BofA makes splash with $633 million of structured notes issuance; tally for week $1.43 billion

By Emma Trincal

New York, Nov. 3 – BofA Securities Inc. priced its monthly lineup of block trades using a variety of issuers, itself in particular, for the pricing of nearly half of last week’s total issuance of structured products, according to preliminary data compiled by Prospect News.

BofA Securities sold $633 million out of $1.43 billion, or 44.2% of the week’s total. The agent did so in a limited number of offerings – 37 compared to the 299 total reported so far for the week.

BofA Finance LLC topped the list of issuers for the week, bringing to market many of the deals it distributed, or $277 million in 19 issues. The top Canadian issuers, which usually lead when BofA closes its book – Bank of Nova Scotia, Toronto-Dominion Bank, Canadian Imperial Bank of Commerce and Royal Bank of Canada –fell behind BofA Finance. UBS AG, London Branch placed second with $185 million in 156 deals, a 12.9% share.

Updated figures for the previous week showed $1.03 billion sold in 239 deals, another big tally to which UBS was the main contributing agent, having sold 25% of this notional amount.

Accelerated Return Notes

Leveraged notes issuance played a major role last week, which was no surprise as BofA tends to focus on large “Accelerated Return Notes” (ARNs) providing capped leveraged upside exposure with or without downside protection.

In this structure type, Canadian Imperial Bank of Commerce priced the top deal with a $43 million issue of 14-month ARNs linked to an equally weighted basket of three bank stocks – Goldman Sachs Group, Inc., JPMorgan Chase & Co. and Morgan Stanley.

The payout at maturity will be par of $10 plus 300% of any basket gain, subject to a maximum return of 24.3%. Investors will be exposed to any basket decline.

BofA Securities was the agent for this trade along with 16 out of the top 20 deals.

Bank stocks were one of the underlying of choice last week. BofA Finance LLC priced $26 million on another basket consisting of the same three bank stocks. It was a three-year autocallable market-linked step-up notes offering paying at least 35% step-up value at maturity if the notes are up or the index gain. The downside is fully exposed to losses.

The third-quarter earnings season kicked off earlier this month with upbeat results from the large banks, showing strength in trading, equity markets and asset management. This may have resonated with structured notes buyers. But other factors may have helped too.

Healthier banks

“I suspect we’re seeing those deals on bank stocks because people anticipate higher rates,” a sellsider said.

“The liability side of the curve moves up slower than the asset side of the balance sheet. Maybe banks will get more spreads, which is good for banks.”

Banks borrow short term and lend long-term. Typically, a steeper Treasury yield curve increases banks’ profit margins.

“Short term rates are not rising yet. But inflation concerns are built in the longer-end of the curve. The prospect for banks is bullish.

“In fact, I’ve noticed that Barclays has a few deals on banks coming up later this month,” he noted.

He cited Barclays Bank plc readying a shorter dated autocallable issue on the worst-performing of the SPDR S&P Regional Banking ETF and the S&P 500.

“It shows a 7% type coupon on a 75% coupon barrier. I’ve seen a few more coming up.”

On the energy front, Exxon Mobil Corp. and Chevron Corp. reported their best earnings since the beginning of the pandemic.

BofA Finance priced a $32.61 million energy deal on the Energy Select Sector index, a 14-month leveraged note.

Tech deals

Big tech companies reported their earnings last week, which drew interest in worst-of stock offerings.

UBS AG, London Branch priced $16.67 million of three-year autocallable notes paying a 9% annualized contingent coupon based on the worst-performing of Netflix, Inc., Apple Inc., Alphabet Inc. and Amazon.com, Inc.

Credit Suisse AG, London Branch introduced a financial stock in the tech mix with its $15 million of five-year worst-of snowball on Facebook, Inc., Alphabet, Amazon.com and Blackstone Inc. The annual call premium was 13.6%, the knock-in-level, 60%.

Facebook reported its earnings on Monday and announced a name change to “Meta” starting in December.

Russell shines

Equity-index-linked notes accounted for two-thirds of last week’s volume, another sign of BofA’s impact at this time of the month when the agent closes its calendar.

The Russell 2000 index has gained more visibility of late. Last week was no exception with the small-cap benchmark replacing the Dow Jones industrial average as the underlying of choice for single-asset offerings.

A total of $271 million of notes tied to the S&P 500 index alone priced last week, or 19% of the volume.

