Week's volume surges to $941 million, buoyed by Bank of America, end of month

By Emma Trincal

New York, Sept. 4 - The boost created by Bank of America's sales at the close of the month bolstered volume last week, but both the market and this agent have seen more active month-end weeks, including the end of July and the end of August a year ago, according to data compiled by Prospect News.

Agents priced $941 million in the week ended Friday, which coincided with the end of August. It was more than twice the $447 million worth of sales seen the week before. The number of deals increased by nearly two-fold from 124 to 235, according to the data.

For the month, however, the trend was negative. Agents sold $2.48 billion in 617 deals, a 17% volume decline from July's $3.0 billion in 598 offerings.

Compared to August a year ago, sales fell 13.5% from $2.87 billion.

On a year-to-date basis, volume remained flat. Agents sold $24.60 billion this year, compared with $24.50 billion in the first eight months of last year. The number of deals slightly decreased to 5,300 from 5,483, according to the data.

The Merrill Lynch factor

"Last week was a big one, obviously because of Merrill Lynch ticketing," a sellsider said.

"The story is already known for Merrill. They have a very big reach, a very strong infrastructure, and they've been doing it for a very long time. They've been active in the space for over at least 10 years.

"But you have this thing happening at the end of each month. It would be interesting to see how the Merrill Lynch ticketing was this year compared to August [of last year]."

Figures showed that Merrill Lynch's market share last week contracted compared to last month and a year ago when looking at the final week of the month.

The most active week in July was the last week of the month, which ended July 26. During that period, sales amounted to $1.50 billion. Bank of America Merrill Lynch priced nearly 56% of it. In comparison, it sold 38% of last week's overall volume with $358 million.

Last year, sales reached $1.37 billion during the final week of August, with Bank of America contributing 54% in $740 million.

The data also showed that the market volume excluding Bank of America, at $583 million, decreased last week from $660 million at the end of July. It was also lower than the final week of August 2012 with $630 million.

"You have to look at numbers except Merrill Lynch. That's the swing," the sellsider said.

"JPMorgan does its deals weekly. Morgan Stanley through the month. It's really Merrill Lynch that contributes to this huge boost at the end of each month. You have to take the Merrill Lynch factor out.

"Outside of the regular Merrill Lynch business, the week was fairly slow. This week shows a better vibe."

Leverage, indexes

Equity index-linked products structured with leverage dominated the flow of deals last week.

Leverage with barriers or buffers took the lead with 31% of the volume followed by leveraged notes with no downside protection with 25%. For the year, the trend is the opposite with non-protected leveraged products prevailing over leveraged buffered notes or barrier notes, according to the data.

The sum of those two types of leveraged products - simply leveraged structures - saw its volume increase by 7% to $9.52 billion from $8.88 billion year over year.

"It indicates more comfort on the part of investors with principal at risk," a market participant said.

"When I look at leverage, I look at leverage with or without a buffer as pretty much the same. Whether you have a buffer or nothing, leverage trades are for people who are bullish on the short-term range of a stock or an index."

Index deals dominated the market last week, making for 71% of the total, a contrast with the yearly average market share of 55.35%. This asset class is also on a negative trend for the year, showing a 1.85% decline from $13.87 billion to $13.61 billion.

Simultaneously, single stocks have continued to be more widely used, rising 14% for the year to $5.54 billion from $4.86 billion.

"You see a huge pickup in index deals at the end of each month because retail deals usually fall when the month closes," the market participant said.

"Broker-dealers push up sales at the end of the month as the production ends at that time and there's a rush to print more tickets, to get the commission, whereas institutional sales are different - they are more driven by investors."

Last week, the volume in single-stock deals fell down 30% to $103 million.

"Usually single-stock deals are more of an institutional investor play," this market participant added.

"Institutional investors like the stock but realize that a structured product can give them a more efficient use of capital. I think you'll see more appetite for stock-linked notes from institutions while retail is more focused on indexes.

"Perhaps we had fewer stocks last week because many are still on holiday. Institutional investors probably want to see people back. They want to see more movement in the stock. In contrast, index deals work for brokers. Money is ready. They can pull the trigger. It's different from a stock deal where you're looking at the right entry point."

The sellsider noted that some agents have changed the way they bring deals to market, in particular single-stock products.

