal

New York, Nov. 4 – October was the worst month of the year for structured products issuance, and the week ended Friday was the worst closing week so far this year, according to data compiled by Prospect News.

Agents priced $1.14 billion last week in 184 deals. It was the final week of the month and the worst for the year. The second worst week ending a month cycle was in September with $1.4 billion, the data showed.

Without Bank of America, volume would have been limited to half a million dollars. The top agent priced $637 million in only 15 offerings, or 55.72% of the total.

Its top deal alone made for 15% of the volume: Bank of America Corp. priced $175.01 million of 14-month notes linked to the S&P 500 index with a 300% upside participation up to a cap of 11.79% and no downside protection.

October performance eyed

“Things have gotten worse starting last summer. I remember that volume was very steady and healthy up to June. Then came the summer, followed by a weak September. It doesn’t look like October was a very good month either,” said a market participant.

October was the worst month of the year, with $2.74 billion of structured products issuance, according to preliminary data compiled by Prospect News.

Indeed volume decreased steadily starting in July ($3.79 billion), August ($3.07 billion) and September ($3.04 billion).

The last week of October, compared to all other weeks this year that closed a monthly cycle, was the weakest, according to the data. September’s last week came next and then the final week of April.

Skittish investors

A sellsider said that investors remain skittish despite the recent equity rally.

After the August correction triggered by China, the S&P 500 continued to exhibit volatility but regained strength at the end of September with the S&P 500 index as of Wednesday up 11.5% since Sept. 25.

“People are not over last summer’s correction. The market may be up but it’s recent. I don’t think people are willing to commit money long term. They don’t trust the market. I wouldn’t either,” said the sellsider.

“Then you had the uncertainty around the Fed. The rally itself doesn’t help because of the lack of volatility.”

Bank of America

Bank of America last week issued most of its deals, including all of its largest ones under its own name, according to the data.

The No. 3 deal was Bank of America Corp.’s $135.26 million issue of three-year autocallable market-linked step-up notes tied to the Euro Stoxx 50 index. The call premium was 11.5% per year triggered if the price on an annual observation date was higher than the initial level. The step-up level was 135%. Investors were fully exposed to losses.

Out of the 15 offerings that Bank of America priced last week, only two came from a different issuer. It was Canadian Imperial Bank of Commerce, which brought to market two leveraged note deals, one for $28.58 million linked to the Euro Stoxx 50 index; the second for $26.53 million tied to the S&P 500 index.

“It could be that they didn’t do a lot of BofA deals in the beginning of the year. Maybe they’re under pressure by Treasury to do their own deals. It’s good for branding,” the sellsider said.

Issuers other than Bank of America make for approximately 80% of the volume priced by Bank of America Merrill Lynch, the agent. Those external issuers account for 75% of the number of deals, according to recent data compiled by Prospect News.

Bank of America tends to offer its clients a wide range of issuers for credit diversification purposes, a market participant said. That most of its deals were issued by the bank itself last week came to him as a surprise.

“It’s only on one week so we can’t really draw conclusions,” he said.

“But usually Bank of America uses lots of different names.”

The issuers Bank of America uses routinely are: Barclays Bank plc; HSBC USA Inc.; Credit Suisse AG, London Branch; HSBC USA Inc.; Deutsche Bank AG, London Branch; AB Svensk Exportkredit; and Royal Bank of Canada, according to the data.

TLAC worries

“I’ve heard that there’s been a lot of regulatory pressures on issuers. I don’t know if it applies to BofA, but it may. With TLAC, the regulators as I understand are imposing stricter capital requirements,” the market participant said.

The acronym TLAC stands for Total Loss Absorbency Capacity.

The term designates the capital large banks are required to hold in order to absorb losses.

“Big banks are under a lot of scrutiny to make sure that in case of default they have the capacity to withstand losses. People in the industry right now are questioning whether banks can use structured products as part of their capital to satisfy the capital requirements.”

The rule proposed by the Financial Stability Board is designed to make sure that the so-called “globally systemically important banks” or G-SIBs have sufficient loss absorbing capital to face an adverse credit event. The final rules are expected to be released this month.

“It’s getting tougher to issue structured notes. It may be harder to find banks to issue the paper. If that’s the case it would explain why some big banks are doing it under their own name. As a placement agent, they obviously would have more influence on themselves to issue a note.”

Another big GS

Regulatory rules or proposals have become an important factor behind what gets priced and how, sources said.

Case in point: lawyers and market participants speculated last week that the emergence of a relatively new issuer, GS Finance, a subsidiary of Goldman Sachs may have been related to regulatory factors as well.

GS Finance Corp. priced on Thursday $150 million of 0% leveraged buffered notes due Oct. 5, 2016 linked the S&P 500 index. The deal offered par plus 1.5 times the index return up to a 13.20% cap with a 5% buffer. It was the second largest deal.

The week before, GS Finance had brought nearly the same terms (the cap was 45 basis points higher) in an eye-catching $350 million deal.

Market participants speculated that Goldman Sachs may have used its subsidiary to better satisfy FDIC’s resolution plan requirements.

Playing defense

A structural trend seen last week was investors’ willingness to accept lower caps for more protection.

The third largest deal last week offered an example.

In it, Bank of America priced $53.90 million of two-year leveraged notes linked to the S&P 500 index. The structure offered a leverage factor of two, a 14.04% cap and a 10% buffer.

“People think the market is at all-time highs. This deal gives you 7% a year as a maximum return.

But when you don’t expect a lot of upside it’s reasonable to have a lower cap and a bigger buffer,” said the market participant.

“In fact with this type of market view, I would expect to see more digital and autocallables in the near future. Anything that caps the upside but makes you outperform if the market is only making small gains would make sense.”

Leveraged return notes with buffers or barriers exceeded the number of leveraged products with no protection. They represented 33.15% of the total versus 22.80%, which is a change from the normal trend, which is the reverse.

The second agent after Bank of America was Goldman Sachs with $186 million in 12 deals, which includes the GS Finance offering. It was followed by JPMorgan, which sold 33 deals totaling $55 million.

“Things have gotten worse starting last summer. I remember that volume was very steady and healthy up to June. Then came the summer, followed by a weak September. It doesn’t look like October was a very good month either.” – A market participant on October issuance levels

“People are not over last summer’s correction. The market may be up but it’s recent. I don’t think people are willing to commit money long term. They don’t trust the market. I wouldn’t either.” – A sellsider, commenting on the skittishness of investors

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