Structured notes tally for week $1.47 billion; BofA nabs two-thirds of sales in block trades

By Emma Trincal

New York, Jan. 31 – Last week was BofA’s pricing week, with the agent grabbing 67% of total notional sales or $987 million in just 48 offerings, according to preliminary data compiled by Prospect News. This agent tends to price its monthly inventory during the final full week of the month.

The week’s tally was $1.47 billion in 88 deals, but the final figures will be revised upward as not all deals were filed with the Securities and Exchange Commission at press time.

Compared to its 25% penetration rate of a year ago during the same final full week, BofA’s presence last week was significant.

Canadian banks

BofA, which for the past few months has been issuing more of its own paper, has gone back to using the group of Canadian issuers, which constitutes the bulk of its open architecture. Those are Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada and Toronto-Dominion Bank. The “five” made up 61% of last week’s issuance volume in 45 deals totaling $893 million, according to the data.

BofA was the agent for 32 of those deals, totaling $751 million, or nearly 85% of the “Canadian” group of issuers.

“When BofA issues its own deals, it’s directly the result of corporate treasury. If the treasury has the appetite for funding, BofA will issue more of its own paper. When they don’t, they’ll use other issuers, mostly Canadian banks. It goes by cycles,” a market participant said.

The growing presence of Canadian banks has been a trend for some time, he added.

“The structured products market is huge in Canada, huge... These guys are deep in the space. So, the push of Canadian issuers in the U.S. is not a surprise,” he said.

Strong January

Overall, volume this month through Jan. 26 has been strong with $6.13 billion in 1,111 deals, a 19% increase from December’s $5.16 billion during the same time.

Issuance volume is also robust compared to a year ago, which saw $5.11 billion printed, a nearly 20% jump, and this is without the most recent update.

“We had a very active January. It’s hard to say why,” a distributor said.

“I guess a little bit of this was deals maturing and calls.

“The market is also pretty upbeat and totally focused on Fed rate cuts which are expected this year.”

Fed rules

The stock market has been watching and positively reacting to any sign of lower inflation.

The opportunity came out last week with the decline of the Personal Consumption Expenditures (PCE), which is the Fed’s favorite inflation gauge, reinforcing hopes for a Fed pivot. Several rate cuts are projected for this year.

“Meanwhile the market is totally oblivious about what’s happening in the rest of the world. It has not priced in geopolitical risks,” this distributor noted.

“Obviously, stuff is happening in Ukraine, in the Middle East and other parts of the world. The market is chugging along, totally insulated from what’s going on outside of the U.S.”

The Fed’s decisions remain indeed the biggest factor moving stock prices.

The Federal Open Market Committee on Wednesday left interest rates unchanged, which was expected. But it also indicated that rate cuts were not imminent, which prompted a sell-off.

BofA’s disruption

When BofA enters the market at the end of the month, the typical patterns seen around structures and asset classes get significantly modified.

For instance, single stock underliers, which typically make up 13% to 17% of the total, only represented 5% of last week’s sales. The changes also applied to equity indexes, which represented 72% of last week’s notional versus two-thirds on average last year.

The difference in structures between a “normal” week and “BofA week” is also notable. BofA is mostly involved in equity replacement notes for asset allocation purposes; hence, the agent has a bias toward leverage. This has not necessarily been the case over past “regular” weeks.

Last week, 42% of total sales originated from leverage while the market share for this structure type was only 14% the week before and 20% last year.

BofA’s heavy weight also cut the market share of autocallables, which accounted for only 29% of last week’s tally compared to 67% the previous week and 47% last year.

Toppish market

The big picture, however, reveals a decline in leveraged notes issuance. During the trailing 12-month period through Jan. 26, agents priced $19 billion of such products, a 17.3% drop from $23 billion during the previous period.

Leverage may be a casualty of the bull market. Last year saw the S&P 500 index rise 24% and the Nasdaq jump 43%. The market this year has already posted several all-time highs as the economy is strengthening and inflation easing.

“People are not excited about upside participation because the market trades at all-time highs. Growth notes are a little bit out of favor,” an industry source said.

Big ARNs

This does not stop BofA from pricing block trades of its “Accelerated Return Notes,” or “ARNs,” which are short-term capped leveraged products. When tenors are 13 or 14 months, downside protection is eliminated.

An example of those structures distributed by BofA was last week’s second largest deal.

Royal Bank of Canada priced $84.12 million of 14-month 0% ARNs linked to the S&P 500 index paying triple any index gain, capped at par plus 12.71%. Investors will be exposed to any index decline.

A similar structure was brought to market by HSBC Bank plc in $45.05 million of 14-month ARNs linked to the Russell 2000 index. The return was three-times the gain up to a maximum payout of 19.03%. Again, investors were fully exposed to the downside.

Sometimes BofA extends the duration of its leveraged capped notes to include a buffer as was the case with Bank of Nova Scotia’s $58.65 million of three-year notes linked to the S&P 500 index, which provided for a 10% buffer. The payout will be double the index gain up to an 18% cap.

Absolute return, snowballs

The top deal, which offered an absolute return feature, did not fit into the BofA’ s ARN template except for the short tenor, capped upside and small buffer.

It was Canadian Imperial Bank of Commerce’s $86.45 million of 14-month notes on the S&P 500 index. The one-to-one upside is capped at 10%. The downside offers an 8.62% buffer with absolute return.

Absolute return notes amounted to $134 million in just three offerings, or more than 9% of the week’s tally, this deal accounting for most of it.

BofA can apply its one-to-one downside feature to other structures. The agent is not a big seller of autocallable contingent coupon notes. But it offers some so-called “snowballs” whose payout in the form of a cumulative call premium is linked to an autocall at or above par instead of an interest payment at or above a lower coupon barrier.

A sizable example last week was HSBC Bank’s $83.91 million three-year autocallable Strategic Accelerated Redemption Securities tied to the S&P 500 index.

The 8.9% annualized call premium is determined on three annual call dates. If the notes are not called at maturity, investors will be fully exposed to the index decline.

Worst-of on pause

Another change BofA may introduce when it prices its monthly inventory is the prevalence of single index underliers as opposed to worst-of.

Notes tied to the S&P 500 index alone represented $664 million in 27 offerings, or 45% of the week’s tally.

BofA Securities did $303 million of it in nine deals. JPMorgan, Goldman Sachs and Citigroup contributed to the rest.

JPMorgan Chase Financial Co. LLC for instance priced $42.45 million of 13-month digital buffered notes on the S&P 500 index. The payout at maturity will be par plus 7.51% if the index gains or declines by no more than its 15% buffer. The 15% buffer is geared with a 1.1765 multiple.

Other agents than BofA have found success in selling digital notes, which appeal to investors in toppish markets.

Digital notes issuance last week totaled $180 million, or 12% of the week’s tally in nine deals.

Toronto-Dominion Bank priced the top one in $45 million of S&P 500 index-linked notes due May 13, 2026. The “in-the-money” structure gives some room to mildly bearish investors with the 19.55% payout payable above an 85% in-the-money strike. Below the 15% geared buffer, losses are compounded by a 1.1765 multiple. TD Securities (USA) LLC, not BofA, was listed as the agent, according to the filing.

The top agent last week after BofA Securities was JPMorgan with $124 million in seven deals, or 8.4% of the total.

It was followed by UBS and Morgan Stanley.

The No. 1 issuer was CIBC, capturing 16.3% of the weekly tally in 12 offerings totaling $239 million.

© 2015 Prospect News.
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