BofA prices biggest deal of year as weekly structured products issuance tops $1 billion

By Emma Trincal

New York, Sept. 1 – BofA Securities Inc. hit the market with massive block trades among which was the top deal of the year on the behalf of Barclays. The tally for the week ended Friday was $1.16 billion in 231 offerings, according to preliminary data compiled by Prospect News.

BofA was closing its monthly calendar last week, distributing $795 million in 37 deals, or 68.6% of the week’s total. During the week of Aug. 15, which saw $1.23 billion in sales, according to updated figures, UBS was the top agent with 40% of total sales in 167 offerings.

After two solid weeks in a row, volume last month through Aug. 27 was at $5.1 billion in 1,022 deals. Those figures remain preliminary and will be revised upward.

The year so far is remarkably strong with volume up 24.5% to $58 billion through Aug. 27 from $46.6 billion last year. The deal count rose more than 10% to 15,635 from 14,179.

Participation first

As always when BofA Securities leads distribution, the bulk of the flow comes from leveraged notes (Accelerated Return Notes or ARNs) as well as autocallable market-linked step up notes, one of this agent’s specialty.

As both products offer participation, the lion’s share of the issuance volume was in growth rather than income. Leverage accounted for 44% of the total, a level not seen in a long time. Agents priced twice as much leveraged products without downside protection than leverage with barriers or buffers. This had to do with the short-term nature of the ARNs sold by BofA, which emphasize leverage (2x or 3x) rather than protection.

Indexes made for nearly two-thirds of last week’s flow versus 25% for stocks and 5.5% for ETFs.

Yield driver

The prevalence of leverage versus income in large trades is atypical and only happens when BofA closes off the month.

Most of the time, volume is driven from a flurry of small deals providing income, said a sellsider at a New York-based bank.

“The ratio of income versus growth is more heavily weighted toward the income side, which we can attribute to the low interest rates environment,” this sellsider said.

“With plain-vanilla fixed income paying 1% or 2%, advisers have been looking for alternatives.

“Autocallable coupon notes have become a very popular way to get yield enhancement.”

This trend has been driving this year’s significant volume increase, he said.

“For us, the volumes are definitely up significantly, and it keeps going that way.

Shift in preferences

Total sales in autocallable income notes accounted for $36.7 billion this year, or 63.3% of the total, according to Prospect News.

This type of product’s tally for last year was $23.5 billion, a 50.3% share.

Autocallables have jumped in volume by 56%, more than double the growth seen in the overall structured notes issuance volume.

The decline in leveraged notes issuance (down 6.3% this year) is mainly a function of the overwhelming ascent of income products. Leverage accounted for $11.9 billion this year, versus $12.7 billion last year. Market shares for this product dropped to 20.5% from 27% last year.

“We’re seeing structured notes gaining momentum with more advisers coming to us for the first time and they come looking for higher yield,” the sellsider said.

“Some of them may have looked at structured products in the past and never got involved. Now more advisers are coming in. I would attribute this year’s phenomenal expansion to this quest for yield.”

Strong summer

The summer doldrums were not part of the market picture this year neither in the stock market nor in the structured notes space.

One more time, the S&P 500 and the Nasdaq-100 indexes hit all-time highs last week after Federal Reserve chair Jerome Powell indicated that bond tapering could begin by the end of the year but reiterated that inflation is transitory, which investors interpreted as the Fed’s unwillingness to rush into hiking interest rates.

Since the beginning of June, the 10-year Treasury rate dropped 27 basis points, encouraging investors to look for income alternatives.

“For us, we had this summer some of the biggest months ever,” the sellsider said.

“July and August were really strong, July being a little bit stronger but both months were close.

“When the summer comes, many expect a pause. It hasn’t happened this year. Maybe it’s a function of fewer people going on vacation as they used to. But whatever the reason, we haven’t seen the typical summer slowdown.”

Top deal of the year

The top eight deals in excess of $30 million were all sold within the BofA Securities distribution channel.

The first one was the largest offering of the year.

Barclays Bank plc priced $137.49 million of 14-month Accelerated Return Notes linked to the S&P 500 index.

The payout at maturity will be par plus triple any index gain, up to a maximum payout of par plus 10.72%.

