August opens soft with $341 million; BofA steps in early in month with 28% market share

By Emma Trincal

New York, Aug. 12 – Agents sold 73 deals totaling $341 million in the week ended Friday, a sluggish pace even by first-week-of-the-month standards, according to data compiled by Prospect News.

The two worst weekly starts of the month were seen in April and June. Each month kicked off with $320 million. August did not fare much better. In comparison, the first week of May saw the pricing of $520 million. March began with $440 million.

“We had a nice pickup heading into the summer,” a distributor said.

“Very traditionally in the summer, we see our end advisers taking a vacation or not being able to reach their customer base. We don’t see the same slowdown with larger size or institutional [investors] or what not. But since our focus is on the retail side, we do feel the impact of the slow season.”

Early push

Without the contribution of Bank of America in the initial week of August, volume would have been lethargic at less than $250 million, according to the data.

Bank of America unexpectedly contributed to almost 30% of the volume last week, which is uncommon for this part of the month. It priced six deals totaling $95 million, or 28% of the volume.

“I was unaware of that,” the distributor said.

At times, BofA Merrill Lynch brokers do not sell anything during the first week of the calendar. Months such as May and July this year have been the exception with over 10% of the overall market but nothing close to 28%. From January to July, Bank of America’s contribution to the initial week of the month has averaged 5.6% of the overall volume, according to the data.

“It’s surprising because they put out their calendar deals usually at the end of the month. It almost sounds like an overlap or lags from the prior month,” the distributor noted.

“It may have been some reverse inquiries, some people taking advantage of the increase in volatility,” a market participant said.

Market sell-off

While August recorded a slow start for U.S. structured products, U.S. stocks suffered a negative week as investors digested the July employment report, which was seen as a confirmation that the Fed is on target for a rate hike next month. The Dow Jones industrial average ended the week down after a seven-day losing streak. Oil continued its decline, pushing down share prices of big oil companies.

“The uncertainty in the markets did not help investors make a decision. Add to that the summer and the early calendar and you don’t get a great week obviously,” the market participant said.

Japan first

There was only one deal over $50 million last week. Goldman Sachs was the agent.

Goldman Sachs Group, Inc. brought to market $75 million of 0% notes due Nov. 13, 2015 linked to the Topix index. The issue price was 99.93% of par. The payout at maturity was par plus the index return with full downside exposure.

Goldman Sachs underwrites the same one-to-one, or tracker, deal tied to the Topix index approximately once a month. Including last week’s offering – the largest for the year – this agent has sold eight such deals totaling roughly $210 million so far this year. The largest one after last week’s was done in May for $50 million.

“It’s definitely a deal designed for access. If you want exposure to the Topix, Goldman enables you to do so with this note or another type of wrapper,” the distributor said.

Facebook 3x

There were more single-stock deals last week (over 25% of the volume) than the 18% average for the year. The largest trades by volume were linked to Facebook, Inc. and Nokia Corp. Other used names included Mobileye NV, Halliburton Co. and Biogen Inc.

The second largest deal was based on a single stock and sold by BofA Merrill Lynch.

Barclays Bank plc priced $36.19 million of 0% Accelerated Return Notes due Aug. 26, 2016 linked to Facebook shares. The payout at maturity offered three times leverage on the upside up to a 23.3% cap. There was no downside protection.

“Investors have a specific target in mind and want to increase the chances of getting the return. A leveraged note will help you achieve that,” the market participant said.

A short-term, highly leveraged note with an attractive cap but no downside protection is a popular structure for Bank of America, the distributor said.

“But it’s usually done through an index, not with a stock and even less so with a stock like Facebook,” he said.

He was referring to the fact that Facebook does not pay a dividend.

Other deals

BofA Merrill Lynch underwrote the No. 4 deal, which offered full downside protection over a seven-year term and one-to-one upside exposure capped at 74%. The $26.5 million deal based on the Dow Jones industrial average was issued by Bank of America Corp.

JPMorgan Chase & Co. brought to market the third offering for $30.1 million. Distributed by JPMorgan, the notes offered exposure to the ordinary shares of the 23 Spanish companies included in the MSCI Spain 25/50 index. The one-year note featured a 114% participation rate on the upside with no cap and full downside exposure.

The most popular structures employed last week were leveraged notes with no downside protection, which represented 25.50% of the total volume in seven deals along with trackers in four offerings making for 23.15% of the volume sold.

Volume as of Aug. 7 has grown to $28.61 billion this year from $25.71 billion for the same period of last year, an 11.3% increase.

The top agents after Bank of America last week were JPMorgan with 17 deals totaling $76 million, or 22.38% of the volume, and Goldman Sachs, which with its $75 million Topix-linked deal captured 22% of the market.

“It may have been some reverse inquiries ...” – A market participant on BofA’s 28% market share for the week

“It’s definitely a deal designed for access.” – A distributor on Goldman’s Topix-linked tracker notes

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