BofA prices its block trades, pushing total structured products issuance to $797 million for week

By Emma Trincal

New York, Aug. 1 – The monthly calendar ended on Friday with $797 million of structured products priced in 249 deals last week. It was nearly $200 million more than the previous week in just about the same number of offerings as deals were much larger, according to data compiled by Prospect News.

The data is updated for the previous week but may not be final for last week as the top offerings priced either on Thursday or Friday.

BofA leads

As expected for the close of the month, BofA Merrill Lynch was the top agent. It sold 41% of the market share in 13 offerings totaling $324 million. Through its finance subsidiary – BofA Finance LLC – the firm was also the No. 1 issuer with $173 million in six deals.

In an unusual way, Bank of America issued itself more than half of the deals it distributed. This ratio is usually much lower for the final week of the month due to Bank of America’s open architecture platform. In the last week of June for instance, Bank of America sold only 15% of its own deals, the rest going to a variety of issuers, most of which were Canadian banks.

The Canadians were not forgotten with BofA Merrill Lynch pricing two Canadian Imperial Bank of Commerce deals in excess of $35 million each and one Bank of Nova Scotia deal for nearly $33 million.

More internal deals

There is no conclusion to reach from the fact that BofA Merrill Lynch for once used less external issuers than it usually does as it happened last week, said a structurer.

“Trust me, they’re not running out of issuers. Everybody wants to work with them,” he said.

Talking about two of the three trades coming from CIBC, he credited the success of this issuer to the man who runs the U.S. structured products business in New York, Gage Olcott.

“Gage is doing a great job obviously,” he said.

Canadian trend

The use of Canadian banks is not a new trend, he added.

“It started a couple of years ago. I think it’s because they’re very aggressive in terms of getting into this business,” he said.

“They have decent ratings too and so more investors are getting familiar with the Canadian paper.”

Unlike U.S. banks, Canadian issuers are not subject to TLAC (Total loss-absorbing capacity) regulatory requirements. This could be another factor, he said.

“Canadian banks don’t have to issue notes through a subsidiary. It may help a little bit. Perhaps some clients are more comfortable dealing with the actual bank and not one of its affiliates,” he said.

Year still up

The year remains strong compared to 2017, but the summer slowdown is gradually eroding the advance.

Total issuance volume so far is at $32.75 billion through July 27. That’s a 9.3% increase from $29.96 billion during the same period last year, according to the data.

There is no question that part of the growth is the result of a rise in the number of deals: 9,136 versus 7,738 last year, an 18% boost.

But deal size is also a factor: there have been 44 deals in excess of $50 million this year versus 30 in 2017. This year’s top deals were also much larger with the biggest one at $600 million, nearly twice as large as last year’s No. 1 deal at $310 million.

Facebook shock

Last week’s equity market ended on the downside after Facebook, Inc. tumbled 19% on Thursday following its disappointing earnings. It was the biggest-ever one-day drop in market value for a U.S.-listed company, according to Dow Jones.

Even though Google's parent company Alphabet and Amazon.com, Inc. did well in response to their own earnings announcements, it was not enough for investors to regain confidence in the FANG names (Facebook, Amazon, Netflix and Google). As Twitter, Inc. share price plunged as well the next day also due to unimpressive earnings (a nearly 20% drop), the week ended up mixed. The S&P 500 index rose 0.6% but the Nasdaq dropped more than 1%.

This did not stop investors’ appetite for technology names.

Technology stocks accounted for 45% of all single-stock issuance volume last week. Similarly, 53% of all stock deals brought to market last week were linked to a tech stock.

Those were: Facebook, Nvidia Corp., Netflix, Inc., Twitter, Micron Technology, Inc., Alibaba Group Holding Ltd., Amazon and Apple Inc.

UBS priced nearly $5 million of Facebook deals in 11 offerings, seven of which priced after the price of the stock plunged.

Terms or entry

“Pricing those deals pre-earnings and post-earnings are two different things,” a sellsider said.

