Bank of America dwarfs competition with 65% of month-end volume

By Emma Trincal

New York, June 4 - Last week's $1.64 billion volume was robust despite the Memorial Day holiday, but the action was mostly driven by Bank of America. This agent, always on top at the end of each month, did even better than usual last week, pushing its penetration rate to 65% of the total volume with 26 deals totaling $1.07 billion, according to data compiled by Prospect News.

A look at volume for each final week of the prior months of 2014 reveals Bank of America's increasingly dominant presence or perhaps the rest of the market shrinking as a whole. Agents other than Bank of America had a 55% and 52% participation rate at the end of February and March, respectively, but this level dropped to 44% in April and 35% in May. In January, the distribution was evenly split between Bank of America and the other agents.

BofA Merrill Lynch priced the top seven products last week using five different issuers not including Bank of America Corp. Those deals ranged between $50.87 million and $144.50 million, according to the data.

New products

"Two-thirds of the volume came from Bank of America last week. That tells us something about their distributing power," a sellsider said.

"They are really the dominant force in the structured product industry. You could say that for Bank of America, bigger is better.

"This is not a surprise because there are two things Bank of America is doing extremely well.

"First, they allow new products to come out. I'm not saying they're the only ones. Morgan Stanley and JPMorgan do too, but compared to the smaller broker-dealers and even to the wirehouses, they're just better at approving new products.

"It doesn't mean they're pushing the envelope in innovation. The products can be the same, but they add new tweaks."

He offered an example

"They'll take a step-up with unlimited upside participation after the step level and change it into an income product by replacing the participation with a bonus coupon. You end up with something quite different, but you used the same concept," he said.

"Any change in a structure needs to be approved. When it comes to approving new products, Bank of America has an open mind. While other firms would spend months to get a product approved, they speed up the process because they recognize that just because a product is new doesn't make it more dangerous.

"They change the way their products look so that people can buy and sell. And they do that by spending the time to educate their brokers so that clients can understand the products better."

Open architecture

The second factor behind Bank of America's strength is its open architecture, he said.

"Bank of America is the leader in this market because they're particularly good at offering products from different issuers," he added.

The top seven deals sold last week were brought to market by the following issuers: Credit Suisse AG, London Branch; HSBC USA Inc.; Deutsche Bank AG, London Branch; Royal Bank of Canada and Barclays Bank plc.

"Investors have already bought Bank of America paper, and credit diversification is very important to them," he said.

"They want and demand different kinds of credit. They're looking at structured products as part of their core portfolio. You simply can't have your core portfolio with one bank.

"The fact that Bank of America deals with so many different kinds of issuers is of course one of the main reasons behind their success."

Full downside risk

One characteristic of the top seven deals priced by Bank of America last week was the absence of any buffer or barrier, according to the data.

Using either leverage with a cap or a step income payout structure, all those deals had in common a short tenor and the absence of any downside protection.

Sources were not surprised.

"You can't put downside protection with these rates and volatility. You can't. That's the way the market prices," a market participant said.

"Volatility is at its lowest point since the pre-crisis levels of 2007. Rates are very low as well."

Depending on the bullishness of the investor, eliminating the buffer made sense in order to get the best terms.

"People are just trying to optimize the best type of return while minimizing risk," he said.

Top deals

Credit Suisse priced the largest offering, $144.5 million of 0% Accelerated Return Notes due July 31, 2015 linked to the S&P 500 index. The upside participation rate is 300% of the index return, subject to a maximum payout of par plus 10%. There is no downside protection.

The second largest deal, also sold by Bank of America, was HSBC's $107.47 million of 7% STEP Income Securities due June 12, 2015 linked to the common stock of Ford Motor Co. If the final price of Ford stock is greater than or equal to the step level, 107% of the initial share price, the payout at maturity will be par of 1.51%.

If the final share price is greater than or equal to the initial share price but less than the step level, investors will receive par.

Investors will be fully exposed to any decline in the share price.

Buffer and term

Asked what prompted investors to jump into large deals with no downside protection at all, a structurer said the answer is not demand but pricing.

"Short term, it's very hard to have protection. The numbers don't work out. People are worried about missing on a big rally, so they want to get as much upside as they can," he said.

