Agents price $476 million; buyers concentrate on yield enhancement; year 15.6% ahead of 2014

By Emma Trincal

New York, March 18 – Agents sold $476 million in 108 deals in the week ended Friday, about 11% more than the previous week. But volume for the month to date is already lagging February, falling 15.5% to $904 million as of March 13 from $1.07 billion last month, according to data compiled by Prospect News.

However, a strong January, which saw $5 billion brought to market, gives this year a 15.6% advance from last year. Volume increased to $9.65 billion this year from $8.34 billion in 2014, the data showed.

Last week’s top deals were not exceptionally large except for the largest one, which was more than $50 million. But among the main offerings, income products were the dominant theme.

“There’s a bigger appetite for income with interest rates as low as they are right now. People are reaching out for yield, and they are willing to take on risk for it,” said Mark Dueholm, chief trader at Landolt Securities.

“As long as interest rates will remain low, we’ll see a lot of demand for structured products because there is just not enough yield to be found elsewhere.

“Low rates may make it harder to put deals together. Terms may not look as favorable. But as long as investors can get find the yield, they will be willing to accept those terms.”

STEP Income Securities

The top income structure seen last week, and one distributed by BofA Merrill Lynch, was the STEP Income Security.

Royal Bank of Canada priced the No. 1 deal in size with $52.54 million of 8% STEP Income Securities due March 28, 2016 linked to the common stock of General Motors Co. The notes offer a potential extra income of 3.97% if the final share price exceeds 108%. The exposure to the price decline is one-to-one. BofA Merrill Lynch was the agent.

“That doesn’t seem very attractive. You’re capped. You have all the downside. But the search for yield is such it makes those products very desirable,” a sellsider said.

The structure is based on the sale of at-the-money puts on General Motors along with the purchase of out-of-the-money digital calls in order to pay for the 3.97% bonus, he explained.

Looking at the closest expiration on an option contract, he found that the January 2016 put currently offers a $3.25 premium. With the stock trading at $38.00 a share, the premium paid to the investor who is short the option would be 8.55%. With a 10-month contract paying that amount, he evaluated a one-year at contract paying roughly 9%.

“But the advantage of this deal in addition to an 8% coupon is that you get the potential for a 4% bonus if the stock appreciates. That’s the trade-off. How much this is worth, that I don’t know,” he said.

“But we know for sure that most people are leaning towards income structures. On our platform, probably 70% of our volume at the moment comes from income products.”

BofA Merrill Lynch sold another STEP Income deal, this time on the behalf of Credit Suisse AG, London Branch for $19.48 million. It was the No. 5 offering of the week. The one-year product, which is linked to FireEye, Inc., has an 11% fixed coupon with a potential 6% extra coupon if the stock finishes above 111%. There is a 95% barrier.

Autocall

The No. 2 deal was a traditional autocallable. Instead of paying a fixed or contingent coupon, the structure offers a premium when the autocall is triggered.

RBC priced $32.91 million of 0% Strategic Accelerated Redemption Securities due March 28, 2016 linked to the common stock of Apple Inc. The notes will be called at a 20% annualized premium if Apple’s stock closes at or above its initial share price on a predefined quarterly observation date. If the notes mature, investors are fully exposed to the stock’s decline. BofA Merrill Lynch was the agent.

“Autocallables tied to a single stock are inherently more risky. A stock has the potential to fall dramatically,” Dueholm said.

“Sometimes the autocall provision is replaced by an issuer discretionary call. The discretionary call is going to bring more value. That’s another way to boost the coupon among many others, like the type of underlier or the barrier type,” the sellsider said.

The use of single-stock underliers was unusually high last week, making for 36% of the volume with 60 deals totaling $172 million. For the year so far, single-name deals account for only 19% of the total volume issued.

“If you put a single stock, there is significant risk in there. It allows you to pay a higher coupon,” the sellsider said.

But he warned that investors should be familiar with the name.

“Anyone who buys any note that’s linked to an individual stock has to have a view on the stock that fits the return of the note. Usually when it comes to yield-enhancement notes, you have to be very neutral, otherwise you do something else. It’s OK for income but not if you’re a bull. Remember, as a holder of the notes your upside is capped and you’re not entitled to receive dividends,” he said.

The top agent was JP Morgan with 22 deals totaling $132 million, or 27.71% of the total. It was followed by BofA Merrill Lynch and UBS.

“People are reaching out for yield, and they are willing to take on risk for it.” – Mark Dueholm, chief trader at Landolt Securities

“Anyone who buys any note that’s linked to an individual stock has to have a view on the stock that fits the return of the note.” – A sellsider

© 2015 Prospect News.
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