Structured notes agents price $1.08 billion for week with BofA capturing nearly half of total

By Emma Trincal

New York, Sept. 30 – Issuance volume reached $1.083 billion in 134 deals during the final full week of September marked by Bank of America’s booking its monthly calendar, which always boosts notional sales, according to data compiled by Prospect News.

BofA Securities, Inc., the agent of Bank of America, priced 48.5% of the volume in only 23 offerings totaling $525 million. More than half of this agent’s sales came from five leading deals ranging from $44 million to $64 million.

Month, year

Revised figures for the previous week ended Sept. 18 showed $990 million in volume through 337 deals.

These numbers pushed up September’s volume to $3.5 billion through Sept. 25, a 12.4% increase from August.

Three more days remain for the month, making any monthly count premature.

Volume for the year through the end of last week remained strong.

A total of $50.59 billion was issued, a 43.5% jump from last year’s $35.25 billion. Meanwhile the deal count surged by more than a third to 15,515 from 11,635.

Old money, new money

“We know why this year was good. It’s because of the huge amount of autocalls we have in this market,” a market participant said.

“When those deals get called you have more volume. Many in the industry are cheerleaders. They will tell you: volume is up. Well, that’s true. But I would be curious to know how much of this increased volume is just replacement.”

More than half of the year’s volume originates from autocallables, according to the data. Leverage on the other hand accounts for only 27% of the total.

“When we see more issuance volume, does it mean the industry is growing or does it mean more deals have been called and proceeds reinvested?” he said.

“If it’s just replacement, we are at risk if the stock market goes down because then, deals don’t get called and the whole industry is tanking.

“It would be interesting to see those volume figures adjusted, if we could break it down between new money and proceeds rolling when it’s called.”

Choppy market

Last week’s market was another roller coaster that saw the Dow Jones industrial average and the S&P 500 index decline for the fourth consecutive week.

The main culprits were an increase in Covid-19 cases in Europe and the fading hope that a fiscal relief bill could be passed in Congress before the Elections given the focus on filling the Supreme Court seat left vacant by the recent death of Supreme Court justice Ruth Bader Ginsburg.

The S&P 500 index lost 0.6% on the week while the Dow dropped 1.8%.

“We’ll have much higher volatility levels not just to the Elections but all the way to January,” the market participant said.

“I don’t know anyone who’s willing to bet that things are going to be smooth after Nov. 3.

“It’s going to be contested on both sides, and that’s going to impact the market.

“I wouldn’t blame any party to ask for a recount. But once it’s over, half of the country is going to be unhappy and disappointed. We’ve seen that in 2016 when the losing candidate conceded. Imagine what it will be like when the Election is contested.

“I don’t see how we’re not going to have a big surge in volatility.”

Acceleration, dispersion

Leveraged structures finally made a push last week with 40% of the total versus 38% for autocalls. Usually autocalls significantly dominate leverage. This more balanced distribution is routine anytime BofA Securities closes its book as the agent is the champion of block leveraged trades. It priced $185 million of such deals last week, including the top three deals.

The volume of worst-of deals dropped last week as those products made for 17% of the total through only 12 offerings.

It was not a surprise: the top six deals were tied to the S&P 500 index alone. All were distributed by BofA Securities.

Big ‘FAAMG’

A large proportion of the $186 million worst-of products derived from a single big trade. It was a GS Finance Corp.’s $40 million of three-year worst-of notes tied to Amazon.com, Inc., Microsoft Corp., Alibaba Group Holding Ltd., Alphabet Inc. and Facebook, Inc.

The underlying alphabet soup of the deal was close to be a “FAANG.” The acronym stands for Facebook, Amazon, Apple, Netflix and Alphabet, Google’s parent company.

The callable notes pay a 28.5% contingent coupon over a coupon and maturity barrier of 70%. UBS is the agent.

The large size of the deal may have had to do with a recovery in the sector, which saw the Nasdaq Composite gain 1.1% on the week.

Red and blue...socks

The market participant said he enjoyed seeing a week light in worst-of issuance.

