Agents price $453 million of structured notes during week; BofA, Morgan Stanley top agents

By Emma Trincal

New York, April 4 – BofA Merrill Lynch led as the top agent for structured products issuance during the shortened holiday week ahead of Good Friday, closely followed by Morgan Stanley. Both agents pushed total volume for the week to $453 million in 153 deals, according to preliminary data compiled by Prospect News.

BofA Merrill Lynch sold three large deals totaling $127 million, or 28% of the issuance for the four-day week. Those deals priced on Wednesday, a day before the end of the week, which also closed the first quarter.

Morgan Stanley was slightly behind, pricing 21 offerings for $108 million, or 23.75% of the total.

Closing week

It is very likely that BofA figures will be updated. This agent according to current data, was not really in the market during the previous week ending March 23, which suggests that it closed its monthly calendar last week.

During that final week, BofA usually shows a higher penetration rate, which is typically between 50% and 65% of the volume. However, Morgan Stanley last week priced a big trade, which may have skewed the typical pie.

It remains to be seen how strong BofA performed at the end of last week. Delays in filing with the Securities and Exchange Commission are frequent, especially during holidays.

Volatility up

It was another roller coaster last week as the tech stocks tumbled. The FAANG names – Facebook, Inc., Amazon.com, Inc., Apple, Inc., Netflix, Inc. and Alphabet, Inc. led the decline, but a rebound on Thursday ahead of the holiday weekend helped finish the week on a positive note. Still, the Dow Jones industrial average finished the quarter down 2.3%.

Overall, despite some frequent rebound rallies, volatility is rampant and the markets are trending lower.

Case in point: since its all-time high of Jan. 26, the S&P 500 index is down nearly 10%.

Will the pullback demoralize investors? It depends on how much further the market will decline, sources invariably say.

Products for all seasons

A market participant tends to think that demand for structured notes should be resilient regardless of the market conditions however.

“Right now, I don’t see reasons why people should shy away from buying structured notes. If anything, this is the time to do it,” he said.

“You want to protect your exposure, get a buffer to create a cushion.”

Short opportunities

He added that even in a more bearish environment, demand for structured notes should prevail.

“If you want to short stocks you should look at bear notes. I know that there aren’t many of them in the market right now. But it’s simply because people are not bearish enough. If they were more bearish you would find plenty,” he said.

In addition, if structured notes with a short bias are not being structured at this stage, investors always have the option of using exchange-traded notes.

He took the example of the recent technology sector pullback.

The FAANG tool

The FAANG names contributed to most of the losses in the sector. First Facebook plunged as a result of a data scandal. Amazon was hit by president Donald Trump’s criticism of the company. Other stocks in that group dropped amid fears of the government moving toward imposing regulatory oversight on Silicon Valley.

“If you’re bearish on the FAANGs you should look at the FAANG ETN,” he said.

He was referring to Bank of Montreal’s BMO REX MicroSectors FANG+ index negative 3x inverse leveraged ETNs due Jan. 8, 2038 linked to the NYSE FANG+ index, total return. The series along with a long version was launched in January.

“Structured notes allow you do a lot of things, including shorting. The market is turning. Volatility is up a lot. Sometimes the gains are high, sometimes the losses are heavy. But it’s not a reason not to do structured products. This is precisely the time you should get into it. Will people do it? That part, I can’t say,” he said.

March disappoints

March took a toll on volume for the year.

Sales on a year-to-date basis through March 31 amounted to $14.8 billion, a 7.65% increase from the first quarter of last year.

But each of the three first months of the year, when compared with the same month a year before, showed that the momentum of the early part of 2018 has been erased. March was the culprit, according to preliminary data.

January this year with $6.12 billion amid an exceptional rally was up 39.5% from the same month in 2017.

Even February sales, which saw the beginning of the market pullback, advanced significantly, up nearly 35% to $5.52 billion from the same month a year before.

But March’s issuance volume plummeted by 40% to $3.14 billion from $5.24 billion. The data is subject to upward revision.

Trailing 12 months

A clearer picture –and also brighter one –emanates from the trailing 12 months. Volume from March 31, 2017 to March 30, 2018 is $51.79 billion, a 23.55% increase from $41.92 billion in the same period a year earlier, according to the data.

“Trailing figures are much better than year-to-date. I think they’re also more telling,” the market participant said.

“What that shows is that the last nine months of 2017 were much, much better than the previous April through December of 2016.

“If you only look at the last three months you get a lot of noise. Yes 12% is not as high as 23% but there could be a myriad reasons. Is the sell-off one of the reasons? We don’t really know for sure. It’s likely, but it’s too short to tell,” he said.

