BofA’s big deals push weekly structured products issuance volume above $1 billion mark

By Emma Trincal

New York, March 31 – As the stock market rallied and yields normalized, BofA Securities was busy pricing its monthly structured products inventory last week in 22 deals totaling $627 million, according to preliminary data compiled by Prospect News.

This notional amount done via so few offerings represented 60% of the total sold – $1.052 billion in 239 offerings. This put the month through March 26 at $4.6 billion, a third less than in February. But the data is in flux and figures will be updated as more deals are posted on the Securities and Exchange Commission’s website.

When BofA Securities closes its monthly calendar, several things happen on a consistent basis: index-linked notes overwhelm any other asset class; two main structures dominate: leverage and market-linked step-ups; and Canadian issuers shine within the dealer’s open architecture platform.

Last week was no exception.

Four Canadian issuers brought to market $659 million in only 21 deals, or 63% of the total issued in only 14% of the deals.

All those deals, except for a couple of small ones, emanated from the BofA Securities channel.

Creditworthiness

“Canadian banks have AA credits. These are strong credits. Those are names that are in favor. There aren’t’ much AA credits left among U.S. banks,” said an industry source.

“The strong credit doesn’t hurt pricing if the deal is short. A lot of those leveraged plays are 13 or 14 months. Any bank with strong credit will price very well in the short term.”

Out of the top 10 deals, all of which were sold by BofA, nine were linked to equity indexes and only one to exchange-traded funds.

ARNs, step-up

In terms of structure, the top BofA offerings came in two different structure types as always with this agent.

One is the short-dated Accelerated Return Notes (ARNs), which pay triple the upside return up to a cap and offer no downside protection. The other is the slightly more complex “autocallable market-linked step-up” deal.

With a longer maturity of usually three years, the structure pays an annual call premium when the underlying is above its initial level. Premium cumulate. Those products tend to be single-asset-based. At maturity, if the index finishes flat or up, investors get at a minimum a step-up value or the index gain if the return is superior to the step-up level. Generally, there is no downside protection.

Nearly $100 million deal

The top deal last week was an Accelerated Return Note.

Royal Bank of Canada priced $97.76 million of 14-month ARNs linked to the S&P 500 index paying triple any index gain, capped at 13.08%. Investors will be exposed to any index decline.

Next came Canadian Imperial Bank of Commerce’s $90.45 million of three-year autocallable market-linked step-up notes also on the S&P 500 index.

The annualized call premium is 9.05% and the step-up value, 126% of the initial level. Investors will be exposed to any losses.

Canadian block trades

CIBC did another such deal for $72.99 million. It was a six-year note paying a smaller call premium of 5.12% but the step level was at 135% and a 15% buffer was offered on the downside.

BofA tends to price very large block trades with its market-linked step-up notes, which are distinct from the common Phoenix autocallable product.

“If you’re expecting a more muted, not super-charged equity market, the ability to make 9% per year may be attractive,” said Marc Premselaar, senior managing director, structured solutions at CAIS.

“You’re selling that upside beyond the call premium. It’s good if you have a moderate or muted view on equity.”

Toronto-Dominion Bank priced $51.72 million of a 14-month notes with double upside exposure to the S&P 500 index, a cap of 10.21% and a 5% buffer.

International equity

The interest for international equity was seen on a few other large trades.

Royal Bank of Canada for instance priced $46.58 million of 14-month ARNs linked to the Euro Stoxx 50 index with triple leverage and an 18.7% cap.

Separately, Barclays Bank plc priced $42.25 million of 14-months ARNs linked to an unequally weighted basket of foreign indexes, which included the Euro Stoxx 50 index, the Nikkei 225 index, the FTSE 100 index, the Swiss Market index, the S&P/ASX 200 index and the FTSE China 50 index.

All those offerings were distributed under the BofA Securities umbrella.

“People buy a lot of those Accelerated Return Notes when they have a range bound view on the market. In a sideways market, you’ll get more flows,” a market participant said.

“If you think the market is already toppish and is not going to climb forever, why not get leverage and give up some of the upside?”

ETFs

Exchange-traded funds made for 14% of total sales with 14 deals totaling $148 million. The largest one, which was also distributed by BofA, was HSBC USA Inc.’s 37.48 million of autocallable market-linked step-up notes on the iShares Global Clean Energy ETF, a sign that renewable energy can draw large bids for a relatively new asset class.

JPMorgan and Morgan Stanley also priced sizable deals in excess of $30 million.

JPMorgan Chase Financial Co. LLC issued $34.64 million of two-year autocallable contingent interest notes linked to the worst of the SPDR S&P Regional Banking ETF, the SPDR S&P Biotech ETF and the Technology Select Sector SPDR fund. The annual contingent coupon is 15% and the interest barrier, 68.6%.

