BofA prices jumbo deals as weekly structured products tally hits $1.85 billion

By Emma Trincal

New York, Oct. 5 – During the last week of the third quarter, structured products sales amounted to $1.85 billion in 197 deals, according to preliminary data compiled by Prospect News. While this was not the biggest week of 2022 in notional amount, it was by far the one bringing to market the greatest number of big offerings as well as the top structured note issue excluding cash-settled products.

The average deal size last week was $9.40 million compared to $5.30 million for the weekly average year to date, the data showed. There were three offerings in excess of $100 million, the top one sized at $146.5 million; three other deals in the $60 million to $96.5 million range and seven between $30 million and $41 million.

BofA Securities captured about 59% of total distribution in just 40 deals totaling $1.076 billion. It priced the top six deals and 13 out of the top 14.

“These are the big subscriptions you see at the closing of each month especially when BofA closes its monthly inventory,” a market participant said.

Those deals as always with BofA consisted of two types of products. The short-term Accelerated Return Notes, which provide capped leveraged upside most often with no downside protection and the autocallable market-linked step ups which combine annual cumulative call premium with an uncapped digital payout at maturity called the “step-up” payment.

HSBC’s top deal

The No. 1 offering was a leveraged product.

HSBC USA Inc. priced $146.52 million of 14-month Accelerated Return Notes linked to the S&P 500 index.

The payout at maturity will be par of $10 plus triple any index gain, up to a maximum payout of par plus 22.8%. Investors will be exposed to any index decline.

This deal was the largest of the year if one excludes two very large issues of cash-settled equity-linked notes, which are a combination of structured notes and convertible bonds and not viewed as pure retail structured products. The largest of those two jumbo deals was BofA Finance LLC’s $530.45 million linked to Merck & Co., Inc. issued in May.

Leverage, step-ups

Bank of Nova Scotia priced another leveraged deal, this time with a buffer thanks to the slightly longer tenor. It was a $104.26 million issue of two-year capped leveraged notes linked to the S&P 500 index paying 2x leverage up to a 28.98% cap with a 10% buffer on the downside.

As an example of an autocallable market-linked step-up issue, Toronto-Dominion Bank priced $104.08 million of a six-year trade on the S&P 500 index via BofA’s distribution channel.

The notes will be called at par of $10 plus a premium of 10.9% per year if the index closes at or above its initial level on any annual observation date. If the index finishes above the step-up level, 150% of the initial level, the payout at maturity will be par plus the index return. From flat to up to the step-up level, investors will get the step-up payment of 50%. On the downside, the protection is provided by a 15% hard buffer.

TD Bank priced another autocallable market-linked step-up issue for $96.5 million also on the S&P 500 index. Its call premium was 15.5% but the notes lacked downside protection at maturity.

Growth in the portfolio

“Those deals are big because advisers use them for asset allocation,” the sellsider noted.

“That’s only because you get the upside.

“The market-linked step-up are autocalls, but if you don’t get called you have unlimited upside. The leveraged one is capped for sure. But they represent a view. You don’t think the market is going to go too high over the short-term horizon. That view finds a place in your portfolio. Phoenix autocalls, as attractive as they are, are not asset allocation tools. They’re designed for income.”

One unusually big income offering was BofA Finance’s $34.75 million trigger callable contingent yield notes on the worst of the S&P 500 index, the Dow Jones industrial average and the Russell 2000 index. The contingent coupon is 14.5%. Coupon barrier and repayment barrier at maturity are at 70% of the initial price.

UBS Financial Services Inc. and BofA Securities, Inc. are the agents.

Protection wanted

Income-oriented autocallables last week accounted for 23% of the sales with 80 deals totaling $419 million, a much lower share than the 43% average for the year to date.

Leveraged structures made for 38% of the total with $704 million in 55 deals. Twelve autocallable market-linked step-up deals hit the market for $408 million, or 22% of the total.

Leverage with buffers and barriers surpassed in volume their unprotected counterparts with $450 million issued versus $254 million, respectively.

“It’s good that people are seeking protection,” the sellsider said.

