Structured products issuance $1.09 billion for week, helped by strong showing by BofA

By Emma Trincal

New York, Sept. 29 – The last full week of the year’s third quarter ended strong with $1.094 billion of structured products issuance in 197 deals, according to preliminary data compiled by Prospect News. BofA Securities priced two-thirds of this tally with $720 million in 30 deals as it was closing its monthly inventory, including a $111 million issue, the third largest one for the year.

Issuance volume for the year through Sept. 24 is up 27.1% to $65.86 billion from $51.8 billion last year.

The deal count rose 11.3% to 17,632 from 15,838.

Last week comes on the heels of another solid week, according to the most recent updated data, showing $1.36 billion in 351 deals with UBS this time dominating the flow.

Indexes and leverage

As BofA controlled most of the flow last week, it determined the types of structures and underliers which were used, namely equity indexes designed for growth as opposed to the usual preference for autocallables.

Equity-index-linked notes made for 77.5% of last week’s tally.

For a change, leverage with 37% of the total surpassed income-oriented autocalls, which accounted for a third of total sales. Another popular structure, almost exclusively distributed by BofA, was the autocallable market-linked step-up, which accounted for 22% of the total.

The rest was a mix of digital products and absolute return notes.

Turbulent market

It was a wild week on the equity markets with the S&P 500 index down 3% in the early part of the week after a big sell-off on Monday, which pushed the Dow Jones industrial average 600 points lower. On that day, the CBOE Volatility index surged to 28.79 on concerns about the possible default of Chinese property development company China Evergrande Group as well as tensions in Congress around the passage of a $3.5 trillion stimulus and the debt ceiling deadline.

But the “buy the dip” crowd took over and the market recovered to finish flat. The S&P 500 ended the week up 0.5%.

Such volatility would have been an opportunity to strike attractive terms on short volatility autocalls and other income products. But BofA’s routine is to bring its growth-oriented block trades at the end of each month.

“What priced last week is indicative of what BofA has to offer. I don’t know how it reflects the greater market,” said a sellsider.

“With custom trades we see more single stock activity and more income than growth. But BofA’s deals are designed for asset allocators, so I’m not surprised it was mostly growth-oriented.”

$111 million deal

By far leveraged notes were the largest trades in size.

BofA last week underwrote the third top deal of the year, one of its usual short-term levered and capped notes with no downside protection. It was BofA Finance LLC’s $110.99 million of 14-month notes tied to the S&P 500 index. The payout at maturity will be triple any index gain, subject to an 11.73% cap.

The two other largest deals for the year to date showed the same structure branded as “Accelerated Return Notes.” They had an identical 14-month term with 3x leveraged exposure to the S&P 500 index up to a cap and no downside protection.

The top one was Barclays Bank plc’s $137.49 million with a 10.72% cap, issued at the end of August. The No. 2 in size was Toronto-Dominion Bank’s $120.59 million with a maximum return of 11.61%.

BofA Securities was the agent as well on both deals.

“Those Accelerated Return Notes remain very successful. But there is now a new product that competes with them, the buffered ETFs,” said the sellsider.

“For someone looking for S&P exposure, you have to evaluate whether it makes sense to use a note or an ETF wrapper. One difference though is the ETFs are one-year term.”

Market-linked step-up

Autocallable market-linked step-up notes are another hallmark of BofA and were the other type of big offerings hitting the market last week.

The largest of such deals was BofA Finance’s $49.34 million of three-year autocallable market-linked step-up notes linked to the S&P 500 index. The notes will be automatically called at an 8.2% cumulative annual premium at or above initial level. If the index finishes above the step-up level, 118%, investors will get the index gain; if the index is up but below 118%, they will get 18%. The downside is not protected.

Usually, the step level is the annual premium multiplied by the number of years, which in this deal would have been 24.6%, the sellsider noted.

“They put a lower step looking to achieve that 8% per annum premium,” he said.

“They probably thought that it’s best to reach for more yield in the portfolio.

