Issuance hit $825 million with BofA taking two-thirds of volume; non-U.S. issuers at forefront

By Emma Trincal

New York, July 5 – The first half of 2017 finished with a good week as Bank of America priced its block trades for June, capturing two-thirds of the week’s $825 million volume, according to preliminary data compiled by Prospect News.

A total of 129 offerings hit the market. Bank of America sold $545 million though it needed only 23 deals to hit that level.

As the number one agent, BofA priced all of the top 20 deals except four. The six largest trades were distributed through its BofA Merrill Lynch channel.

“July is generally a very good month for BAML. Then it’s July and August. Everything slows down but they do okay. Comes September they do gangbuster deals again,” an industry source said.

Last June, Bank of America was not in the market, preferring to postpone its pricing to July in anticipation of market disruptions due to the U.K. vote on exiting the European Union, or Brexit.

Canada tops

The big surprise last week was the overwhelming presence of non-U.S. issuers for the largest deals, in particular Canadian banks but also HSBC, the British bank, which priced the No. 2 offering.

Among underlying, the Euro Stoxx 50 index was in favor.

The No. 1 deal was issued by Canadian Imperial Bank of Commerce via agent BofA Merrill Lynch with $62.65 million of 14-month leveraged notes linked to the Euro Stoxx 50 index. The notes have three times leverage, a cap of 18.55% and no downside protection.

Next HSBC USA Inc. priced $40.56 million of five-year autocallable market-linked step-up notes also linked to the Euro Stoxx 50 index and also via BofA Merrill Lynch.

Bank of Nova Scotia issued the next four deals, all via BofA. The first one for $38.05 million was an offering of market-linked step-up autocallables on the Euro Stoxx 50. The next one at $37.41 million offered leverage on the Euro Stoxx. The two others, for $32.72 million and $32.45 million, were linked to a basket of indexes and the S&P 500 index respectively.

Tests

An analyst offered an explanation for the predominance of non-U.S. issuers: the 34 U.S. banks were awaiting the results of stress tests by the regulators. All passed and the Federal Reserve approved stock buybacks and dividend increase plans, which in turn triggered a financial stock rally.

“To issue debt before knowing the results of the stress would no make sense. It would also be unfair to the debt-holders,” said Dick Bove, financial stock analyst at Rafferty Capital Markets.

Citigroup and JPMorgan announced their biggest share buybacks. Citigroup doubled its dividend.

But what makes shareholders happy may be a concern for bondholders. Money returned to the stock market in the form of buybacks or dividends is cash taken off the balance sheet. As a result, the “equity backup” to the debt is shrinking, he explained.

“It might seem prudent to hold off and wait for the test results before issuing debt,” he said.

Earnings

Bove added another factor: banks last week were already in a “quiet period.”

Most U.S. banks report their earnings around mid-July.

“We are in a black-out period. Whether it had an impact on debt issuance I’m not sure. But banks are reporting their earnings next week.”

Credit diversification

Another explanation offered by structured products market participants was that BofA Merrill Lynch, has already sold plenty of debt issued by Bank of America and is constantly in need of credit diversification.

“They’re rotating from firm to firm,” the industry source said.

“They’re moving toward banks they have not done much with before because their clients want more diversification.

Canadian paper in particular is in high demand because of the banks’ good credit quality, said the market participant.

Funding needs

“A lot of those banks may not have the opportunity to participate in the hedge. Maybe their hedging capital is strong in Canada but not in the U.S.,” he said.

“Also they may not have internal distribution in the States.”

Some foreign issuers such as Royal Bank of Canada with its private bank and HSBC have distribution capabilities in the United States, he explained. But the top U.S. distribution channels are better positioned.

“Meanwhile those banks want funding. They’re looking for someone to sell their paper.

“And since they all want the same thing they’re all willing to give you the best level. Otherwise how else are they going to distribute in the U.S.?”

Steps

The most widely used structures last week –and these are BofA Merrill Lynch products –were the so-called “step”, which made for a third of the total volume. Those products come in two forms: the first type called market-linked step-up gives investors a digital boost up to a step level. If the underlying is greater than the step level, investors get a delta one exposure to the index with no cap.

A second variety, the step income, is a traditional reverse convertible with a fixed coupon. Above the coupon return level, investors effectively get an extra coupon.

Both types have one thing in common: they guarantee a digital return on the upside, but one that does not cap the upside at the step level. Investors can still obtain something more above this minimum return.

Digital Plus

“As the market has been going up and up, people have become a bit reluctant to invest in traditional digitals for a while. Digitals used to be very popular and they work well when the market is flat. These steps or step-ups give clients a little tweak. It gets people excited to go back in the digital structure,” the market participant said.

“People want a digital plus. You need a digital plus something to get you motivated if the market is up so you’re not going to miss out if there’s going to be a bull market.”

Month on watch

Volume for the month is down 40% to $2.55 billion from $4.80 billion as of June 30 compared to the full month of May, which showed $4.80 billion, according to the data.

Part of this may just be temporary as not all deals were filed last week by press time, especially as the Securities and Exchange Commission was closed on July 4 for the Independence Day holiday. The size of the gap however seems to suggest that the trend will remain negative.

Compared to a year ago when June saw $2.33 billion in sales, this year is up 9.45%. But this should not be reassuring given that Bank of America did not price more than four deals totaling $56 million in June 2016.

“There was nothing in particular in the market to get people to do block trades in June,” the market participant said.

“The rates went up but it was something expected so we didn’t get volatility.

“DOL went effective this month. For some people that was good. They had planned on that. For others who were hoping it would get postponed and didn’t prepare for that, I guess it may not have been so good.”

He was referring to the Department of Labor’s fiduciary rule, which took effect on June 1.

“I don’t see any major reason to justify larger trades. We would need a reform in Washington this summer. But it’s unlikely with Congress on vacation...Or perhaps some big rollovers.”

Year

The figures for the year, though, continue to be encouraging. Volume is up nearly 38% to $24.90 billion from $18.07 billion last year.

A significant part of the increase is due to the jump in the number of offerings to 6,331 from 4,035.

After BofA Merrill Lynch, the second agent last week was Goldman Sachs, which priced $65 million in 10 deals, or 8% of the volume. It was followed by JPMorgan and Morgan Stanley.

Bank of Nova Scotia was the top issuer with $159 million in five 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.