Structured products agents price $842 million for week; BofA sells more than half of total

By Emma Trincal

New York, Sept. 4 – Agents sold $842 million of structured products in 174 deals in a week that neatly coincided with the finish of a volatile month just ahead of the Labor Day weekend, according to preliminary data compiled by Prospect News.

Not surprisingly, Bank of America was the main player as it booked its monthly calendar. This agent captured 52% of the total issued in eight block trades totaling $438 million.

Both total issuance volume and Bank of America’s notional sales will be revised upward as not all deals were filed with the Securities and Exchange Commission website in the wake of the long weekend.

The week was dominated by a few large trades, all distributed by Bank of America, one of which exceeding $116 million. Leveraged deals made a strong comeback, again partly due to the push of Bank of America, which is known to emphasize those traditional structures.

Fourth deal of the year

Bank of Nova Scotia priced $116.83 million of 14-month Accelerated Return Notes linked to the S&P 500 index. The deal was the top one for the week.

The payout at maturity will be par plus triple any index gain, with an 11.86% cap. Investors will be exposed to any index decline.

Scotia’s $116.83 million deal is the fourth top offering in size this year. The other three are also all from Bank of America’s platform. All share the same characteristics: they’re 14-month offerings tied to the S&P 500 index; they provide 3x leverage exposure up to a cap; and investors are fully exposed to the downside. The only variable term is the cap size.

The top one among those three largest deals year to date also came from Scotia with $145.8 million sold May. The cap was set at 12.15%.

In January, BofA Finance LLC sold $133.9 million with a 14% cap.

Finally, the third one, another BofA Finance priced at $132.7 million. The cap was 10.15%.

Scotia expanding

Back to last week, Scotia with those two trades captured more than 21% of the total, according to the preliminary figures.

“Scotia, as well as most Canadian banks, made a very strong push into the wirehouse market in the U.S.,” said Matt Rosenberg, sales trader at Halo Investing.

“Their rise in issuance has been exponential due to their strong relationship with some of the top firms, in particular with BofA.

“They got there not by casting a wide net but rather with huge trades like that.”

Over 60

Bank of America distributed three other deals in excess of $60 million. One was BofA Finance LLC’s $66.84 million of two-year notes on the S&P 500 with two-times any gain, a cap of 14.6% and a 10% buffer.

The next one was HSBC USA Inc.’s $64.49 million of six-year autocallable market-linked step-up notes tied to the S&P 500 index with a 6.38% annual call premium. The step payment of 30% at maturity is paid in the event of a no call. The downside offers a 15% buffer.

The third one, another Scotia credit, was priced at $60.8 million. The two-year product linked to the S&P 500 index pays double any gain up to a maximum return of 8.98%. The downside is buffered at a rate of 5%.

The revenge of leverage

Leverage made a significant push last week, after a period of muted issuance.

In the past few months, autocallable and income-generating products have gained solid market shares, eclipsing somehow the traditionally prevalent place of leveraged notes with or without barriers or buffers.

Leverage accounted for 62% of total volume in last week’s market in only 43 deals.

In comparison, leveraged issuance volume represented 36% of the year-to-date total sales.

The first reason for the disproportionate amount of leverage is the role played by Bank of America last week as it closed its book for the month, said Rosenberg.

“All those big Accelerated Return trades are the staple of every broker, especially within the Bank of America channel.

“For those seeking leverage and, in some cases, partial downside protection, it’s an easy-to-comprehend structure that fits into most portfolios. It lends itself into these large size deals.”

Size was also a function of how the notes are being sold.

“Those leveraged deals are marketed by Bank of America over the course of the month. They may start with a small commitment and it turns out to be $100 million at the end of the month.

“It’s a very different type of distribution than the one-off that people are looking for when buy dual directional or autocalls for income or simply as ways to play sideways markets rather than the overlay in the portfolio.”

Rally

The market last week may have predisposed investors to bid on growth notes, although Rosenberg was not convinced that it was the case.

“I look at it more from a calendar perspective than as the result of the market direction itself,” he said.

But on the other hand, spikes in volatility play a role in the pricing of autocallables and income products at other times during the month, he noted.

Stocks rallied last week on hopes of a pause in trade tensions with China. The S&P 500 index gained 2.8% to 2,926.50 and the Dow Jones industrial average closed at 26,403, up 3% on the week.

The pre-holiday week marked the end of a volatile month. The S&P 500 index fell by 1.8% in August. Fears of a recession revived by a recent inversion of the 10-year minus two-year portion of the yield curve and nervousness around trade tensions contributed to the drop.

More protection

Leveraged deals offering buffers and barriers exceeded principal-at-risk leveraged plays as they accounted for 35% of total notional versus 25%.

The non-protected structures often come with higher leverage multiples and higher caps. They’re often shorter in duration.

Rosenberg said that full-downside exposure leveraged notes are popular even in this market. But not for his clients.

“Personally, we don’t sell anything without protection. These 3x deals... I don’t know how often you see these kinds of structures outside of Merrill’s network.

“The 3x up, no downside protection is a staple for the Merrill broker. It’s not a staple for your average registered investment adviser,” he said.

Other big trades

The next top deals of the week were again short-term leveraged deals. Bank of America acted as the agent.

BofA Finance LLC priced $39.36 million of two-year Accelerated Return Notes on the Euro Stoxx 50 index with triple the index gain capped at 22.3% with full downside exposure.

Canadian Imperial Bank of Commerce issued $36.75 million of five-year leveraged notes linked to the Dow Jones industrial average. The payout is 1.145 times any index gain with no cap. There is a 20% buffer on the downside.

BofA Finance did another three-times, no downside protection $34.93 million 14-month deal on the S&P 500 index with a cap of 11.82%.

Unchallenged popularity

“These are still the most popular deals whether capped or not capped, protected or not, 14-month or two years, two-times or three-times leverage and almost always on the S&P. People use them as part of their portfolio allocation since everyone has a core allocation to U.S. large-cap,” a sellsider said.

“Having leverage is like having some kind of a buffer because you don’t have to put all your money to work.

“We see capped leveraged buffered deals for a simple reason: we’re almost at all-time highs.

“It’s a macro allocation rather than a tactical play. People buy those deals with the market in mind rather than to just get more yield.”

Leverage and buffered protection can now be seen in other wrappers, not just in notes, he said.

For instance, unit investment trusts and exchange-traded funds, which offer similar structures have gained some traction of late, he said.

“This goes to show that mainstream investors are embracing these kinds of payouts.

After Bank of America, the top agent last week was UBS with 57 deals totaling $168 million, or 20% of the total. It was followed by Citigroup and Goldman Sachs.

The top issuer was Bank of Nova Scotia, which brought to market $178 million with its two block trades, or 21% of total notional.

For the year, Barclays Bank plc is the No. 1 issuer with $4.60 billion in 1,158 offerings, 14.7% of the total.

© 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.