BofA prices a third of week’s $879 million structured products by pushing big Euro Stoxx trades

By Emma Trincal

New York, Feb. 28 – BofA Merrill Lynch closed its monthly calendar in the shortened Presidents Day holiday week ended Friday.

Total issuance volume was $879 million in 117 deals with BofA Merrill Lynch distributing almost a third of it in 17 offerings totaling $555 million, according to preliminary data compiled by Prospect News.

Euro zone craze

Investors last week expressed a strong interest in Europe.

More than a third of total notional priced on the Euro Stoxx 50 index. The overwhelming demand for European equity exposure translated into large deals: 10 trades totaling $326 million.

The Euro Stoxx 50 was the most popular index by far, accounting for 54% of equity issuance and 85% of equity indexes volume, according to the data.

Figures are subject to upward revisions as not all deals are filed with the Securities and Exchange Commission at press time. But trades linked to the S&P 500 index showed a modest volume of $62 million in comparison through seven offerings.

Both indexes finished the week flat.

Fundamental, pricing

An industry source emphasized the fundamentals behind the strong bid.

“Many people have suggested that if you’re looking for growth in the market, the safest place to get it is in the Euro Stoxx 50,” he said.

“Growth is not as strong in Europe and the market is still lagging the U.S. But it’s an established market that has the potential to grow. It’s much safer than going to other areas of the global market. Clients tell us they’re getting the best bang for their buck.”

The S&P 500 index is up more than 3% this year despite the February sell-off while the European benchmark has gained less than 0.5%.

A distributor agreed that investors’ view on Europe was a factor.

“If people weren’t bullish on Europe this index wouldn’t be so popular,” he said.

The bullish sentiment is partly driven by the divergences in monetary policies between the European Central Bank and the Federal Reserve.

“The ECB is inclined to keep its dovish stance while we’re raising rates. They’re rolling back bond purchases. The Fed is reversing QE,” he said.

“Low interest rates is stimulative toward equity markets.”

But the mechanics of pricing were an even more significant driver.

“The optics you get on a Euro Stoxx deal ... has an impact. It’s very compelling because the dividend yield of the Euro Stoxx relative to other major U.S. or international indices is so much higher,” he said.

The dividend yield on the Euro Stoxx 50 index is 3.35% while the S&P 500 index shows a dividend yield of below 2%.

Year growth

Volume for the year is up. Agents sold $9.42 billion through Feb. 23, a 24.5% increase from last year, according to the data.

Volume for the trailing 12-months to Feb. 23 is up 28.4% from the same period a year earlier to $52 billion from $40.5 billion.

Leverage

In terms of structures, last week saw leveraged notes prevail with a volume of $481 million in 23 deals.

Volume for leverage was $481 million.

The trend was mostly due to BofA Merrill’s impact on the market. This agent priced more than 77% of all return enhancement notes, according to the data.

“We see a lot of leverage,” the distributor said.

“On our end, clients mostly want leverage with some form of protection. Since the sell-off, people are looking for more conservative options for their equity exposure.”

Two big HSBC deals

BofA Merrill Lynch priced the top eight deals.

The top deal of the week was HSBC USA Inc.’s $59.67 million of 14-month Accelerated Return Notes linked to the Euro Stoxx 50 index. The payout at maturity will be par plus triple any index gain, up to a maximum return of 23.05%.

Investors will be exposed to any losses.

“High leverage on a short piece of paper...that’s a recipe for large size deals. The optics are great. We prefer more conservative deals though. But some clients really like those bullish notes,” the distributor said.

HSBC USA also priced the second deal for $55.48 million, also based on the Euro Stoxx 50. The leverage factor of 1.36 is lower and the three-year tenor longer than the previous offering. In exchange, investors get a 25% buffer and have no upside cap.

“That’s the most popular growth structure that we see,” the distributor said.

“It may not be the biggest ticket but most banks are offering this type of deal in their calendar over the course of the month. Three-to-five-year, Euro Stoxx growth with a hard protection. There’s enough x participation to make up for any dividends. The uncapped upside is a lot easier to sell.

“It’s a key plain-vanilla growth opportunity on the vanilla side for brokers and advisers alike.”

Financial basket

Coming next was another deal that was a high-leverage play. But rather than using an index, the issuer linked the return to a basket of stocks.

BofA Finance LLC priced $50.68 million of 14-month leveraged notes linked to a basket of financial sector stocks (Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley). The basket components are equally weighted.

The upside participation rate is 300%, the cap, 19.38% and the downside shows no barrier or buffer.

“In this rising interest rates environment there are reasons to be bullish on banks. Because it’s an equally weighted basket and not a worst-of, you’re not taking tail risk if something happens to one of those names. It’s a way to cash on levered growth,” said the distributor.

Next BofA Finance priced $44.84 million of two-year leveraged notes on the Euro Stoxx 50 index with two-times leverage, a 39% maximum return and a 10% buffer.

Minimum return deals

Market-linked step ups with or without an automatic call were also in high demand, making for a third of the volume.

These products, which are among BofA Merrill Lynch’s best-selling offerings, provide investors with a gain of at least a step-up payment if the index finishes flat or up. If it rises above the digital level, investors get the index return. Generally, investors are fully exposed to losses.

The top deal in this category – and the No. 5 for the week – was again brought to market by HSBC USA and linked to the Euro Stoxx 50 index.

The three-year notes offer a 130% step-up level. The notes are automatically called annually above initial price with an annual call premium of 16.15%.

The top agent after BofA Merrill Lynch last week was UBS, which sold 71 deals totaling $106 million, or 12% of the total. Coming next was Morgan Stanley followed by Goldman Sachs.

The top issuer was HSBC USA with $406 million in 14 deals. Five of them were over $35 million in size.

“Many people have suggested that if you’re looking for growth in the market, the safest place to get it is in the Euro Stoxx 50.” – An industry source

“On our end, clients mostly want leverage with some form of protection. Since the sell-off, people are looking for more conservative options for their equity exposure.” – A distributor

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