“After the earnings, there is no uncertainty anymore. You’ll see a noticeable drop in terms. Volatility evaporates. Everybody understands that the stock sucks.”

On the other hand some audacious autocallable note buyers will be attracted to the bargain, which they see as an additional protection against further losses, if they are bullish, he said.

“You won’t get the best terms because there isn’t much vol., but you’re striking the deal at a low entry point,” he said.

Indeed, there is a difference between buying Facebook at $217.50 per share on July 25 and $176.26, the next day or $174.89 on July 27, he noted.

The stock was trading above $172 in mid-afternoon session on Wednesday.

“For those who like the names, you’ll see digital and leveraged structures, I’m sure,” he said.

“I think the FANG trade, the tech trade in general is going to continue. It’s a way to diversify and to gain access to the top-performing sector of the U.S. market.”

Proprietary indices favored

A few small deals offering full principal-protection were brought to market last week. They were for the most part tied to issuers’ proprietary indexes.

GS Finance Corp. for instance priced 11 deals on the GS Momentum Builder Multi-Asset 5S ER index totaling nearly $19 million. Barclays Bank plc did three deals on the Barclays Trailblazer Sectors 5, Morgan Stanley Finance LLC two on the Morgan Stanley MAP Trend index and HSBC USA Inc. one on the HSBC Vantage5 Index (USD) Excess Return.

“A lot of the full principal-protected notes are done on proprietary indices,” the structurer said.

“It’s simply because you can do those indices with low volatility using algorithms. It allows you to buy the calls at a cheaper price. You could never do that on the S&P.”

BofA’s top deal

BofA Merrill Lynch priced the top seven offerings and more. All offerings were equity index-linked notes. The agent sold its two signature products: leveraged notes and market-linked step-up.

BofA Finance LLC’s $52.62 million of 14-month Accelerated Return Notes linked to the Euro Stoxx 50 index offer par plus triple any index gain, up to a maximum return of 21.9%.

Investors will be exposed to any index decline.

Two CIBC deals

Canadian Imperial Bank of Commerce issued the No. 2 trade with $36 million of 14-month Accelerated Return Notes linked to the Russell 2000 index. Investors will get triple any index gain capped at 11.55%. There is no downside protection.

Canadian Imperial Bank of Commerce priced another large trade for $35.55 million. This time the downside is protected with a 10% buffer. The term is two years, the leverage multiple is 2 and the cap is at 35%. The notes are linked to an unequally weighted basket of international equity indexes.

Five-year BofA

Next, BofA Finance priced $34.93 million of five-year Leveraged Index Return Notes linked to the Dow Jones industrial average. It’s less common for BofA Merrill Lynch to price large size longer-dated trades.

If the index return is positive, the payout at maturity will be par plus 114.6% of the index return.

Investors will receive par if the index falls by up to 20% and be exposed to any losses beyond 20%.

Big step-up

The following deal, for $34.74 million, also came from BofA Finance. It is a three-year autocallable market-linked step-up note deal based on the S&P 500 index. It offers 7.75% call premium at the initial price. The step-up value is 121% of the initial price with uncapped delta one return above the step level.

Investors will be exposed to any losses.

Bank of Nova Scotia’s $32.63 million was the last deal over $30 million and the sixth one. It was also an autocallable market-linked step-up deal with a three-year tenor. Linked to the Euro Stoxx 50 index, the notes pay a 15.9% annual call premium at the initial price trigger. The step-up value is at 135% of the initial index level. Investors will have one-to-one exposure to the decline.

The top agent after BofA Merrill Lynch last week was UBS with $134 million in 92 offerings, or 16.8% of the total. It was followed by Credit Suisse.

Last week’s top issuer was JPMorgan Chase Financial Co. LLC. The JPMorgan finance unit is also the No. 1 issuer for the year with $5.16 billion brought to market in 1,252 deals, or 15.8% of the total.

© 2015 Prospect News.
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