Investors will be exposed to any index decline.

“It’s a big number,” the sellsider said.

“But I believe it’s a firmwide effort to promote a certain strategy recommending allocating a certain percentage of the portfolio to growth. Merrill has a lot of advisers who have a lot of clients. If they’re all allocating a certain percentage to their portfolio, it’s going to add up to a big number.”

Big ARNs

Barclays also issued a $54.16 million of leveraged notes on the S&P 500 index carrying a 5% buffer for the same maturity. Leverage was two times up to a 7.85% cap.

Less common from BofA’s franchise was a big leveraged trade on a single stock.

Bank of Nova Scotia priced $42.18 million of 14-month Accelerated Return Notes linked to Apple Inc. with triple the gain up to a 23.34% cap and a one-to-one downside exposure.

Bank of Nova Scotia brought also $37.47 million of two-year leveraged notes with a 10% buffer on the S&P 500 index. The payout at maturity is two times any index gain, up to a maximum return of 10.73%.

Market-linked step-up

BofA also priced autocallable products, but those were not typical income plays.

One was a classic snowball issued by HSBC USA Inc. in $31.25 million of six-year Strategic Accelerated Redemption Securities on the S&P 500 index. The notes are automatically callable each year at a 6.95% annualized premium with memory feature. In the absence of a call, investors are fully exposed to the index decline.

The other type of autocallable structure was the market-linked step-up notes guaranteeing a minimum digital return (step-up payment) at maturity if the index is flat or up with unlimited upside participation. In the meantime, the notes may be called annually with a cumulative annual premium if the index is above or at its initial level.

Barclays and HSBC each issued autocallable market-linked step-up for $39.71 million and $32.66 million, respectively.

The S&P-linked Barclays notes have a three-year maturity, a 7.8% call premium and an 18% step-up payment. No downside protection is offered.

The HSBC issue of $32.66 million showed three-year notes on the Russell 2000 index. The call premium is 9.7%, the step, 21% and the downside risk is 100% with no barrier.

Extending the maturity to seven years, Barclays came out with $30.85 million of autocallable market-linked step-up notes on the Russell with a 10% buffer, 6.15% annual call premium and 125% step-up level.

No yield enhancement

None of those top offerings are income-oriented products and the notes are all tied to a single index, the sellsider noted.

“There are certainly more index worst-of on the income side. On the growth side, you can structure deals on a single index,” he said.

“Even the market-linked autocalls are growth products. At least that’s how we categorize them because they don’t provide any income stream.”

No protection, no problem

Another characteristic of BofA’s block trades was the absence of downside protection in most of them.

Five out of the top eight deals offered no buffer or barrier. Two deals showed buffers, one for 10%, the other for 5%.

A buysider said that buying notes without any downside protection, especially shorter-dated products, was risky in the current market.

“I don’t know what is going to cause the sell-off, but everybody is waiting for it,” he said.

“The extreme of the market from being down so much in March 2020 and then being up so much, this has people spooked a little bit. It’s too much, too fast.”

The S&P 500 index, which was hovering around its recent 52-week high on Wednesday, has gained 107% since the low of March 2020.

Asset allocation

But the sellsider said the absence of protection was not the result of any bullish bet.

“There is no market timing involved. It’s not as if advisers were confident the market won’t sell off and therefore had no need for downside protection,” he said.

“It’s a play on a portion of the growth portfolio. We’ll take one-for-one down, the same as the index, and three times the upside. It’s part of a systematic play.”

U.S. issuers lead

The top agent last week after BofA was UBS with 152 deals totaling $138 million, or 11.9% of the total.

It was followed by JPMorgan and Goldman Sachs.

Barclays Bank was the No. 1 issuer with $315 million in nine deals, or 27.2% of the total.

HSBC USA was second with $226 million in 12 offerings, a 19.5% share.

Canadian issuers were not as visible as they usually are when BofA prices its deals at the end of each month.

Bank of Nova Scotia placed only third with $165 million in nine deals.

“It could just be because certain banks get better funding levels at a given time,” the sellsider said.

“Some names look more attractive than others based on their credit spreads and funding levels at different points in time. It varies.”

© 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.