“It makes sense. I tend to see those step-ups as income products. Income but uncapped. It’s a hybrid.”

But some of those deals offered the exact opposite option – a lower annual premium and a higher step-up.

Bank of Nova Scotia for instance priced $41.22 million of three-year autocallable market-linked step-up notes linked to the Russell 2000 index.

The annual call premium is 5.21%, but the step-up value is raised to 121%. Investors are fully exposed to the index decline.

“This one is more growth-oriented,” he said.

Rising yields

Among one of the many concerns weighing on the market last week were interest rates ticking higher.

“We’ll see if we can break out of the range. Last week yields went up a lot. Pricing conditions could change depending on the events that could take place in the next couple of weeks,” the sellsider said.

The yield on the 10-year Treasury finished the week at 1.45%, its highest level since July.

As investors are waiting for the likely Federal Reserve’s tapering and observing signs of persisting inflation, yields have continued to spike this week with the 10-year hitting 1.56% on Tuesday.

Higher yields put tech stocks under pressure, which may lead to another cycle of rotation out of growth into cyclical stocks once stock deals reemerge, the sellsider said.

Single assets

But for last week, the trend was clearly centered on indexes. Given the types of structures, most index deals were based on a single underlier. Only 22% of index notional sales were worst-of, according to the data.

This again was a reflection of Bank of America’s focus on asset allocation.

“From an asset allocation perspective, it’s easier to bucket one single index in a portfolio as opposed to worst-of where you don’t know until maturity which bucket it’s going to go into,” the sellsider said.

With volatility on the rise and earnings season coming up, he predicted the usual swing of the pendulum toward single-stock deals.

Wild exposure

The quest for yield was visible in some of last week’s offerings offering exposure to high-flying stocks.

Barclays Bank for instance priced $4.21 million of three-year phoenix autocallables linked to the worst of Tesla, Inc., Coinbase Global, Inc., Airbnb, Inc. and Roku, Inc. The contingent coupon rate is 26.25%. The coupon barrier as well as the principal repayment barrier at maturity are 60%.

“I think it’s great. If the biggest issuer on the Street is issuing a note with Coinbase on it, it’s an interesting story in itself,” the sellsider said.

“I don’t follow Airbnb but for the others, you’re dealing with high-growth, high-volatility stocks of the future.

“People want exposure to those names. They just don’t want to own them outright.”

Healthy correction

October may turn out to be the turbulent month it has been historically.

“We could see more volatility like last week and I hope we do,” the sellsider said.

“Corrections are healthy.

“Over the past 18 months, the market has been constantly running up. It gets to a point where you have fewer and fewer opportunities to price attractive terms.

“People see volatility as a call to action.

“Last week provided good entry prices. It might be beneficial to strike deals during those times. Let’s hope we have a 5% to 10% drawdown.”

When volatility spikes, coupon rates may rise, and barrier levels drop. Other things may happen.

“You could see names drop from four to three to two if volatility goes up,” he said.

Consistent buyers

Investors but also issuers may welcome some volatility pick up, agreed a market participant.

“The market has been up all year and coupons have been down,” he said.

“If you’re used to a 70% downside protection and 7% coupon and the market goes up, the 7% becomes 6%. That tapers the enthusiasm as the coupons get lower and lower.”

Sources have contended that “everything is relative” and that compared to the bond market, returns from autocallables remain very competitive. The market participant dismissed this argument.

“The regular, consistent buyer of structured notes isn’t really looking at coupons relative to bonds. They’re looking at coupons relative to the levels they had one month ago, two months ago, three months ago.

“People ignore what they had a year ago. But over the recent couple of months, they’re looking for value.”

For this reason, a rise in volatility will not just impact the terms of the deals but also the overall volume.

“If the market gets shakier, if we get a 10% correction, more deals will get printed. We would see an increase in issuance,” he said.

The top agent last week after BofA Securities was UBS followed by JPMorgan.

BofA Finance was the No. 1 issuer with $339 million, or 31% of total sales in 10 deals.

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