“I hear too many advisers saying they don’t believe in buffers just because the market is down 20%. They keep on talking about the huge rebound after March 2020, which they don’t want to miss. They don’t understand that the market went up a lot and fast after March 2020 because it went down a lot and fast during that one-month bear market.

“Advisors think the market will always go up. That’s how they make their living.”

Good credit wanted

Last week marked a visible comeback of Canadian issuers within BofA’s platform. BofA has for a long time used Bank of Nova Scotia, Canadian Imperial Bank of Commerce, TD Bank and Royal Bank of Canada as its preferred issuers. But those names have not been as prominent in the past few months when BofA hit the market once a month. Combined, the four issuers last week brought nearly half of total issuance volume with 61 deals totaling $859 million.

“As the market gets rocky, Canadian banks seem to be a safer place to be in the financial sector compared to Europe,” the market participant said.

He gave as an example Credit Suisse whose credit default swap spreads have considerably widened due to heavy losses incurred last year as a result of hedge fund Archegos Capital Management’s fire sale.

“That stuff is overblown but it sparks fear in the market,” the market participant said.

“At the same time, you’re paid a premium when issuers’ spreads widen. U.S. and Canadian issuers are perceived as much safer and it may be more appealing to investors right now.”

A different bond exposure

One interesting underlying to emerge last week came from a GS Finance’s $40.47 million leveraged note. Bond ETFs are nearly never used as underliers, but this note was linked to a basket, which included this type of asset.

The basket consisted of the iShares 7-10 Year Treasury Bond ETF with a 35% weight and the S&P 500 index with a 65% weight. The six-year notes will pay 1.23x the basket return on the upside and offer a 70% barrier on the downside.

“It looks boring to me,” the market participant said.

“We printed stuff on the high-yield bonds using JNK. People did the price discovery. They realized the margin was not so great for taking on credit risk versus just buying the ETF.”

“JNK” is the ticker for the SPDR Bloomberg High Yield Bond ETF.

The sellsider agreed that bond ETF underliers are rare. He attributed the fact to pricing.

“Most structured notes sell volatility. With bond ETFs, volatility is limited; that’s why you don’t see them in notes. I’m not saying bond ETFs are bad. But the numbers are just not attractive,” he said.

The market participant said that bond volatility picked up of late as a result of the Federal Reserve’s tightening.

“There is plenty of risk on the longer end of the curve. The example of the U.K. last week was telling,” he said. He was referring to the Bank of England stepping in to buy government bonds in an effort to dampen a sudden spike in volatility hitting U.K government bonds. Many fear global pressures on bonds as the Fed is not the only central bank to raise interest rates. But last week’s move in England caught the market off-guard, he said.

“Notes on bond ETFs offer only a marginal uptick. There’s too much volatility in fixed-income. The payoff is not worth it,” he said.

He explained the big size of the deal as a result of the scarcity of those products.

Turbulent week

Last week was another bad week for the market.

Rising interest rates not just in the U.S. but globally put additional pressure on equity markets. The S&P 500 index and the Dow both lost nearly 3% on the week.

“That makes the case for notes,” the market participant said.

“I look at ugly markets and I see opportunities. I see opportunities to provide protection to clients. Notes are small steps you can do to adapt your portfolio to the environment and insulate yourself from short-term volatility spikes.”

Q4 outlook

Issuance volume for the year through Sept. 30 dropped 15.5% to $63.63 billion from $75.29 billion, according to the preliminary data. The deal count fell by 38% to 14,105 from 22,594.

“We’ll end up the year down. Hopefully not down 20%. A 10% drop year over year is still possible. I certainly hope so. But we’re unlikely to end up flat. There’s too much to make up for,” the sellsider said.

The top agent last week after BofA Securities was UBS with $174 million in 35 deals, or 9.4% of the total, followed by JPMorgan and Morgan Stanley.

The top issuer was HSBC USA with $363 million in 15 deals, or 19.7% of the total.

For the month, Barclays Bank plc grabbed first place with $573 million in 49 deals, a 10.7% share.

The No. 1 issuer year to date is JPMorgan Chase Financial Co. LLC with 2,461 offerings totaling $9.54 billion, or 15% of the total.

© 2015 Prospect News.
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