Goodbye highs

Paul Weisbruch, vice-president of options sales and trading at Street One Financial, said he is observing the sell-off and has continued to develop a more bearish bias although he does not anticipate a major bear market. In fact, he foresees some trade opportunities for certain types of notes.

“The market is drifting lower. The S&P is at 2,600. We’re far from the 2,873 high of late January. We’re going to have a choppy year. I’m not bearish but I don’t think we’re going to see the high of this year. I think we’ll be stuck in a 25-26 channel,” said Weisbruch.

Mental put

The extreme intraday volatility helps day traders but not buy-and-hold investors. Weisbruch said the succession of sell-offs and rallies sometimes during the same trading session are mainly due to the “buy-the-dip” mentality.

“You have people who are selling into a substantial rally. It cut short these rallies. But then someone is coming, buying at the dips. I’m not sure how long this will last,” he said.

“Right now, it’s like a mental put.

“In addition to that you have those overnight headlines from China. That’s not a good thing.

“We’ve seen plenty of down days lately, some that don’t improve, some that reverse. But you still see a lot of red.”

Cap is good

If the market does not turn bearish, this type of price action could bode well for investors seeking steady returns in the form of coupons and digital payouts (caps) in exchange for some downside protection. Leveraged capped notes with buffers or barriers could also benefit.

“The market will be drifting sideways,” he said.

“Rallies are going to be short-lived.

“I’m not predicating a free fall. I’m just saying we’re not going to see a substantial rally.”

Structures with caps and barriers may be adapted to this market environment, he said.

“We’re down 10% from the highs. There’s still appetite for buying on the dip. If you have a 25% barrier, it should be OK. This market is going to trade range bound for a while,” he said.

Big BofA deal

BofA Finance LLC’s $71.14 million of 14-month Accelerated Return Notes linked to the Euro Stoxx 50 index were the top offering last week. The payout is triple any index gain capped at 34.25%. Investors are exposed to any index decline.

“It looks pretty good and it should be. The Euro Stoxx pays 3.5% in dividend,” said the market participant.

“It’s very short-term with one-to-one on the downside. But the cap is high. Most of those short-term bullish deals will maximize the cap and won’t give you a buffer. It’s a cleaner structure that way. If the market goes down, it goes down. If they add a buffer to it, it won’t do much anyway. It’s too short.”

Cooking session

Merrill Lynch & Co priced the second largest deal on the behalf of Deutsche Bank AG, London Branch with $39.02 million of market-linked step-up notes. It was a 14-month deal based on an international equity index basket commonly used in the market. The basket is made up of the Euro Stoxx 50 index with a 40% weight, the FTSE 100 index with a 20% weight, the Nikkei Stock Average index, also with a 20% weight, the Swiss Market index with a 7.5% weight, the S&P/ASX 200 index, also with a 7.5% weight, and the Hang Seng index with a 5% weight.

If the basket finishes above the step-up level – 115.65% of the initial level – the payout at maturity will be par of $10 plus the basket gain.

If the basket is unchanged or gains by up to the step-up level, the payout will be par plus the step-up payment of 15.65%.

Investors will be exposed to any decline in the basket.

“This is a very common basket. We see it all the time. It’s pretty much the same components. They just change the percentages,” said the market participant.

“They’re juggling the weightings just to get the cap that they want.

“Issuers are like chefs in a kitchen. They use some ingredients and change the proportions to get the flavor they want. Potatoes are cheap but you don’t want to do just that. You have to add onions, beef, tomatoes and other ingredients according to some guidelines.”

Morgan Stanley trade

Morgan Stanley Finance LLC priced the third deal with $33.55 million of two-year leveraged notes linked to the Russell 2000 index.

The payout at maturity will be par plus triple any index gain, up to a 24.9% cap.

Investors will be exposed to any losses.

“That’s a pretty good cap for the Russell, an index that doesn’t pay as much dividends as the Euro Stoxx,” the market participant said.

“It’s your standard three-times, capped.”

After BofA Merrill Lynch and Morgan Stanley, the third top agent last week was UBS. It priced 72 deals totaling $102 million, or 22.5% of the total.

The top issuer was Morgan Stanley Finance LLC with $96 million in 19 deals, or 21.26% of the total.

For the year to date, JPMorgan Chase Financial Co. LLC is No 1 with $2.17 billion in 528 offerings.

“Right now, I don’t see reasons why people should shy away from buying structured notes. If anything, this is the time to do it.” – A market participant

“The market is drifting lower. The S&P is at 2,600. We’re far from the 2,873 high of late January. We’re going to have a choppy year. I’m not bearish but I don’t think we’re going to see the high of this year.” – Paul Weisbruch, vice-president of options sales and trading at Street One Financial

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