Notes tied to the Russell 2000 index represented $133 million, or 9.3% of the total. Meanwhile, only one deal for $33 million was priced on the Dow, according to the preliminary data.

“I suspect people have done so much of the Dow, at some point you get filled out,” the sellsider said.

“It’s not price-related. Everything is so expensive.”

The Russell 2000 index had two advantages over the S&P 500 and the Dow, he explained. It is the most volatile of the three. In addition, it brings additional premium when combined with large-cap indexes in a worst-of.

Till the music stops

Earnings continued to push bulls to buy stocks last week. The S&P 500 index was up 1.3% and the Nasdaq gained 2.7%.

“This market keeps on going higher,” the sellsider said.

“People dance until the music stops. I think the music will stop when the market won’t be able to ignore inflation anymore, which would force the Fed to raise rates.

“If we get, as we expect it, our first-rate hike in July, the market may top out by October 2022. No one can predict what’s going to happen next. But I think we may be good for another year and that’s it.”

Meanwhile, issuers and investors alike are dancing on the tune of a record year in the structured notes space.

The year 2020 was the record year going back to 2004 when Prospect News began collecting data. But no longer.

Sales this year amounted to $74.91 billion through October, already surpassing last year’s full tally of $72.7 billion.

The deal count is up as well. Agents through the end of October have sold 19,959 deals, a 9.3% increase from 18,252 during that time last year.

But this year’s growth is fragile, the sellsider said.

“A serious correction would reverse the trend of rising issuance volume because autocalls are the fuel of our growth. If deals don’t get called, sales will be crushed. This year is a great year. But 2022 may not be as great,” he said.

A pullback could also be “painful” for issuers, he added.

“The banks have to hedge those autocalls. I hear growing concerns about risk management from a hedging perspective,” he said.

Lowe’s, Walgreens

Single stocks-linked note offerings represented 13% of last week’s tally.

Royal Bank of Canada issued the top one with $15.65 million of 8% STEP Income Securities due Nov. 14, 2022 linked to Lowe’s Cos., Inc.

At maturity, the notes pay an extra 3.5% if the share price finishes at or above the 108% step level.

RBC priced the second top stock deal with $13.5 million of one-year 7.6% airbag autocallable yield notes on Walgreens Boots Alliance, Inc.

BofA Securities Inc. was the distributor for both deals.

October was the best month for the equity market since November 2020. The S&P 500 index rose nearly 7% during that time. Some market participants however warned about long-term risks.

“While capital flows certainly support the bullish narrative in the short-term, such can get easily reversed with a change in sentiment,” said Lance Roberts, chief investment strategist at Clarity Financial in a recent note.

“With economic growth weakening and inflation increasing, the risk of a reversal is increasing.”

Among the main risks, he pointed to high earnings estimates, persisting inflation, an overbought market, continued supply chain issues and rising interest rates.

Goldman’s SPACs deals

None of this has stopped investors so far from looking for new ways to boost returns and fast. The frenzy for so-called “meme” stocks was in play last week in reaction of Donald Trump’s start-up, Trump Media & Technology Group, merging with the special purpose acquisition company (SPAC) Digital World Acquisition.

The blank check company announced the merger on Oct. 20 pushing up the price from less than $10 a share to $175 in two days. The stock closed last week at $66.

The excitement and volatility provided by meme stocks and SPACs may have led Goldman Sachs to offer several SPACs-linked structured notes on the Rule 144A market, according to a source.

“Only a handful of offerings have been done,” this source said. No pricing information is available.

The notes are two-year products linked to a basket of SPACs trading at a discount and paying a coupon. Some leverage is available to investors, this source said without elaborating.

Curb your enthusiasm

It remains to be seen if SPACs-linked notes will become a standard product searchable on the Securities and Exchange Commission website.

Another possibility of future exotic underliers has now emerged with the recent launch of the first U.S. based Bitcoin ETF on Oct. 18.

One attracting aspect of those potential new underliers is their volatility, which could raise the premium to more desirable levels for investors.

Whether the volatility arises from controversy as it is the case with the “Trump SPAC,” or from investors’ love affair with Bitcoin, investors should remain rational, said Steve Sosnick, chief strategist at Interactive Brokers.

“If you do choose to trade or invest in either of these shares, please try to leave your biases and passions aside. Trading without objectivity can be very expensive,” he warned.

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