Agents price $511 million in month’s second week; BofA Merrill Lynch shows an early lead

By Emma Trincal

New York, June 17 – Action in the U.S. structured products market ended quietly last week with 87 deals totaling $511 million.

Sources however noted the intriguing input of BofA Merrill Lynch, which priced eight offerings for a total of $226 million. That represented 44% of the overall volume, an unusual market share for early in the month, according to sources commenting on data compiled by Prospect News.

Early cycle

BofA Merrill Lynch typically prices all its deals in the last week of each month, giving its brokers the full month to gather indications of interest from clients.

The agent priced four of the top five deals for $193 million.

“It’s surprising. I’m not familiar with their intra-month activity, but it seems very early in the month for them to do that type of volume. It does seem like a lot,” a sellsider said.

“I don’t think they changed the way they do business though. It may have been a number of trades they had to close later because of Memorial Day, things that got pushed out. Maybe they thought they would capture more demand.”

Bond volatility

Rates are beginning to normalize, according to firms’ analysts. The recent global bond sell-off continued to push yields higher with the 10-year Treasury yield hitting the 2.5% threshold on Wednesday.

Bond yields in the United Kingdom, Europe and other developed countries reached new highs last week as well.

On the equity side, the week ended negative amid fears of Greece exiting the euro zone.

Rising yields worldwide did not stop investors from heavily bidding on income-oriented structured products, according to last week’s data.

A combination of autocallable reverse convertibles, standard autocallables and one large Step Income Securities deal dominated the week, accounting for 57.5% of the volume.

The sellsider said he was not surprised to see such high demand as rates remain historically low.

“People anticipated rates to increase in June. Now the expectation is for September. The Fed has pushed that off a little bit. Even when the Fed starts raising rates it will be very slow,” he said.

The top deals of the week delivered fixed or contingent coupons combined with extra benefits such as uncapped participation or extra yield.

Top deal

The top deal of the week was an example of yield and upside participation.

It was Barclays Bank plc’s $59.54 million of three-year autocallable market-linked step-up notes linked to the Euro Stoxx 50 index. The structure gave investors a one-to-one upside participation if the final index was greater than the 130% step-up value.

The income potential was delivered through an automatic call, paying a 12.2% premium per year if the index closed at or above the initial index level on any yearly call date.

If the final index level was between its initial price and the step-up value of 130%, the payout was par plus the step-up payment, 30%.

There was no downside protection.

“With volatility created in equities, investors can now extract more yield and more upside,” the sellsider said.

“Equity-linked notes still capture a lot of dollars.

“Those market-linked step-ups where you can get yield and a little bit of upside are a pretty good spot to be in right now.”

STEP Income

HSBC USA Inc.’s $58.3 million of one-year 7.5% STEP Income Securities linked to the common stock of Ford Motor Co. was the No. 2 deal. If the final price of Ford stock was greater than or equal to the step level, the payout at maturity would be par of $10 plus the step payment of 3.31%. The step level was 107.5% of the initial share price.

If the final share price was greater than or equal to the initial share price but less than the step level, investors would receive par.

If the final share price was less than the initial share price, investors had one-to-one exposure to the decline.

“With this one you’re still capped but you can eventually capture more yield than the coupon,” the sellsider said.

The third deal was a standard one-year autocallable brought to market by Deutsche Bank AG, London Branch. It was $34.44 million in size and linked to Apple Inc.

The call premium of 18.5% per annum was observed annually and triggered if Apple stock closed at or above its initial share price. In the absence of a call, investors had full downside exposure at maturity.

Equities for income

Investors looking for yield continue to benefit from the risk premium offered in equities through income-oriented equity-linked notes, a structurer said.

“You always have a difference in return between the two asset classes,” he said.

“The volatility seen in Europe around the Greek crisis has impacted fixed-income markets a lot.

“We experience very large moves even on the five-year and 10-year swap rates because of the volatility seen in the bond market.

“Investors may be keen to look at other asset classes than fixed income. Equities, which appeared riskier a couple of years ago, may be more attractive now as a way to extract yield.”

No. 4 deal

JPMorgan Chase & Co. issued the week’s fourth largest deal, which was also designed for income seekers. UBS was the distributor.

It was $30.71 million of trigger phoenix autocallable optimization securities due June 18, 2025 linked to the worst performing of the Euro Stoxx 50 and the Russell 2000 index.

The contingent quarterly coupon was 8.5% per annum payable if each index closed at or above a 70% coupon barrier level on a quarterly observation date.

There was a 50% European barrier.

The top agent after BofA Merrill Lynch was JPMorgan with 23 offerings totaling $92 million, or 17.92% of the total.

It was followed by UBS with $77 million priced in 23 deals, or 15.16% of the volume.

“It does seem like a lot.” – A sellsider on BofA Merrill Lynch’s volume

“Investors may be keen to look at other asset classes than fixed income.” – A structurer

© 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.