"With interest rates as low as they are, there's really not that much to play with. How can you have downside protection? It's not feasible. If you want a buffer or a barrier, the only way to do it is to go from one year to five or six years."

The top seven deals last week had roughly one-year tenors.

"There's no way you can put a buffer on a one-year deal," he said.

"Besides, a buffer is not the panacea. It just gives you peace of mind. It may limit your losses, but it's still not true principal protection.

"We often say that people like buffers. But it's a very general statement. It's like saying people like money. If you look at what you get with a buffer, maybe it's not worth having a buffer.

"Just because a deal doesn't have a buffer or a barrier doesn't mean it's a bad deal. It's not necessarily worse than a buffered note or barrier product. There is no such thing as a better deal. A deal can be more suitable with your views, and that will make it a better deal for you."

Leverage and steps

The No. 3 deal last week was an autocallable market-linked step-up note, a variation on the step-up structure.

Credit Suisse priced $84.72 million of 0% autocallable market-linked step-up notes due May 26, 2017 linked to the Euro Stoxx 50 index. The notes can be automatically called on two annual dates at an annualized call premium of 11%. If the notes are not called and the final index level is greater than the step-up value, 128% of the initial level, then the payout at maturity will be par plus the index return.

If the final index level is greater than or equal to the initial level but less than or equal to the step-up value, then the payout will be par plus 28%.

If the final index level is less than the initial index level, investors will have one-to-one exposure to the decline.

In the third deal, Bank of America sold $67.8 million of 0% Accelerated Return Notes due July 31, 2015 linked to the Euro Stoxx 50 index on the behalf of Deutsche Bank.

The notes offer three times leverage with a 15% cap and full downside exposure.

"What you saw last week were mostly leveraged notes and step-ups," the structurer said.

"Those two structures reflect different views, but both types of deals are short-term and bullish.

"They don't give investors any protection on the downside, but they offer something else.

"With the leveraged note, having no downside protection allows the issuer to throw in more leverage, which is the case here with triple the return. Or they can give you a higher cap.

"With the step income notes, the investor wants income. The elimination of the buffer enables the issuer to increase the coupon."

Stocks

Bank of America priced a few large deals linked to single stocks. While some said that Bank of America tends to price a larger volume of equity index notes than notes linked to single stocks, the market participant said he is doubtful about this notion.

"I don't think there is nothing new with big stock deals. Bank of America doesn't just do big index deals. They also do stocks. They've always had a mix," he said.

RBC priced a deal based on a single stock that was the week's No. 5 offering, $61.43 million of 10% STEP Income Securities due June 12, 2015 linked to the common stock of Under Armour, Inc. The step level is 110% of the initial price, and the step payment offered above this level is 2.72%.

Barclays priced the next two deals, both linked to a single stock and using a three-times leveraged payout structure.

The first one for $59.5 million is linked to Amazon.com, Inc. with a 21% cap. The next one for $50.88 million is linked to Apple Inc. with a 20.58% cap.

Single-stock-linked notes made for a third of last week's issuance. The year-to-date average is 27%, according to the data.

Volume up 14%

Volume for the month as of May 30 has fallen by 6.6% to $3.28 billion from $3.51 billion in April but is flat from a year ago, according to the data

"Volume is hard to analyze. It's always based on the underlying equity, volatility, credit spreads. If volatility picks up, volume will pick up, I guarantee you that. Volume and volatility are 100% correlated," the market participant said.

Sales, however, have grown nearly 14% for the year to $18.05 billion from $15.85 billion last year. The number of deals rose by 12.5% to 3,757 from 3, 336.

"That's good. It's still double-digit. The fact that we dropped from April doesn't really concern me. These are short-term volume variations. But being up from last year by 14% is a good sign. It's a pretty healthy increase," the structurer said.

The No. 2 agent last week was UBS with 87 deals totaling $187 million. It was followed by Citigroup, which sold 10 deals for $100 million.

Citigroup Inc. priced a large interest rate offering with its $47 million leveraged callable CMS curve-linked notes due May 30, 2034 linked to the 30-year Constant Maturity Swap rate and the two-year CMS rate. The interest rate for the first two years is 10%. The leverage factor is four times, and the interest rate is capped at 10%.

"Bank of America is the leader in this market because they're particularly good at offering products from different issuers." - A sellsider

"The fact that we dropped from April doesn't really concern me." - A structurer

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