Morgan Stanley Finance LLC priced a similar structure in $33.83 million of two-year contingent income autocallables tied to the Financial Select Sector SPDR fund, the Communication Services Select Sector SPDR fund and the SPDR S&P Regional Banking ETF paying 13.06% in contingent coupon based on a 70% barrier.

Overall, leveraged notes made for 36% of total sales last week. The second-most popular structure was the autocallable market-linked step-up with a 31% share. The pure income-oriented Phoenix autocalls for a change were not the dominant play, accounting for 27% of the total. Other structures include digital notes, principal-protected notes on volatility-controlled proprietary indexes, absolute returns among others as well as rates deals.

Talking about rates, a surprise last week was the pricing of a large interest-rate-linked note with CIBC’s $30 million of five-year floating-to-fixed rate notes linked to the two-year Constant Maturity Swap rate.

Stock-pickers’ optimism

Single-stock issuance last week was relatively uneventful because volume associated with indexes was overwhelming.

But the rotation theme is still on. When economic news improves and rates rise, investors are flocking to cyclical stocks, such as financials, energy, travel in anticipation of the reopening of the economy. By the same token, technology stocks get hurt when the market expects inflation, which hampers growth stocks’ valuations.

The Treasury market was relatively calm last week with the 10-year yield not jumping above the 1.7% threshold previously crossed but contained at 1.65%. This gave some breathing air to tech stocks. The Nasdaq was up 1.2% on the week.

Total sales of notes tied to stocks amounted to $77 million in 104 deals. Bets on the economic recovery seemed to persist with energy (Apache Corp., Chevron Corp., Marathon Oil Corp., ConocoPhillips), banks (Citigroup Inc., Bank of America Corp., Capital One Financial Corp., JPMorgan Chase & Co.) and travel and leisure names (Royal Caribbean Cruises Ltd., MGM Resorts International, United Airlines Holdings, Inc., JetBlue Airways Corp.) being the most used underliers.

Rotation

As the first quarter is ending and the uncertainty around long-term yields persists, advisors are in the process of rebalancing their portfolios. It’s unclear yet whether technology or recovery bets will gain preeminence.

“Going forward, what happens with long-term yields is going to determine whether the rotation from growth into value will continue,” said Premselaar.

“The rotation from technology to sectors that may benefit from higher rates and an economic rebound like financials, energy and travel stocks will depend on how quickly rates will rise or fall.

“Volatility and the yield on the 10-year Treasury will be on the investors’ radar screen.”

A day to remember

Volume remains strong for the year to date with $19.56 billion in 5,758 deals through March 26, only 5% below last year’s notional, which may be updated when more deals get posted.

“Volatility as measured by the VIX was not high last week and has not been high for some time, said Premselaar.

“We started the week with the VIX around 23 and it closed down below 20.

“It wasn’t too choppy in the context of what we saw before.”

He was referring to March 23, the day that marked the one-year anniversary of the Covid 19-induced bear market, one of the shortest in history. The S&P 500 index on March 23, 2020 dropped 35% from its high of the previous month. Since then, the benchmark has gained 74%.

“A year ago, the VIX was hovering around 80. Now it’s at 20. Yet we’re seeing very strong volume. It tells you that advisers are putting structured notes in their portfolios on a much more consistent basis than ever before, whether they use it as alternative investments, yield-oriented strategies or as equity complement,” said Premselaar.

Last year, with volatility spiking, investors were jumping in to lock in high yields and attractive terms, he noted.

“But now, with the VIX a quarter of what it was a year ago, they’re still implementing structured investments in the portfolio. It says a lot about how advisors have become comfortable with structured notes as an asset allocation tool to use in their portfolios on an ongoing basis,” he said.

Flexibility

One factor contributing to the ease of adoption of structured products is the progress of customization.

“Structured investments offer a lot of flexibility. You can customize them to fit the client’s needs,” he said.

“If you have a muted view on the market, you can put autocalls, you can get incremental returns.

“If you’re concerned about the market coming off new highs, structured notes provide a much-needed downside protection.

“Most trades offer some kind of protection whether barriers in autocalls or buffers in enhanced return notes. Even if you’re capped out, as long as the cap is in line with your view, getting this downside protection is one of the main advantages of structured investments.”

The top agent after BofA Securities last week was Morgan Stanley with $126 million in five deals. It was followed by UBS.

The top issuer was Canadian Imperial Bank of Commerce with $296 million in eight deals.

It was followed by Royal Bank of Canada with $176 million in three offerings, followed by Toronto-Dominion Bank with $103 million in three deals. Bank of Nova Scotia placed fourth.

© 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.