Big week before Superstorm: Nearly $700 million issued; Bank of America tops

By Emma Trincal

New York, Oct. 31 - Before hurricane Sandy began to disrupt the Northeast coast Monday night, agents participated in a particularly busy week, with sales of structured products reaching $684 million, according to data compiled by Prospect News as of Monday.

Volume is likely to have been even higher as the data does not include announcements made on Tuesday.

For sellsiders back at their desks on Wednesday - after two consecutive days during which the market was shut down - last week's volume suggested a positive month.

Big October

"October in general is one of the busiest months of the year," a structurer said.

"First, you have the rollovers. People are finally back, unlike September when you still have people on vacation. October tends to be a pretty big month. I would guess it might even be the biggest in terms of notional size."

The week was concentrated around big offerings distributed by Bank of America, which priced 11 out of the top 12 deals. Morgan Stanley sold one of the 12 in a $53.28 million deal tied to Apple. All of Bank of America's deals priced on Thursday, while the Morgan Stanley offering hit the market on Tuesday.

Overall, the 12 largest offerings, totaling $464 million, accounted for two-thirds of the week's volume.

Because the month is not technically over, some were wondering if last week's pace may not have accelerated in anticipation of the storm. But sources said that it was unlikely.

Stormy weather

"I don't think the storm had any impact," the structurer said.

"Banks try to price everything on the last Thursday; at least that's the case with Bank of America who did the huge deals."

Bank of America priced more than 60% of the total in 12 deals, according to the preliminary data.

"Things vary from a bank to another, based on the schedule they follow," he added.

"Most prospectuses conceive that market disruptions may happen. In fact, if it happens, issuers can change the strike. I don't think the storm was a major disruption.

"Issuance is a month-long selling process. By the end of the month, most of the interest is consolidated by individual investors.

"Just because you get the storm for two or three days doesn't mean the calendar is changing."

"On the scheme of things, volume is driven by the calendar, not by the weather," he said.

A market participant agreed.

"Usually, things close on the last Thursday. People don't like to close on Friday, in case there's a problem, like if it goes back to the issuer," he said.

"It's the cycle. Deals had to be priced last week if you want the financial advisor to be credited for October business. That's how it works."

Top three

The top three deals were in excess of $50 million. One hundred and fifty six deals were offered last week, according to the preliminary data.

The top three deals were big S&P 500-based products, with the first two featuring capped upside leverage and no downside protection.

Bank of America Corp. priced $90.69 million of 0% Accelerated Return Notes due Oct. 31, 2014 tied to the S&P 500 index.

Investors had a 300% upside participation up to a 19.77% cap and were to lose 1% for every 1% decline in the index.

The second deal was issued by HSBC USA Inc., which sold $64 million of 0% Accelerated Return Notes due Jan. 3, 2014 tied to the S&P 500 index.

If the index return was positive, the payout at maturity would be par plus 300% of the index return, subject to a maximum payout of par plus 15.12%. Investors would lose 1% for every 1% decline in the index.

Morgan Stanley priced deal No. 3 with $53.28 million of contingent income autocallable securities due Oct. 26, 2015 linked to the common stock of Apple Inc.

Sources said the offering was popular due to Apple but also because of the potential 3.7% yield per quarter. One interesting feature of the structure was the step-up redemption threshold on three different time periods, all above the initial price.

Stock bid

There was a significant interest for large, well-known stocks as suggested by the size of some of the single-stock offerings. The Morgan Stanley product on Apple was the top stock deal, but Bank of America sold two others for Royal Bank of Canada.

Royal Bank of Canada priced $34.73 million of 8.5% coupon bearing notes due Nov. 8, 2013 linked to Citigroup Inc. shares. The reverse convertible has a 93% barrier and paid interest quarterly.

Separately, Royal Bank of Canada priced $25.86 million of 7.5% STEP Income Securities due Nov. 8, 2013 linked to the performance of Intel Corp. The step level was 107.5% of the initial price with a payout at maturity of 6.25%.

Investors were exposed to any losses.

"Some of the stocks have definitely come off. People may think that it's a good time to hop on," the market participant said.

"Apple is around $600. It was at $700 in September. Most firms call for a $700 level at least. This is a good way to get upside appreciation as the stock is off its peak."

The structurer pointed to the high visibility and volatility of the underlying stocks being used.

"People have been sitting on the sidelines for some time. After the recent selloff, they may think now is a good time to enter back into the market," the structurer said.

"Investors are really looking for yields. To get a high-yielding product, you need to link it to a volatile stock. With the more volatile stocks, you're going to get more yield compared to linking it to an index.

"Names like Citi, Apple, are very well known names. It makes it more enticing to take on the volatility and that's how people are trying to get high yield."

Top issuers

The structurer noticed that Bank of America had been using Royal Bank of Canada as issuer for some of its largest deals, in sizes of $25.8 million, $34.73 million and $47.42 million.

UBS also distributed offerings issued by the Canadian bank but only for a couple of products of less than $10 million.

"Bank of America cannot be only selling their own paper to their own distribution channel. They have to diversify the credit. RBC is one of the best credits. HSBC is a pretty solid credit too," the structurer said.

"RBC is known to be competitive on the option pricing side of the business. That's another plus. I'm not surprised to see them in many of Bank of America's deals."

Bank of America used HSBC as the issuer of another relatively large product: HSBC's $37.02 million of capped Leveraged Index Return Notes due Oct. 31, 2014 linked to the PHLX Housing Sector index, seen as a way to play the recovery in housing. There was a 10% buffer, two-times leverage on the upside up to a 26.1% cap. It was the fifth largest deal priced last week.

Less noticeable but noteworthy for the expressed market view was a six-month offering of RBC's $14 million of Bear Strategic Accelerated Redemption Securities tied to the Russell 2000.

Bear notes are still relatively rare in this bullish market environment, but they may make a comeback should a correction begin, sources noted.

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