Structured notes agents sell $810 million for week; BofA leads with month-end block trades

By Emma Trincal

New York, Feb. 5 – Bank of America closed its monthly calendar last week helping total notional sales hit $810 million in 201 deals for the week, according to preliminary data compiled by Prospect News.

BofA Merrill Lynch distributed more than a third of the issuance volume in six deals totaling $278 million. The firm priced two deals in excess of $60 million and one over $100 million.

January

The market’s tally for January is $4.33 billion in 1,162 deals, according to the preliminary data.

Issuance volume is down 21.5% from December’s $5.52 billion.

But compared to a year ago, volume is up 17.3% from $3.69 billion.

The deal count year to date is also higher by 6.5% from 1,091 in January 2019.

Leverage, income

Surprisingly for a week dominated by Bank of America, the breakdown between leverage and income products was evenly split at 37% each. Bank of America tends to primarily offer leveraged notes and autocallable market-liked step ups. Prospect News does not categorize the latter as autocallables given the uncapped participation at maturity.

Bank of America priced the bulk of its large trades at the end of the week with settlement dates on Feb. 6 and Feb. 7, which indicates two things: the total market tally will be revised upward and the proportion of leverage versus income will be likely to rise as well.

Leveraged note issuance accounted for $301 million in 33 deals, according to currently available data.

Autocallables

Autocallables contingent coupon notes totaled $287 million in 126 offerings to which $13 million in seven snowball offerings was added.

The swings of last week’s market justified the use of range bound strategies through barriers and contingent income, sources said.

Autocallable market-linked step-ups, which are counted separately, represented a notional of $102 million in two large trades.

Market sell-off

With markets gaining all-time highs in the past few weeks and the sudden emergence of the coronavirus scare, investors’ bullishness was on pause.

“The market was down last week due to those coronavirus fears. But I don’t think this virus is going to be a long-term drag on the market,” a portfolio manager said.

“This is really a short-term hiccup driven by fears.

“Valuations are a greater concern. A little bit of protection, some hedging is not a bad thing.”

It was the second straight week of market losses with the S&P 500 index down 2.1%, erasing its gains for the year.

The stock sell-off came with a brief yield curve inversion between the 10-year and the three-month Treasuries as a result of a flight to safety.

At the heart of the selling: concerns about the global economy and China.

Fear not priced in

“There is a lot of uncertainty,” a market participant said.

“The market is quite pricey. Some people are taking some profits. They hedge themselves by taking money off the table.

“Prices are high and we have a lot, a lot of unanswered questions.

“Obviously people worry mainly about this virus because it’s a very unpredictable situation.

“The consequences on China are also unknown. How much a Chinese economic slowdown could impact the U.S.?

“The U.S. is doing pretty well but this is a year with a lot of risks.”

The Democratic primaries kicked off this month, a reminder for the market that the elections represent another wildcard.

“I’m afraid that the volatility and uncertainty around the elections has not taken hold,” he added.

“The market seems to believe that it’s a done deal and that we’ll maintain the status-quo.

“The expectation is the reelection of Trump. It may be the case, but as we get close to the conclusion, the market will be increasingly volatile because nothing has been priced in yet.”

Few stocks

Unlike previous weeks, the amount of stock deals was muted last week: only $92 million in 107 deals came from stock underlying, or 11% of total sales. Most of this notional originated from single stocks ($70 million) while worst-of deals on several stocks were not much visible, accounting for $22 million in nine deals.

Equity index-linked notes offerings on the other hand were the top asset class at $670 million, an 83% share in 78 deals.

This result is consistent with Bank of America’s pattern of distribution at the end of each month.

As the market has begun to rally again since Friday, it’s unclear whether investors will focus on more protection with caps or risk-on strategies instead, through growth products.

Volatility last week as measured by the CBOE VIX index did not rise significantly despite the market’s fixation on the new virus, a sign that investors still remained optimistic. The VIX rose to 19.5 on Friday without piercing the 20 level, below which the market is considered relatively stable.

Nearly complacent

An industry source said his clients for now do not appear to demand more downside protection.

“Most people are still excited about the afterglow of 2019. It’s not about people getting worried about the market. It’s more about managing clients’ expectations and giving them some real-world outlook,” this source said.

“They say: ‘hey, we made 20% last year, let’s keep it up!’ You have to tell them: ‘come down.”

“Investors don’t always realize that we’re heading toward the end of a cycle. Looking forward, if you get mid-single-digit returns, you should be satisfied.”

Structured notes can be used to hedge along with the traditional approach.

“We provide some protection through asset allocation, some dividend-paying stocks, higher-quality equities, higher-quality bonds, trimming back high-yield,” he said.

Top deal

Barclays Bank plc priced the year’s top deal with $103.74 million of 14-month leveraged notes linked to the S&P 500 index.

The payout at maturity will be par plus 2 times any index gain, up to a 7.3% cap.

If the index falls by up to 5%, the payout will be par.

BofA Merrill Lynch is the agent.

Top Canadian deals

Coming next, BofA priced another issue of 14-month leveraged notes on the behalf of Bank of Nova Scotia for $68.17 million. Based on the performance of the Euro Stoxx 50 index, the payout at maturity will be par plus triple any index gain, up to a maximum return of 18.2%. The structure offers no downside protection.

The third offering was one of BofA’s best-selling products. Canadian Imperial Bank of Commerce priced $65.58 million of three-year autocallable market-linked step-up notes due Jan. 27, 2023 linked to the Euro Stoxx 50 index.

The product pays a 12.65% annualized call premium if the underlying is above its initial price on any annual observation date with a memory feature for the premium. At maturity, investors receive par plus any index gain if the index finishes about a step-up value of 135%. If it is positive but below this value, the payout turns into a digital offering the 35% step-up return.

Investors will be exposed to any losses.

Other trades

BofA sold a similar deal – the fifth one in size for the week on the behalf of Credit Suisse AG, London Branch – for $36.41 million. The three-year issue was tied to a global equity index basket consisting of the Euro Stoxx 50 index, the FTSE 100 index, the Nikkei Stock Average index, the Swiss Market index, the S&P/ASX 200 index and the Hang Seng index with weights of 40%, 20%, 20%, 7.5%, 7.5% and 5%, respectively.

The annual call premium is 11.1% and the step-up level, 135%. Investors will also be exposed to losses.

The fourth offering was an autocallable contingent coupon worst-of on indexes.

Morgan Stanley Finance LLC priced $49.84 million of trigger autocallable contingent yield notes due Jan. 31, 2030 linked to the least performing of the Russell 2000 index and the Euro Stoxx 50 index.

The notes will pay a contingent quarterly coupon at an annual rate of 6.03% based on a 70% coupon barrier. The notes will be called above initial price. The principal repayment barrier at maturity is 60%.

UBS Financial Services Inc. and Morgan Stanley & Co. LLC are the agents.

Finally, the next big deal was brought to market by GS Finance Corp. with $32.3 million of 14-month leveraged notes linked to the MSCI Emerging Markets index. UBS Financial Services Inc. is the selling agent.

The payout at maturity is three times any index gain, capped at 15.53% with full exposure to any index decline.

The second top agent last week after BofA Merrill Lynch was UBS with 110 offerings totaling $210 million.

It was followed by Goldman Sachs with $120 million in eight deals.

© 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.