"It looks like JPMorgan is putting smaller deals through. They are replicating the reverse convertible UBS model," the sellsider said.

"They're doing deals in the $10,000-to-$100,000 size, which is typical of UBS.

"It just puts more flexibility in the hands of the advisers. They can be more tactical-oriented; they don't depend that much on the structuring desk to come up with ideas."

The average deal size of JPMorgan deals has shrunk to $4.37 million this year from $14.8 million last year, according to data compiled by Prospect News.

JPMorgan has sold $3.70 billion in 846 deals this year, compared with $5.66 billion in 382 offerings last year.

Top offerings

The top three deals last week were leveraged notes without any downside protection.

The first and third deals were tied to equity indexes. The second was linked to a single stock.

HSBC USA Inc. priced the top deal with $59.65 million of 0% Accelerated Return Notes due Oct. 31, 2014 linked to the Euro Stoxx 50 index. The leverage factor is three times, and the cap is 19.2%. Investors will lose 1% for every 1% decline in the index. BofA Merrill Lynch was the underwriter.

European equity has become a popular theme among investors.

There were 13 deals using the Euro Stoxx 50 alone (not mixed with other indexes) last week. Among those, five were part of the top 15 deals.

The week's second-largest offering was Barclays Bank plc's $45.12 million of 0% Accelerated Return Notes due Sept. 12, 2014 linked to Ford Motor Co. shares. The payout at maturity will be 300% of any gain in Ford shares, up to a maximum return of 27.39%. Investors are exposed to any losses. BofA Merrill Lynch was the underwriter.

Coming next was Bank of America Corp.'s $41.28 million of 0% Accelerated Return Notes due Aug. 28, 2015 linked to the S&P 500 index. The leverage multiple is three, and the cap is 16.9%. BofA Merrill Lynch was the underwriter.

The fourth- and sixth-largest offerings were market-linked step-up notes, a signature product of Bank of America.

Bank of America's $41.23 million of 0% market-linked step-up notes due Aug. 24, 2018 linked to the S&P 500 index was the deal No. 4. It features a 132.36% step-up value and an 80% trigger level.

The other step-up was Bank of America's $36.28 million of 0% market-linked step-up notes due Aug. 28, 2015 linked to the S&P 500 with a 115.4% step-up value and the barrier level set at the initial index level.

Curve play

Finally, sources noted a steepener deal with an equity component. It was the No. 7 offering of the week.

The issuer, JPMorgan Chase & Co., sold $30 million of fixed-to-floating-rate leveraged CMS curve and S&P 500 index-linked notes due Aug. 31, 2028.

The interest rate is 10% for the first year. After that, it will be five times the spread of the 30-year Constant Maturity Swap rate over the five-year CMS rate, subject to a maximum rate of 10% per year, multiplied by the proportion of days on which the index's closing level is at least 55% of the initial level. Interest is payable quarterly and cannot be less than zero.

The payout at maturity will be par. The deal was distributed by Morgan Stanley Smith Barney LLC.

Interest rate-linked notes have soared this year to $894 million, more than three times last year's notional of $289 million, according to the data. Their size, however, remained small at 3.79% of the total this year versus 1.25% last year.

"Interest rates deals have picked up. These trades have a future for sure, and we'll see their volume expand. It's a more sophisticated technology than a leveraged deal or leveraged deal with buffer. Even more complex are those hybrid transactions like this JPMorgan deal, where you have an interest rates curve play on CMS and on top of that you add an equity contingency," the market participant said.

When the underlying includes an equity component, Prospect News does not categorizes the deal as interest-rate based. To fit into that category, the underlying has to be a pure rate component.

"I hope these deals will grow. I'm always a supporter of more people embracing new products," the market participant said.

"Overall market sentiment is not bad," the sellsider said.

"There's definitely an interest in steepeners. I expect volume to pick up. Curve steepener products will rebound.

"We'll start to see very large deals in the $40 [million], $50 million size.

"On the other hand, equity will remain the same."

UBS last week was the second agent with $198 million, or 21% of the total. It was followed by Goldman Sachs with $87 million, which represented 9.25% of the total.

"You see a huge pickup in index deals at the end of each month because retail deals usually fall when the month closes." - A market participant

"We'll start to see very large deals in the $40 [million], $50 million size." - A sellsider on curve steepener products

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