July structured products issuance kicks off at record levels as BofA returns to the market

By Emma Trincal

New York, July 13 – The short, Fourth of July week was one of the busiest periods for structured products issuance to begin any month as Bank of America, which suspended its pricing in June in order to avoid any Brexit-related crash, returned to the market. BofA pushed its June deals onto the July calendar, according to data compiled by Prospect News and as previously reported.

A July like no others

In total, agents priced $750 million in 79 deals in the four-day week ended Friday, the data showed.

The situation was exceptional, sources said. At this time of the year, volume tends to be weak due to the monthly calendar cycle, the start of a slow season and the Fourth of July weekend.

On average, the first week of July has been about half that size in the past five years, according to the data.

Bank of America’s contribution to last week’s volume was remarkably high. The agent priced $675 million, or nearly 90% of the total in only 32 deals. This market share is much higher than what Bank of America usually prices on the final week of a month, which ranges between half and two thirds of the total.

The top 25 deals were all distributed by BofA Merrill Lynch. Bank of America issued about 30% of its own volume sold and used several other issuers, including Barclays, HSBC, Royal Bank of Canada, AB Svensk, Credit Suisse, Deutsche Bank and CIBC, to price the rest.

Hard hedges

“Bank of America didn’t want to price these items last month because of the volatility around Brexit,” a sellsider said.

“That’s why you have this massive volume in just one week, early in the month. I don’t know if they have more to go.”

Even if the impact of the U.K. vote to leave the European Union was not as dire as feared, the agent had no way to know what the implications would be in advance, a structurer said.

Hedging deals would have made pricing too onerous in those market conditions.

The referendum, which took place on June 23, was followed by two days of sell-off, on June 24 and June 27. After that, the benchmarks rebounded. On Tuesday, the Dow Jones industrial average hit a record high.

“It makes sense that they stopped everything. Volatility is good for pricing and it usually helps. But when you have huge fluctuations of the implied volatility, it may be tough to price these deals,” this structurer added.

He pointed to the sharp moves of the CBOE Volatility index prior to and after Brexit. The index measures the implied volatility of the S&P 500 futures.

On June 23, the VIX closed at 17.25. The next day when the results of the vote were announced, it rose to 25.76. Four trading sessions later, on the last day of June, it fell to 15.63.

“When the VIX soars 50% in one day and then in the course of less than a week drops 40% to the level it was before Brexit, you can imagine how difficult it is to price these deals,” he said.

“Imagine you’re pricing something the day before and the next day, the option is worth only 40%. It was unprecedented. I can see why they made that decision.”

Volume year to date is at $19 billion. It continues to lag by 25% of last year’s notional of $24.5 billion, according to the data. That gap has been steady over several weeks.

“Let’s hope that July will continue to be a great month. Hopefully, we can see the gap narrow a little although I’m a little bit skeptical,” said the structurer.

Equity rush

Last week saw a strong bid on equity. Equity underliers, which consist in indexes, single stocks, baskets of stocks and exchange-traded funds, amounted to 96.5% last week versus a yearly average of 91% of total volume.

“That’s a lot. But where else are they going to put their money?” the structurer said.

“Rates are just stubbornly low and people have confidence in equities, especially in the U.S. The benchmarks have just hit new highs again.

The rebound after Brexit fears eased up pushed the S&P 500 index to a record intraday peak of 2,155.40 on July 12.

The rally was not lost on investors who rushed to bid on S&P 500-based offerings last week. This underlier alone was used in the top five deals. It made for 52% of the total volume in 17 deals, the data showed.

In contrast, investors shied away from Europe in fear of the impact of Brexit on the euro zone. Five deals were linked to the Euro Stoxx 50 index representing only 1.17% of the volume priced. The largest one was a Bank of America Corp.’s $31.7 million one-year deal with a 300% upside participation capped at 21.55% with no downside protection.

“I’m not surprised to see so much on the S&P,” the sellsider said.

“From what I read or hear, the U.S. seems to be the safest place or the best relative value when it comes to a lot of things and that’s true for bonds or equities. That might be part of the reason you see so much exposure to the S&P.”

Top deal

The top deals last week consisted in Bank of America’s best-selling structures with a bullish bias. Those came in two brands: first, short-dated leveraged capped notes mostly with full downside exposure, and second, market-linked step-ups guaranteeing a digital amount in flat markets without capping the upside.

Barclays Bank plc priced the top deal with $111.41 million of one-year leveraged notes linked to the S&P 500 index.

The payout at maturity was par of $10 plus triple any index gain, up to a maximum return of 12.45%.

Investors were exposed to any index decline.

The structurer said it made sense for investors to seek those types of products.

“There is high leverage without downside protection. If you look at this deal the correct way, it’s still a risk-managed play on the market,” he said.

“You can put less money to work and for up to the cap, you have a better exposure without putting so much down. In addition, you don’t get downside leverage like a long-only bet.

“For all of this, you have to give up something and that’s why there’s a cap. But if you think the market is already pretty high, you’d rather have less money in the market and give up some of the upside.

“These are very rational short-play structures on the market.”

Leverage, step-up

The second largest offering was also brought to market by Bank of America. It was $68.69 million of two year notes linked to the S&P 500 index. The leverage multiple was two, the cap 15.36%. Investors had a 10% buffer on the downside.

The third offering was a 14-month S&P 500 index-based structure with three-times leverage capped at 11.88% with full downside exposure. Bank of America was also the issuer.

Number four was HSBC USA Inc.’s $43.62 million of six-year 0% autocallable market-linked step-up notes linked to the S&P 500 index.

The notes were automatically called at par of $10 plus a call premium of 6.75% per year if the index closed at or above the initial index level on any annual observation date.

If the index finished up or flat, the payout at maturity would be par plus the greater of the gain and the step-up payment of 40%. There was a 15% buffer on the downside.

“This doesn’t offer a coupon. It looks like an income note but it’s not. You get paid when you get called. It’s a call premium, not a coupon. You also participate in the upside at the end, which is good. But I would say this is a fake income deal. They look like income, but they’re not,” the structurer said.

After Bank of America, the second most productive agent was JPMorgan with $24 million in 15 deals, or 3.17% of the total. It was followed by UBS and Goldman Sachs.

“Rates are just stubbornly low and people have confidence in equities, especially in the U.S. The benchmarks have just hit new highs again.” – A structurer, explaining the demand for notes tied to the S&P 500 index

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