Sales hit $1.38 billion; BofA acts as agent for more than half of volume, No. 4 deal of year

By Emma Trincal

New York, April 2 - Bank of America helped make the last full week of March a big momentum week: agents sold $1.39 billion in 264 deals, compared with $656 million the week before, according to data compiled by Prospect News.

Bank of America contributed to 55% of the volume with $764 million in 25 deals. This agent's notional for the month may even still be subject to increase depending on whether all its deals have been filed by Wednesday.

Bank of America so far sold 14 out of the top 15 products last week with Citigroup pricing the No. 6 deal in a large interest rate offering.

Slower month end

A comparison of last week to the final week of January and the final week of February yields a mixed picture with March closing on the weakest note.

In the week of Jan. 26, agents sold $2 billion, or 18.87% of the first quarter's volume. In the week beginning Feb. 23, sales amounted to $1.88 billion, or 17.5% of the total.

In comparison, the last week of March accounted for 13% of the total.

Assuming that not all of Bank of America's deals were reported as of Wednesday, the contribution of this agent to the total market was already higher than in the closing week of February (45%), which may suggest a slight deceleration on the part of the rest of the market, some sources said.

March, year to date

March so far is nearly 25% weaker in notional amount than February with $2.82 billion versus $3.74 billion last month, the data showed.

January was by far the top month this quarter with $4.11 billion priced in 819 deals.

"We did see a certain slowdown. March was the slowest month of our fiscal year. We attributed it to internal factors, something that affected our numbers. I can't really say if the market overall was slower in March, but we did see a downturn in our distribution," a sellsider said.

"It's hard to tell how strong March has been," a market participant said. "It depends a lot on the firm. For us, January was OK, February was fantastic, and we had an OK March.

"After a fantastic month of February, having a bit less in March was not surprising. You did expect a bit of a mean reversion."

For the year, volume is at $10.67 billion, an 7% increase from last year's $9.96 billion.

"We're optimistic for the upcoming quarter," the sellsider said.

"We're already 22% in our fiscal year to date in notional distribution.

"We think the sale of structured notes will continue to grow rapidly in this market environment because people want to keep their exposure to equities with less risk."

No. 4 deal of year

The top deal last week was also the No. 4 in size for the year so far.

BofA Merrill Lynch sold on the behalf of Deutsche Bank AG, London Branch $129.19 million of 0% Accelerated Return Notes due May 29, 2015 linked to the S&P 500 index. The payout at maturity will be par of $10 plus triple any index gain, up to a maximum return of 10.89%. Investors are exposed to any losses.

"It's a fine note if it's marketed for the right person and for the right reason. You would have to have a mildly bullish short-term outlook on the market. Bank of America has been very successful at marketing these easy-to-understand products," the sellsider said.

"As long as the note can match your view of the market performance over that specific period of time, it will have some appeal."

Leverage regained momentum last week, especially leveraged deals with no downside protection, which accounted for 28% of the volume versus 21% for leveraged buffered notes or barrier leveraged products, according to the data.

"The volume of leveraged notes depends partly on how they are marketed and who sells them. Most of them are distributed by Bank of America. When they're short-term, they are particularly appealing. And most of those notes have done well since last year," the sellsider said.

More leverage

The second-largest deal of the week was also a non-protected leveraged note with an attractive upside leverage factor.

It was brought to market by Credit Suisse AG, London Branch in its $90.95 million of 0% Accelerated Return Notes due May 29, 2015 linked to the Euro Stoxx 50 index. BofA Merrill Lynch was the agent.

The notes have a 300% upside participation rate up to a 19.86% cap.

"People tend to really like one-year, 14-month notes. They're also Bank of America deals, and those guys could put out anything, they'd have some demand for it, within reason," the market participant said.

"Merrill brokers are used to doing them. They do make sense if you have a relatively benign view of the market in that short timeframe."

The top leveraged buffered note was the third deal in size. It was also marketed by BofA Merrill Lynch.

Royal Bank of Canada priced $52.41 million of 0% Leveraged Index Return Notes due March 29, 2019 linked to the Dow Jones industrial average. The structure is uncapped with a 1.13 leverage factor and a 20% buffer.

"These products are typically used for tactical rebalancing. Every portfolio has a core equity exposure designed for a long-term allocation. People are willing to invest in a five-year, and the trade-off is the bigger buffer," the sellsider said.

In sharp contrast, the notional amount of autocallable reverse convertibles, one of the most popular structures this year, declined by 62% to make for only 6% of the total in 44 deals.

Rates fever

Last week saw a spike in the issuance of rates deals. Their volume, usually limited to less than 2.5% of the market, rose to 10.5% in 13 offerings totaling $145 million.

The largest one was Citigroup Inc.'s $46.5 million leveraged callable CMS curve-linked notes due March 28, 2029 linked to the 30-year Constant Maturity Swap rate and the five-year Constant Maturity Swap rate. It was the sixth deal in size last week.

The first year interest rate is 10%. After that, the interest rate will be 5 times the spread of the 30-year CMS rate over the five-year CMS rate, subject to a minimum interest rate of 0% and a maximum interest rate of 10% per year.

The notes are callable after one year and principal-protected.

Morgan Stanley Smith Barney LLC was the dealer.

"Rate steepeners had the biggest price move in the last two years," the sellsider said.

"Pricing has improved even more in the last two weeks after the Fed hinted that rates could be raised sooner than people anticipated.

"The result has been a flattening of the yield curve since the Fed's comments affect the short end.

"On the 30s minus the fives and the 30s minus the twos, you can get more attractive pricing.

"My concern with those deals is that people I think don't fully understand it.

"Steepeners notes get priced off the futures market. And futures are telling you that after seven and a half years, the spreads will be negative. You can look at the 30s minus the fives or the 30s minus the twos, after seven and a half years, that relation is inverted.

"That's why issuers won't show you a five or even a 10 year. But over a 15- or 20-year period, those notes are easier to hedge.

"If they pay zero in the second half of the deal, they can offer these multiples and pay these 10% caps.

"It's more risky than people may think. Investors, especially retail clients, don't fully understand them, in my opinion. They don't understand the impact of the Fed raising short-term rates; they don't see how quickly the secondary pricing on the notes is deteriorating."

The market participant said, "We've been seeing a lot of steepeners. It really started up six months ago when they started to price out very well. But the trend certainly picked up recently."

The No. 2 agent last week was UBS with 73 deals totaling $213 million, or 15.36% of the total.

It was followed by Citigroup with $86 million sold in seven deals, or 6.24% of the market.

"After a fantastic month of February, having a bit less in March was not surprising." - A market participant

"My concern with those deals is that people I think don't fully understand it." - A sellsider on rate steepener notes

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