Structured products issuance $1.21 billion for week; CIBC brings in top deal for $126.6 million

By Emma Trincal

New York, Jan. 31 – As expected, large block trades of mostly BofA Merrill Lynch deals flooded the structured products market last week as the first month of the year was closing.

Agents sold $1.21 billion in 187 deals, an increase of 42.5% from $848 million recorded the week before, according to data compiled and updated by Prospect News.

BofA Merrill Lynch

BofA Merrill Lynch, which prices the bulk of its monthly inventory in the final week of each month, came in with $685 million in just 15 offerings, or 57% of the weekly issuance volume.

“They’re such a powerful distribution engine. They do their single stock deals in the middle of the month and the rest at the end. They do it all over again the next month. They’re a total machine,” a market participant said.

12-month trailing

Volume for the month so far through Jan. 26 is up 2.6% from $3.10 billion in December to $3.18 billion this month, according to the data.

However, the 12-month trailing period to the year ending on Jan. 28 from the previous rolling period shows a solid growth of 24.75%. Volume grew to $49.86 billion from $39.96 billion during that time.

“It’s encouraging to look at the trailing period. We’ve seen that strong trend for a while, and we’re still growing fast. The big picture is very positive,” a sellsider said.

Rally factor

The market at least for last week helped. After the U.S. government reopened on Monday, earnings were positive, propelling the major averages to finish at new all-time highs. The S&P 500 index was up 2.2% on the week, which was the fourth positive week in an exceptionally strong January rally.

The sellsider however was skeptical about the role played by the bull market in the issuance volume growth seen so far.

“I don’t think it’s the rally. It’s part of it. The market going up versus people buying more structured products is not necessarily the same thing,” he said.

“Yes, people feel lucky. They’re more optimistic about the economy. But there are more factors driving volume. It’s a lot of different things.”

FOMO and leverage

Some analysts have argued that in this rapidly rising bull market, investors feel the so-called “FOMO” or “fear of missing out.” They want equity exposure but remain cautious looking for protection as well.

Leveraged notes when carrying buffers or barriers would match that view and may explain the continued trend of robust issuance volume. This sellsider was still skeptical.

Leverage overwhelmingly dominated issuance last week, accounting for 54% of total volume or $652 million in only 34 deals. Leverage with barriers or buffers however accounted for only a third of that. The two other thirds were leveraged notes with full capital at risk.

“I don’t know what to make of this idea that people use leverage for the protection. The need for protection doesn’t seem to be the theme here,” he said, commenting on these figures.

Top deals, Canadians lead

Deals were big in size last week with six exceeding the $50 million mark. BofA distributed five out of them, including the largest one at $126.57 million, the biggest deal of the year so far.

Foreign issuers dominated on the top of the list with Canadian Imperial Bank of Commerce, Bank of Nova Scotia and Credit Suisse AG, London Branch bringing to market the largest trades.

It was unlikely due to earnings reporting blackout since all large U.S. issuers, such as JPMorgan, Citigroup, Morgan Stanley, Bank of America and Goldman Sachs had already reported their quarterly earnings the week before.

“It’s more about investors trying to diversify risk across different issuers. Plus the Canadian banks have pretty good credit,” said the sellsider.

The large Canadian offerings last week came from the Merrill Lynch distribution channel. Given that this agent sells large block trades, the need to provide diversification is crucial, he noted.

CIBC prices $126 million

Canadian Imperial Bank of Commerce priced the top deal. As of the end of last week the $126.6 million of 14-month Accelerated Return Notes linked to the S&P 500 index was also the top offering of the year. The payout at maturity will be par plus triple any index gain, up to a maximum return of 9.65%. Investors will be exposed to any index decline.

“Interesting... They only allowed 3% up,” the sellsider said in reference to the cap and leverage amount.

“It’s almost like a digital. You either get the cap or you don’t because 3% is a really low threshold. Instead of an autocall that would give you this return above par, here there’s a difference of three percentage points where you either get your coupon or you don’t.

“Effectively it’s a digital without being a digital.

“If anything, it shows the investor is not very bullish.”

Euro deals

Bank of Nova Scotia priced the No. 2 deal with $87.14 million of three-year autocallable market-linked step-up notes linked to the Euro Stoxx 50 index.

The autocall triggered at par is observed annually with a 14.65% call premium.

The payout is a 30% digital payout up to the 130% step level. If the index is above the step level, investors will get the index gain.

Investors will be exposed to any losses.

BofA Merrill Lynch is the agent.

EAFE basket for two

Finally, BofA Merrill Lynch was the agent for the next two deals, a pair of nearly “twin” notes linked to the same underlying basket but showing different prices, issuers and participation rates.

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

This basket is far from being a new underlier. Its components vary in weightings but it has been one of the most used underlying over the past couple of years. Its success is said to reflect a need from investors to find a proxy for the MSCI EAFE index.

Trading FANGs

Although exchange-traded notes are not included in the weekly issuance volume data, two new issues are worth noticing for traders.

Bank of Montreal launched a series of two new ETNs linked to the BMO REX MicroSectors FANG+ index. This index, created by ICE Data Services, gives exposure to 10 of the highly traded growth stocks in the technology sector, such as the “FANG” stocks – Facebook, Apple, Amazon, Netflix and Alphabet plus five others – Alibaba, Nvidia, Tesla, Twitter and Baidu.

BMO priced $50 million of a 3x leveraged ETN tied to this index as well as $50 million of ETNs with 3x inverse leveraged exposure to this index.

“I think it’s great that they did that. It’s interesting they would do that on single stocks. But these are names that everybody trades all the time. People should have these kinds of instruments. It’s healthy,” the sellsider said.

After BofA Merrill Lynch, the top agent last week was Credit Suisse with $98 million in seven deals, or 8% of the total. It was closely followed by UBS with $96 million in 101 deals.

The top issuer was Bank of Nova Scotia pricing three deals totaling $201 million, or 16.7% of the total.

“It’s encouraging to look at the trailing period. We’ve seen that strong trend for a while, and we’re still growing fast. The big picture is very positive.” – A sellsider, commenting on recent issuance trends

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