Structured notes agents price $696 million in shortened week, with BofA capturing half of volume

By Emma Trincal

New York, Dec. 4 – Bank of America unexpectedly priced most of its monthly calendar in the shortened Thanksgiving holiday week, according to data compiled by Prospect News.

Last week, which only counted 3.5 sessions as the market closed on Thanksgiving Day and Friday afternoon, saw the pricing of $696 million in 67 deals overall. Bank of America sold $358 million out of it, or more than half of the total, while its percentage share in the previous week had only been 6%.

Short but busy week

“The last week overlapped with December. If most of those Merrill trades were brokerage, I’d say it’s atypical,” a market participant said.

“If I was a broker, I’d like to see my cash in my account by the end of the month. It’s usually how it works.

“But it was the holidays. Whatever the private banks need to do to make it work. We may see the same thing this month by the way since New Year falls right in the middle of the week.”

The top eight trades out of the 11 deals Bank of America distributed last week priced on Nov. 26 to settle on Dec. 4. Given the lag, figures for the holiday week are expected to be revised upward.

There was a fair amount of block trades last week – two in excess of $100 million and one over $60 million.

Leverage tops

Since Merrill captured the bulk of the market, as it does each time it closes its monthly calendar, it came as no surprise that 88% of total notional was based on equity indexes as the data showed.

For structures, leverage prevailed with a 63% market share, or $437 million, for the same reason. Bank of America overwhelmingly specializes in participation notes rather than income products.

“When volatility is low, leverage is the thing to do. You just hope you’re not buying at the top of the market,” a sellsider said.

And indeed, the stock market hit new record highs last week.

Within leverage as a category, notes with no downside protection accounted for a solid 42% of the week’s volume versus 21% for leveraged notes coming with either buffers or barriers.

“Why do people buy leverage without downside protection? I can’t speak to this,” the market participant said. “We tend to show deals with protection. But it’s really up to the investor. Some clients are bullish. They want to capture their thesis and get as much upside as possible at the expense of the downside protection. It’s totally up to the investor to decide.”

Finally, income-oriented trades including autocallable contingent coupon and snowballs made for 23% of the market. For the year to date, they represent more than that with a 40% share, the data showed.

Hot Russell

The Russell 2000 index posted a a new 52-week high last week although short of its all-time high of August 2018. Did that explain an unusual appetite for notes linked to the small-cap benchmark last week? Six offerings linked to the Russell 2000 index priced for $181.55 million, or 26% of the total, an unusually high number for the Russell as a stand-alone underlying.

“I’m not sure it has anything to do with the market other than perhaps the new highs pushed volatility down a bit making the calls cheaper, which helps leveraged notes,” the sellsider said about the bid on the Russell.

“The Russell has always been the second most widely used underlying index after the S&P. The pricing probably looked better,” the market participant said.

“We’re also seeing more interest in the Russell as people are doing less European deals.”

Top deal at $120.57 million

Barclays Bank plc priced the No. 1 deal of the week with $120.57 million of 14-month leveraged 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 return of 11%. Investors will be exposed to any index decline. The underwriter is BofA Securities, Inc.

“That’s the typical Merrill trade. People buy those all the time for their asset allocation. They just rotate the issuer to diversify the credit exposure in their portfolio,” the market participant said.

This deal is the seventh largest one for the year. The top one (also from the Merrill Lynch franchise) priced in May. Issued by Bank of Nova Scotia, it offered a similar structure on the same index: 14-month 3x leveraged and capped with exposure to decline.

Barclays No. 1 issuer

Barclays was the top issuer last week with $302 million in 11 deals, or 43.5% of the total.

BofA Merrill Lynch used this issuer in three of its 11 deals. The other issuers included BofA Finance LLC, HSBC USA Inc. and Wells Fargo Finance LLC. There were no Canadian issuers within Merrill’s distribution network last week.

This is not to say that Canadian issuers were not in the market.

Scotia and Goldman

Bank of Nova Scotia for instance priced the second-largest offering of the week, for $104.31 million. But the dealer was Goldman Sachs & Co., not Bank of America. Scotia Capital (USA) Inc. was the agent.

The 18-month deal linked to the Russell 2000 index pays 500% of the index gains up to a 20% cap, with full downside exposure.

“This one probably went to Goldman’s wealth unit. Scotia works pretty exclusively with the private banks, the wirehouses. Even though they do a lot with Merrill, it’s not a surprise they’d be working with Goldman Sachs,” the market participant said.

Scotia Bank, as an issuer, has used Goldman Sachs as a dealer in 26 deals so far this year, as well as Wells Fargo Securities, LLC to a lesser degree, according to data compiled by Prospect News.

Some big trades

HSBC USA priced $61.93 million of two-year S&P-based notes with 2x leverage, capped at 13.2% and including a 10% hard buffer. BofA Securities is the agent for this deal, the third in size last week.

Another large deal on the Russell 2000 index came next. Brought to market by Barclays Bank plc in a $42.74 million offering, it was an autocallable market-linked step-up notes issue with a five-year maturity, also distributed by BofA Securities.

The notes will be called with a call premium of 6.3% per year if the index closes at or above the initial level on any of four annual observation dates. If not called, the notes will pay either par plus 35% if the index finishes positive but below 135% or the index return otherwise. The structure offers a 15% downside buffer.

Because this autocall allows for upside participation, the product does not fall into the income-oriented categories in Prospect News methodology.

Barclays Bank plc did two other large deals, one with leverage for $35.52 million on the Dow Jones industrial average; the other, an autocallable issue for $35.36 million on the worst-performing of the Russell 2000 index and the S&P 500 index. The agents on those deals are BofA Securities and UBS, respectively.

Issuance volume

After Bank of America, the top agent last week was UBS with $154 million in 38 deals, or 22.1% of the total.

The top issuer after Barclays was HSBC USA with 11 offerings totaling $106 million, a 15.2% share.

Volume for the year to date fell 16.32% to $44.28 billion through Nov. 29 from $52.92 billion during that time last year, according to the data.

The deal count decline was much less drastic at 4.3% to 14,283 from 14,925.

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