Month ends on a strong note, helped by BofA Merrill Lynch’s 50% share, but October was weak

By Emma Trincal

New York, Nov. 5 – Agents sold $1.42 billion in the week ended Friday, which precisely closed the month. BofA Merrill Lynch priced nearly half of the volume in just 23 deals out of 259, according to data compiled by Prospect News.

“They have the largest network, the largest number of advisers. It makes sense,” a market participant said.

“Last week was the end of the calendar. The print was bigger.”

At $3.4 billion, October’s volume was the second worst of the year after June’s $3 billion, according to the data.

“There was a pretty sharp strike in volatility in the 10-year along with moves in equity and a pickup in the VIX,” a distributor said.

“The increase in volatility in the moment created a state of paralyzation. Advisers in our industry were passive. They were not willing to make a decision until things came down.

“You had a sharp bond selloff. People bailed out of the equity market and came back. Now they sit on their hands.”

BofA Merrill Lynch’s lead

BofA Merrill Lynch, however, managed to do quite well, according to the data. The agent priced $676 million last week, or 82.5% of its total sales for the month. This is not out of the ordinary for this firm, which prices its deals at the end of the calendar month.

The firm’s 48% market share for the last week of October is also not unheard of. During the closing weeks of each of the top three months this year – January, February and March in declining order – BofA Merrill Lynch priced between 45% and 56.5% of the market, according to the data.

For the year to date, this agent has captured 27% of the total volume issued, the data showed.

“Bank of America Merrill Lynch is the perfect example of a firm that provides a high degree of value to its investing clients by providing smart indexing alternatives to vanilla stock picking,” a sellsider said.

“Their notes have simple themes and generally outperform their benchmarks. If the rest of the business were able to crack the code like BAML, the issuance in America would be two, three times its current size.”

For other agents, however, last month was a bit disappointing.

Choppy October

“For us, October was only an average month. It was not a blockbuster month, but it was not great either,” the market participant said.

The ups and downs of the market did not help, sources said.

“When the market started falling in early-to-mid October, the selloff overwhelmed interest in new issues. By the time the market had rebounded, the marketing period for new notes was at an end,” the sellsider said.

“The other side of this story is that there was likely a lot of panic selling of existing notes during the market turbulence in October. It’s not something visible because it’s not publicly tracked. But it’s there.”

The market participant agreed.

“It was a particularly choppy month in terms of the market. Investors were not very comfortable. They may have been holding off. Even though we had a rally last week, it’s still a volatile market and people are uneasy. There’s a lot of volatility, up and down,” he said.

The Federal Reserve terminated its QE program last week, but shortly after, the Bank of Japan announced that it would expand its own, pushing stock prices up into record territory on Friday.

“I don’t think it’s clear to investors whether it’s best for them to get into the market during a selloff because prices are better or when the market rallies,” the market participant said.

“When the market drops, there is always the risk of further declines, and when it’s up, some prefer to go long directly. In general though, with huge price moves like what we’ve seen, people stay on the sidelines.”

Issuers meanwhile are pricing according to the market, he added.

“Volatility has dropped. It’s been up recently. Some products benefit from lower volatility like uncapped deals, and they are not so many. And other structures benefit from high volatility like reverse convertibles for instance.”

The CBOE Volatility index rose to 25 in mid-October during the equity selloff but has since dropped to 14.75.

BofA Merrill Lynch priced the top 10 offerings last week except for a $37.26 million Goldman Sachs issue. The top agent sold 15 out of the top 20 offerings including the top five.

“This goes back to a differentiation between retail and wealth management,” the distributor said.

“When issuers distribute large deals like that, they are going directly to wealth management divisions, and distributors don’t get involved.

“Merrill has knowledgeable advisers who have a lot of support, and knowledgeable advisers distribute larger deals to these wealth management groups.”

Top deals

The largest deal was Bank of America Corp.’s $62.11 million of 0% Accelerated Return Notes due Dec. 23, 2015 linked to the S&P Oil & Gas Exploration And Production Select Industry index. Investors at maturity obtain three times the index gain capped at 26.07% with a one-to-one downside exposure.

“Their research group probably has a call on this asset class. There is interest on the part of investors because of the way the oil market has been behaving,” the market participant said.

BofA Merrill Lynch sold another deal linked to the same index but using a different structure type and issued by another name. It was the third largest deal last week, Credit Suisse AG, London Branch’s $56.53 million of 0% autocallable market-linked step-up notes due Oct. 28, 2016 linked to this index. The notes are automatically called at an annualized 11% premium if on an observation date after one year the index is above its initial price. Otherwise investors receive the index gain if it finishes above the 161% step-up level or the 61% step-up payment if it closes between the initial level and the step-up level. There is no downside protection.

The second deal in size was Credit Suisse’s $61.91 million market-linked step-up autocallables linked to the Russell 2000 index with a five-year maturity. The call premium is 7%, and the step-up value is 135% of the initial level. There is an 85% barrier.

BofA Merrill Lynch also sold another deal linked to the same benchmark, AB Svensk Exportkredit’s $53.54 million of 0% Accelerated Return Notes due Dec. 23, 2015. This deal – the No. 4 in size – provides three times leverage on the upside, a 15.33% cap and full downside exposure.

Equity was employed at record-high levels last week with 92% of the volume in this asset class, according to the data. The annual average is 82.5%.

As it is the case at the end of each month, the bulk of equity-linked notes were index products. A total of $1.06 billion of equity index-linked notes hit the market, or nearly three-quarters of the total issuance across all asset classes. On an annual basis, equity indexes make for half of the total volume.

Single stocks, which account for 27.5% of the total on a yearly basis, made for far less last week, with 16.5% of the total.

The top single stock deal – and the No. 7 in size – was issued by Bank of America. It was a $44.44 million issue of 10% STEP Income Securities due Nov. 13, 2015 linked to Delta Airlines, Inc. If the stock finishes at or above the step level, 110% of the initial price, investors receive an additional coupon of 6%. Between the initial price and the step level, their return is par. Investors will lose 1% for every 1% decline in the stock.

Autocallable reverse convertibles, which have increased in volume this year by 36% to represent 20.5% of the total, declined last week to only 13.40% of the market. The structures that saw the greatest volume were leveraged notes and step-ups.

After BofA Merrill Lynch, the top agent last week was UBS with 88 deals totaling $216 million, or 15.20% of the total. It was followed by Goldman Sachs and Credit Suisse.

The year so far is positive for volume. Agents have sold $35.88 billion as of Oct. 31, a more than 12% increase from last year’s $31.97 billion.

“The increase in volatility in the moment created a state of paralyzation.” – A distributor

“For us, October was only an average month.” – A market participant

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