Structured products issuance $563 million in pre-holiday week; BofA captures 85% of market

By Emma Trincal

New York, Dec. 2 – Structured products agents, especially BofA Securities, remained busy in the shortened week preceding the Thanksgiving Day holiday, pricing $563 million in 108 deals, according to data compiled by Prospect News.

BofA Securities did 85% of the total in 15 deals totaling $477 million as the agent was closing its monthly calendar.

Data is subject to upward revisions, especially during holidays, as not all offerings were filed with the Securities and Exchange Commission at press time.

“What you see is what happens at the end of each month: Merrill’s clients rolling their holdings into new issues,” said Ed Condon, portfolio manager at Bluestone Capital Management.

It was a brief but strong week for stocks, which rallied on positive vaccine news. The three main U.S. benchmarks, the Dow Jones industrial average, the Russell 2000 and the S&P 500 index, hit new intraday highs, finishing up 2% on Friday for both the Dow and the S&P and 3% higher for the small-cap index.

The bond and stock markets were closed on Thanksgiving Day and partially open on Black Friday.

Month, record year

Structured notes sales in November so far are slightly lower than in October with $3.247 billion against $3.646 billion, respectively, through Nov. 27.

The good news however is in the year-to-date tally. The year 2020 broke a new record in total issuance volume.

Sales are up 31.64% to $62 billion from $47.1 billion last year, and the year is not yet over. The $62 billion tally already surpassed the full year of 2018, which hit the previous record at $56.77 billion.

Offering cycles

For the week, BofA Securities overwhelmingly dominated the action. It does not mean this agent is not participating in the earlier weeks of the month, but its weight last week indicates it remains committed to its traditional monthly calendar. Things are changing however, and firms, including BofA itself, are moving toward more frequent distribution cycles.

“There’s a high opportunity cost in hedging on a monthly calendar basis,” said Bernd Henseler, head of structured products Americas at index-provider firm Solactive.

“The stock market is moving so rapidly you get better hedging conditions if you shorten your offering period.

“Monthly calendars were necessary in the past to drum up volume. It took time. Advisers had to call clients.

“Now you have a dedicated base of advisers that use structured products on an ongoing basis. With a good foundation of advisers and investors using the products, you don’t necessarily need one month to sell anymore. You can shorten the cycle.”

Agents such as UBS and Morgan Stanley are now topping the league tables, according the data.

“Merrill used to be the 800-pounds gorilla, but there’s a lot of competition,” said a market participant.

“It’s hard to keep track with what’s happening. Things may have changed. People have moved on to other firms or to smaller shops, even to the buyside. You can’t go to conferences anymore. So, it’s hard to figure out who’s doing what,” he said.

Leveraged plays

Leverage made a strong comeback last week thanks to BofA’s typical block trades at this time of the month.

Investors bought $283 million in leveraged return notes in 16 deals, accounting for half of the total week’s notional. The strong participation in this structure contrasted sharply with the 26% average for the year.

However, the volume of leveraged notes without any downside protection was more than triple that of leveraged products offering barriers or buffers.

The market participant said it was not surprising.

“The market is very happy about the new developments with the Covid vaccines. Stocks are trading at all-time highs. People are more upbeat, more bullish. What’s wrong with that?” he said.

“I personally tend to be cautious. I’m nervous about going into the market. But I missed a huge rally. This bear market recovered in one month. Things are not like they used to be. We have to look forward. If everybody was like me the market would go down. The vaccines are coming, Trump is leaving. The market is bullish.”

Indeed, the year was extremely bullish for equities.

The Dow posted its best monthly performance in November since January 1987, rising nearly 12%.

Meanwhile the S&P 500 index gained about 10% for the month.

For the year, the S&P is up 13.5% despite a severe bear market in February and March, which saw the benchmark lose more than a third of its value.

From its Feb. 19 low to its most recent high on Dec. 1, the index has jumped by 68%.

Big leveraged notes topped the list of deals last week.

Barclays Bank plc’s $134.24 million of 14-month leveraged notes tied to the S&P 500 index was the top deal. The payout at maturity is 3x any index gains up to a 13.35% cap. Investors will be exposed to any losses.

Next, Barclays issued $66.3 million of two-year leveraged notes on the S&P with 2x the upside capped at 10.1% and a 5% downside buffer.

BofA Securities was the agent for the top six deals.

Two big step-ups

The next trades were market-linked step-ups, one of BofA’s most popular structures designed as a snowball autocall, paying an annual call premium if the index is at or above its initial price with possible uncapped upside participation at maturity if the index closes above a preset “step-up” level.

If the index gains by up to the step-up level, the payout will be par plus the step-up payment, which is usually (but not always) the sum of the missed call premium.

The downside may or may not offer a protection depending on the length of the product.

Barclays’ $65.79 million of six-year market-linked step-up notes on the S&P 500 index was the third deal for the week. It offered a 5.79% call premium, a 135% step-up level at maturity with a downside buffer of 15%.

The other one for $52.99 million was a three-year Barclays offering also linked to the S&P, featuring a 9.4% annual call premium and a 126% step-up level. Investors had full downside exposure to the index decline.

BofA Securities offered another market-linked step up, this time on the behalf of Credit Suisse AG, London Branch for $29.08 million. This three-year note offering was linked to an equally weighted basket of three stocks: Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley.

The structure had no downside protection but offered a 15.2% call premium and a 145% step-up level.

Sky is the limit

The market participant explained that the appeal of those market-linked step-ups was due to the uncapped upside should the notes never get called.

“Hopefully you get called,” he said.

“They look very attractive because you have all the upside. But what are the odds? If you don’t get called several times, it means the market is down. You’re not very likely to finish above the step level. Therefore, the option is cheap.

“Everybody wins. It gets called: you reinvest the proceeds. You can still get the unlimited upside. It’s just a very unlikely outcome. But it looks really appealing.”

Given the type and size of the top deals, autocallable notes accounted for less than average at approximately 14% of total issuance volume. The year-to-date average is over 53% in contrast.

Similarly, stocks made for only 12% of last week’s sales versus 23% for the year.

“So much in indices may not just be due to the type of deals Merrill is putting out there,” said the market participant.

“At this point in the market it’s becoming more and more difficult to pick stocks. It made sense to reduce your risk in a toppish market by using broadly diversified indices.”

The top agent last week after BofA Securities was UBS with $38 million in 88 deals, or 6.8% of the total.

Barclays was the No. 1 issuer with $378 million in just 10 deals, all of which were distributed within the BofA franchise.

Barclays remains the top issuer for the year with 1,775 issued offerings totaling $8.179 billion, a 14.06% share.

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