Structured products issuance thin in holiday-shortened week; BofA Merrill Lynch leads

By Emma Trincal

New York, Nov. 29 – Agents priced $296 million of structured products in 65 deals in the first three days of last week, ahead of the Thanksgiving Day holiday break, a quiet activity compared to the $564 million issued the week before, according to data compiled by Prospect News.

Figures are preliminary and will be revised upward. Not all firms reported their deals to the Securities and Exchange Commission by press time.

Holiday and BofA

The top agent last week was BofA Merrill Lynch with four deals totaling $160 million, or 54% of the total, according to preliminary data.

The large market share of BofA Merrill Lynch is not a sure indicator that the agent closed its month last week. Since all of its deals are not filed yet, it is hard to say whether pricing took place last week or is actually happening now. A sure signal is the existence of large block trades, but only one of those in the neighborhood of $60 million came out last week.

BofA tends to close its month ahead of holidays or long weekends. The agent could have closed up its calendar month last week, but data at this point is incomplete and cannot confirm it.

BofA Merrill Lynch’s top three deals were issued by Credit Suisse AG, London Branch, making the Swiss bank the top issuer last week with $129 million in eight deals. This ranking is due to BofA’s use of this issuer in three large deals representing 90% of what Credit Suisse issued last week, or $116.5 million.

Month

Volume for November through Nov. 24 is up only 4.45% to $1.65 billion from $1.58 billion in the same time in October. The month has not ended yet, noted the sellsider.

“November is usually weak because of the holidays. Just last week, you wasted an entire week,” he said.

“People were much more interested in Black Friday than buying structured notes. This week, Cyber Monday hit all-time record sales. We should also move into the digital age...and why not, consider a ‘Structured Tuesday.’”

Year

The year-to-date volume remains much greater than last year, up 29.5% to $44.21 billion from $34.16 billion. The pricing environment was not best though with volatility staying subdued and interest rates still low, especially on the longer end of the curve, which has been flattened, the sellsider said.

“It’s not ideal for pricing. But structured product manufacturers always manage to overcome those obstacles and come up with structures that work,” he said.

“On their end, investors have proven able to have more realistic expectations. They accept the idea that the environment has changed and that they’re not going to get the same cap or buffer level that they did in the past. They know they have to deal with reality, and for the most part, they do.”

Near record high

In the next five weeks, agents would have to price an additional $6.30 billion for the market to be able to match the record annual volume of $50.52 billion seen in 2008. It is unlikely to be the case, but it could be close, said the sellsider.

The top two months this year were March and June with $2.46 billion and $2.25 billion, respectively.

“Our market is definitely beating the last five years,” he said.

“Last year was a horrendous year. I’m sure that a lot of people last year decided to stay put. Demand for structured notes picked up this year in part because of that. You have to put your money somewhere.”

Of course investors can always be long the market when prices keep on rising as they have this year. And they did. But the need for protection will always be there, the sellsider said.

Protection

“As we went further into the bull market people didn’t know stocks would keep on climbing this year. You never know for sure when the party is going to end. Right now valuations are high, and there are concerns about a pullback. Having exposure with some protection makes people less nervous,” he said.

Leveraged notes with buffer/barrier protection have been in greater demand this year than their unprotected counterparts, according to the data showing $8.10 billion and $6.22 billion for those two categories, respectively.

The U.S. stock market continued to push to new record highs last week, driven by a rally in technology.

The S&P 500 index was up 0.9% for the week and broke above 2,600 for the first time.

Since the structure lineout was skewed by BofA Merrill Lynch’s greater market shares, the two most popular product types were market-linked step-ups and leveraged return over short-dated maturities, both specialties of this dealer. The two largest deals exemplified these preferences.

Top deal

The first one was Credit Suisse AG, London Branch’s $59.48 million of five-year autocallable market-linked step-up notes linked to the Euro Stoxx 50 index. This type of product offers a minimum guaranteed return on the upside – the step – and unlimited upside above this level with usually one-to-one downside exposure. BofA distributed three such products totaling $81 million, or 27% of the total notional.

For the $59.5 million deal, the notes will be called annually at a 14.26% premium above the initial price. The step-up level is 130%. Investors will be exposed to any losses.

“This is going to be attractive if you’re bullish. You’re guaranteed 6% a year if the index is flat or up. People are putting money in Europe and pricing happens to be more advantageous with the Euro Stoxx. People can use this as a substitute to long position in their portfolio,” the sellsider said.

Another Credit Suisse

The second top deal offered three-times upside leverage up to a 17% cap with no downside protection.

Credit Suisse was the issuer of this $37.59 million of 14-month Accelerated Return Notes linked to a basket of international equity indexes.

The basket consists of the Euro Stoxx 50 index with a 40% weight, the FTSE 100 index with a 20% weight, the Nikkei 225 index with a 20% weight, the Swiss Market index with a 7.5% weight, the S&P/ASX 200 index with a 7.5% weight and the Hang Seng index with a 5% weight.

Small deals, big deals

Leverage accounted for 20% of the volume in five deals. BofA Merrill Lynch was the agent for 92% of this notional in just two offerings, which happened to be the largest ones in this category.

Autocallable reverse convertibles however dominated volume over leverage with 30% of the total.

Those deals come in two separate kinds based on the underlying asset class, which tends to dictate their size: the largest ones are worst-of deals tied to equity indexes or exchange-traded funds. On the other hand, a myriad tiny deals (less than $350,000 in average) are priced on single-stocks in sectors with high volatility such as technology and biotechnology. UBS is the champion of those deals making up in volume the little sizes.

Because single-stock income deals reflect taking a view on a particular name, they will always be smaller, the sellsider said.

A consistent trend

Worst-of structures have gained in popularity. The trend has been established throughout the year, and the appetite for those products goes for index underliers, a market participant said.

A lot of time, the correlation risk is offset by the depth of the barriers, he argued.

“Stocks are more of a tactical play than a portfolio management strategy. We look at structured notes as part of the overall portfolio strategy,” he added.

“Do you own the S&P and the Russell? Do you think any of those will drop 35% in three years? If so how worse off are you than if you’re long those assets?

“You’re not taking on more risk and you’re getting paid a nice coupon.”

Top agents last week after BofA Merrill Lynch were Morgan Stanley with $42 million in five deals followed by JPMorgan with six offerings totaling $31 million.

“People were much more interested in Black Friday than buying structured notes.” – A sellsider

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.