Structured products agents price $1.16 billion during week; BofA grabs 45% of issuance

By Emma Trincal

New York, April 5 – Structured products issuance was strong in the week ended Friday, which closed the first quarter helped by Bank of America’s contribution to nearly half of the notional sold.

In all, 167 deals priced totaling $1.16 billion. BofA Merrill Lynch grabbed a 45% share of this volume in just 18 deals, according to data compiled by Prospect News.

“You probably had some rollovers last week. A lot of notes mature at the end of the month and Friday was the 31st. It may have contributed to the volume,” a market participant said.

Volume for the year is up nearly 21% to $12.38 billion from $10.25 billion last year.

Good start

“The first quarter is up 20%. It’s a very good sign,” a sellsider said.

“Investors were a little bit jittery last week. People worried that the Trump rally was already over. The theory was that if Trump can’t pass his health care bill, then we were not going to see the other stuff either, especially the tax reform, which is what drives the enthusiasm in the market.

“But in reality the selloff was not as bad as people feared. The market is still bullish.”

Stock prices started to rebound this week aided by higher oil prices. Volatility as measured by the CBOE Volatility index remains soft despite a rise on Friday to 12.30. It is now at 11.15, well below the two spikes observed last year, the first one at the end of June after the Brexit vote when the VIX hit 26 and the second, on the eve of the Presidential Elections in November at 22.

Season trends

“When the market is good and volatility is low like today it’s true that it’s harder to do structures, but there’s always a way. You can’t argue with the result. Issuers have found ways to price deals if volume is up 20% for the quarter,” he said.

Each year though offers seasonal trends. First quarters tend to be the best in terms of volume along with the following quarter. But issuance flows tend to be slow in the second half, especially in the summer.

“We still have a few more months before the summer...besides with the summer you never know. Last year’s summer was strong,” he said.

“If I compare this year with last year I have no reason to think that we won’t do as well if not better. Every year has a summer. So far we have a very good lead.”

Merrill’s timing

Bank of America priced seven of the top 10 deals, including the largest one. The capacity of the top agent to price nearly half of the market on the final week of the month was not a surprise for this sellsider.

“They do that all the time. They spend the month to market their products and they price everything on the last week,” he said.

Indeed during the three previous full weeks of March, BofA Merrill Lynch only distributed seven deals for just $65 million, or 3.5% of the volume during this period, the data showed.

“It’s a very efficient way to operate. Do everything in one week. You really wonder why the other firms are not imitating them.”

Some agents do. Royal Bank of Canada for instance generates about 60% of its business in the last week of the month, the market participant said.

The sellsider said that Merrill’s approach was part of its success.

“It gives them more time to pitch their deals. Besides they make it easier for their reps to sell products by showing always the same structures, essentially short-term leveraged deals and market-linked step ups.”

The agent’s methodology was consistent with its strategy, he added.

“They don’t look at structured products as tactical bets. They look at structured products as part of the asset allocation,” he said.

“When you buy a Merrill Lynch note, you’re not doing trading. If you want to do day-trading, you buy ETFs.

“That way they’re not really at the mercy of the market’s daily moves. Unless there is a big event like Brexit, they can market their structures any time during the month. It’s a very efficient way to do business.”

At the end of June last year, in anticipation of the Brexit vote in the U.K. Merrill Lynch decided to postpone its pricing into July.

Over $100 million

The top deal last week was a short-term leveraged note with high leverage and cap.

Barclays Bank plc priced $104.94 million of 14-month Accelerated Return Notes linked to the S&P 500 index.

The payout at maturity was three times any index gain, up to a maximum return of 10.05%. Investors were exposed to any index decline.

“That’s the typical Merrill deal. You don’t have the protection but when you think of it, the most important thing on those short-term notes is not to have a 5% buffer. The most important thing is the leverage and the cap,” the structurer said.

Second: UBS

The second largest offering was distributed by UBS Financial Services Inc. on the behalf of Credit Suisse AG, London Branch, which priced $52.85 million of 10-year trigger autocallable contingent yield notes. The structure was a worst-of with the Euro Stoxx 50 index and the Russell 2000 index employed as underliers.

The notes paid a contingent quarterly coupon at an annual rate of 8.7% if each index closed at or above its coupon barrier, 70% of its initial level, on the observation date for that quarter.

The notes would be called at par if each index closed at or above its initial level on any quarterly observation date after one year.

The barrier at maturity was set at 50% of the initial price.

“The important thing here is the one-year non-call. UBS has a reputation for structuring deals with non-call periods. This one-year is good to have. It gives you a full coupon if you get one. Chances are you’re going to get called on the first call date.”

Canadian issuers

BofA Merrill Lynch was the agent for the third deal: Bank of Nova Scotia’s $51.1 million of three-year autocallable market-linked step-up notes due March 26, 2020 linked to the Euro Stoxx 50 index. The call trigger observed annually was above the initial price with a 14.6% premium. At maturity, if the final index level was greater than the step-up value, 135% of the initial index level, the payout at maturity would be par plus the index return.

If the final index level was positive but less than the step-up value, the return would be the step-up payment, 35%.

There was no downside protection.

BofA priced three other Scotia deals. The largest one was a $34.65 million market-linked step-up identical to the previous one except for the underlying – the S&P 500 index instead of the Euro Stoxx 50 – and the step-up payment of 21%.

BofA Merrill’s propensity to use Canadian issuers was notable last week with another large deal. Canadian Imperial Bank of Commerce brought to market $45.21 million of 14-month Accelerated Return Notes linked to the Euro Stoxx 50 index. It offered three times the upside up to a 23.85% cap. Investors were fully exposed to the downside.

BofA Merrill Lynch is using Canadian banks to bring more credit diversification to its clients, the sellsider said.

“The funding rate is higher because of their higher rating. But people look for that,” said the market participant.

“Most of the appeal of these Canadian issuers is due to investors’ desire to reduce credit risk, “he added.

The top agent after BofA last week was Credit Suisse with $134 million in five deals, or 11.55% of the total. Goldman Sachs and JPMorgan were next.

“Investors were a little bit jittery last week. People worried that the Trump rally was already over.” – A sellsider

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