“Those deals are all the same. They can be repetitive and boring,” he said.

Many registered investment advisers shy away from worst-of payout as they don’t know how to model the risk since the exposure remains a mystery until a call event or maturity.

“You have red socks; blue socks and you have to pull them out of the drawer,” he said.

“These kinds of trades work if you’re willing to hold all of the underlying.

“It’s not a portfolio management tool as much as a yield-enhancement tool.”

Two different businesses

While BofA Securities generate large-sized trades, the agent has seen his ranking drop in the league tables from last year.

Sources attribute the trend to the fact that this agent is not a leader in the autocallable space.

“Others do more deals, so they compete with them more now. Plus, many do mostly autocallables. If you get deals called three or four times a year, you get more notional. And in a bull market like this one – unlike last year – deals do get called,” explained a sellsider.

On the other hand, he conceded, the so-called “ARNs” or “Accelerated Return Notes” packaged by BofA are a “sticky” business.

“With Merrill Lynch, clients have used them for a while. They’re more familiar with the product and therefore more comfortable with it.

“They use it as a protective or accelerated product. It doesn’t replace your equity bucket, but you will use certain pieces of it in your equity allocation.

“It’s an ongoing strategy, not a one-off investment.”

Leveraged notes have made for $3.392 billion in sales in 3,392 offerings so far this year. BofA Securities sold nearly 10% of this but in only 62 trades, which gives an idea of the size of its deals.

External competition

Another downside of having a niche in leveraged notes issuance is the competition the industry is facing from other instruments, namely 1940 Act securities such as exchange-traded funds, some of which are now offering defined outcomes in imitation of structured products, added the sellsider.

In addition, leverage is simple, hence easy to replicate.

“With leverage, you can put together a combination of puts and calls and get the same result, or you can buy leveraged ETFs,” the sellsider said.

“In addition, now you have those new products such as annuities or buffered ETFs.”

Big leveraged bets

HSBC USA Inc. priced the top offering in $67.94 million of 14-months Accelerated Return Notes linked to the S&P 500 index. The payout at maturity will be par plus triple any index gain, up to a maximum return of 17.37%. Investors will be exposed to any index decline.

Bank of Nova Scotia priced the second deal in $61.98 million of two-year leveraged notes on the S&P 500 index paying double any index gain up to a maximum return of 16.6%. The structure provides a 10% buffer on the downside.

Another leveraged deal, the third one still distributed by Bank of America, was brought to market by HSBC USA in $55.31 million of 14-month S&P 500-linked notes. The payout is 2x the upside capped at 14.1% and a 5% downside buffer.

Market-linked step-ups

Another favorite of Bank of America’s distribution, two autocallable market-lined step-up followed, one, a six-year from Bank of Nova Scotia for $50.27 million, the other, a three-year deal for $44 million from HSBC USA. Both are linked to the S&P 500 index.

With those structures, the notes get called at a premium (7.27% per year in the Scotia deal, 12.23% per year with the HSBC trade) when the index is at or above its initial price. At maturity, if the index is up, investors get at least a minimum return dubbed “step-up” (35% in the first deal, 26% in the second). If the index is higher than the step-up, investors are long the index.

The six-year Scotia deal provides a 15% buffer on the downside. In the much shorter HSBC deal investors are fully exposed to the downside.

JPMorgan’s digital

The sixth top deal came from JPMorgan Chase Financial Co. LLC, which priced $40.23 million of 14-month digital notes on the S&P 500 index. It pays a 9.75% digital return if the index finishes at or above 90%.

On the downside, investors will lose 1.1111% for every 1% index decline beyond a 10% geared buffer.

The top agent after Bank of America was UBS with 85 deals totaling $248 million, or 22.93% of the total. It was followed by JPMorgan.

Bank of Nova Scotia was the No. 1 issuer last week with $196 million issued in six offerings, an 18.13% share.

For the year, Barclays Bank plc kept its lead with $7.442 million in 1,523 deals, or 14.71% of the total.

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