Structured products agents price $726 million during week; BofA brings nearly half of supply

By Emma Trincal

New York, Sept. 5 – Structured products agents priced $726 million in 154 deals in the final week of August ahead of the Labor Day weekend with BofA Merrill Lynch distributing $350 million of it, or 48% of total volume, in only 12 offerings, according to preliminary data compiled by Prospect News.

BofA tops

“I wish I was selling $350 million in 12 deals. It sounds good to me,” said a structured notes distributor.

“They know that their network is capable of taking in and allocating structured notes all across the Merrill platform as they systematically allocate those deals for their clients’ portfolios.

“It’s a big wirehouse. Structured notes get allocated every month whether it’s in 12 or 30 deals. It’s a very compelling model.”

Last week’s overall figures are extremely likely to be revised upward as the week ended at the same time as the month, leaving plenty of room for deals to be settled then filed on the following week, this week, in the aftermath of Labor Day.

The combination of late pricing and a holiday weekend almost guarantee higher updated figures, possibly in the neighborhood of $1 billion based on historical data.

The average final week of the month this year has been close to $2 billion, according to the data.

August rally

So far August is slower than July, which corresponds to the famous doldrums of summer. Volume is down 34% to $2.66 billion from $4 billion in July. But again, this decline could be much less depending on August’s finalized data.

The same applies to the 30% decrease in issuance volume for August compared to a year ago. Sales amounted to $3.79 billion in August of last year.

“For us, August has been pretty good. We’ve grown our user-base actively for the past three months. People are getting acclimated to our platform. We’re in a sweet spot,” said Matt Rosenberg, sales trader at Halo Investing.

His company is a technology platform that helps individual investors design their own structured notes through competitive bids between issuing banks.

The summer has seen a strong rally for stocks. The S&P 500 index has climbed 7% from June 1 to Aug. 31. Yet issuance volume for notes during the same time has dropped 8% to $11.05 billion from $12.02 billion. Again, the numbers need to be put in perspective as the count for August is not final yet.

Last month, the equity bullish momentum continued despite global trade headlines and turbulent emerging markets hit by the stronger dollar. The S&P 500 index jumped 3% for the month and hit new all-time highs, breaking its Jan. 26 record.

Meanwhile September is known to be a difficult month for stocks historically and the market has so far been under pressure since the conclusion of Labor Day.

What will this mean for structured notes issuance?

For Rosenberg, the slow seasonal trend observed each summer may have prevailed over market conditions.

“People are in vacation,” he said.

“The summer tends to be slow in general no matter what the market looks like. People go on vacation; advisers can’t get a hold of their clients whether the market is up or down. Then comes September: people are back and you can engage the client again,” said Rosenberg.

For the year to date, volume is still up with the pricing of $37.14 billion versus $34.37 billion last year, an 8% advance. This growth is in part due to the increase in the number of offerings, up 14.5% to 10,387 from 9,077.

Another factor is the greater number of larger deals with 49 this year in excess of $50 million versus 33 last year.

Trends last week

The main underlying asset types and structures seen last week were dictated by the preeminence of BofA Merrill Lynch, which priced eight out of the top 10 offerings, including the top two. Morgan Stanley priced the third and sixth largest offerings.

Equity indexes topped with $533 million in 58 deals, nearly three-quarters of total volume.

Interestingly, rates deals represented a higher-than-usual percentage of total sales with $69 million sold in six deals, or nearly 10%. But the bulk of it came from a large $40 million Morgan Stanley trade.

The most popular structures were leveraged notes. Unprotected leveraged deals (23.4%) were nearly equivalent in volume to their counterparts that offered barriers or buffers (22.4%). Autocallable contingent coupon notes remained important with 18% of the total.

Wells Fargo’s $58 million

BofA Merrill Lynch sold the top two deals, both leveraged notes, one with a buffer and the other lacking any downside protection.

Wells Fargo & Co.’s $58.14 million of two-year Capped Leveraged Index Return Notes linked to the S&P 500 index was the No. 1 deal.

The payout at maturity will be par of $10 plus double any index gain, up to a maximum return of 15%.

Investors will receive par if the index falls by up to 10% and will lose 1% for every 1% decline beyond 10%.

A big Apple

Canadian Imperial Bank of Commerce priced the second top offering with $40.21 million of 14-month Accelerated Return Notes linked to the common stock of Apple Inc.

The payout at maturity will be par of $10 plus triple any stock gain, up to a maximum return of 19.5%.

Investors will be exposed to any stock decline.

Sources noted the relatively unusual size of a single-stock deal, albeit one tied to the popular name along with the fact that BofA Merrill Lynch is more often inclined to price large block trades based on indexes than stocks.

Morgan’s CPI floaters

Coming next was a rate-linked note deal of a fairly large size sold in two issues of $30 million and $10 million.

Morgan Stanley priced a total of $40 million of floating-rate notes due Aug. 30, 2021 linked to the Consumer Price Index. Investors will receive monthly a variable interest rate equal to the year-over-year change in the CPI plus 82 basis points. The payout at maturity will be par.

“It’s not a traditional interest-rate deal, not a steepener or CMS type of offering. But it’s very interesting with a three-year maturity and principal-protection,” said Rosenberg.

“By offering a shorter term, you’re opening up the product to a wider audience. If I was an [investment registered adviser] the idea of a bet on inflation over three years with full downside protection would be pretty compelling.”

Morgan Stanley & Co. LLC is the agent with Morgan Stanley Wealth Management as a dealer.

Bank of Nova Scotia

Bank of Nova Scotia was last week’s second largest issuer. It priced through the Merrill Lynch distribution network the No. 4 and No. 5 top deals.

The Canadian issuer priced $36.06 million of 14-month leveraged notes linked to the Euro Stoxx 50 index with full downside exposure. The payout at maturity will be par of $10 plus triple any index gain, subject to a capped return of 22.23%.

Best-selling ARNs

The second large Scotia deal, also with a 14-month maturity, is linked to an international equity index basket, which is commonly seen in the market and believed to be used as a proxy for the EAFE index.

The basket components are the Euro Stoxx 50 index with a 40% weight, the FTSE 100 index with a 20% weight, the Nikkei Stock Average 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.

The payout at maturity will be par of $10 plus 300% of any basket gain, subject to a maximum return of 20.25%. Investors will be exposed to any basket decline.

“These ARNs, very short-term, 3x, capped notes with no protection have always been Merrill’s bread and butter,” a sellsider said.

The acronym “ARNs” stands for “Accelerated Return Notes,” a brand name used by BofA Merrill Lynch.

“It’s a decent product and the economics work. You couldn’t do a 13-month or 14-month with protection. By getting rid of it and capping the upside, you can get very high leverage over a short period of time.”

Top agents, issuers

After BofA Merrill Lynch, the top agent last week was UBS with $169 million in 84 deals, or 23.2% of the total. It was followed by Morgan Stanley.

The top issuer last week was Barclays Bank plc with $117 million in 31 deals, or 16.10% of total notional.

JPMorgan Chase Financial Co. LLC remains the No. 1 issuer for the year to date with 1,430 deals totaling $5.764 billion, or 15.5% of total volume for the year.

“For us, August has been pretty good. We’ve grown our user-base actively for the past three months.” – Matt Rosenberg, sales trader at Halo Investing

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