BofA closes February structured products calendar, capturing 60% of final week’s sales

By Emma Trincal

New York, March 3 – BofA Securities led the action in the structured products market, pricing most of its monthly calendar in block trades and grabbing 59% of total sales in the last week of February, according to preliminary data compiled by Prospect News.

Agents sold $654 million of structured notes in 86 deals last week, a figure to be revised upward as issuers continue to file their pricing supplements with the Securities and Exchange Commission.

BofA Securities, the distribution arm of Bank of America, priced $388 million in only 11 deals, which demonstrates the large size of its trades.

BofA’s week

“A lot of private banks, wirehouses close at the end of the month,” said Marc Premselaar, senior managing director, structured solutions at CAIS.

While the month-end is always the busiest time, several top firms however are also spreading their deals throughout the month.

“JPMorgan has a weekly calendar. UBS has a lot of one-off customized deals,” he said.

BofA Securities however tends to price between two-thirds and 80% of its monthly notional during the last week of the month, according to Prospect News.

Data for the entire month of February is not yet finalized.

January’s $7.69 billion beats the year-ago tally of $7 billion.

Yearly data

The year to date so far appears relatively flat, but it is probably due to the reporting lag.

Available data showed $11.92 billion sold in February through Feb. 26 versus $11.89 billion during that time in January.

The trailing 12-months figures offer a clearer picture. A total of $72.26 billion have priced in the past 12 months ended Feb 26 versus $58.511 billion during the previous 12-months.

“The trailing 12-month is over $72 billion. Have we seen this before? I don’t think we ever have,” a market participant said.

More deals

Meanwhile, the deal count rose 24% to 22,519 in the past 12 months from 18,210 during the previous period.

“It’s a big jump in the number of offerings. It definitely had to have an impact on volume as well,” the market participant noted.

Morgan Stanley and UBS are the top agents for the period having enjoyed a growth in notional sales of more than 40% each. Both agents have also significantly multiplied the number of their offerings.

“Maybe Merrill should change their model. Their plain-vanilla accelerated return notes are facing the competition of buffered ETFs,” he said.

The market has evolved from block trades to a multitude of smaller, tactical deals boosted by automated distribution, low interest rates and market volatility, sources said.

One-off

“The name of the game for advisers is customization,” said Premselaar.

“That’s why you had a record year in 2020. When the pandemic hit early last year prompting a massive sell-off in February, March and April, advisers saw extremely favorable terms. They needed income solutions. With the volatility spike they started to do income notes. We saw many new entrants in the market who wanted to take advantage of very strong terms.”

Customization and technology have contributed to boost volume. The lower minimum sizes have allowed issuers to print many more offerings, he noted.

“Calendar deals used to be the leading product; now it’s almost like a showroom.”

Outlook

While it’s too soon to predict what the year will be like even for the first quarter, let alone the year, traders and advisers alike keep an eye on volatility.

“January was a very busy, productive month. February had a little bit more of a slow start but it’s getting better as we had recent bouts of volatility,” said Premselaar.

“Not all markets are like March of last year when volatility surged, and people jumped on very attractive terms. But VIX levels were relatively high last week, above 30.”

The VIX index is not a perfect measure of volatility since it’s based on 30-day expectations, he said. But it gives a sense of the overall volatility of the S&P 500 index.

In March of last year, the VIX rose above 85, a level not seen since the financial crisis of 2008.

Premselaar believes demand for structured notes will continue to grow regardless of market conditions. Even in bull markets, which tend to see lower volatility levels, investors are likely to gravitate around structured notes.

“Most notes are sellers of volatility. Not all but most of them. So, when volatility declines, the premium declines as well. The optics aren’t so good,” he said.

“But from a portfolio’s perspective, it’s when the market is up that advisers become nervous about a possible sell-off.

“They want to take advantage of structured notes for the downside protection.”

Pullback scenario

The impact of a market pullback on structured notes may depend on its severity.

For Premselaar, sell-offs are unique buying opportunities for advisers.

“Even during heavy sell-offs like March of last year, people looked for structured products,” he said.

“When the S&P lost 35% between February and March of 2020, it was pretty close to a crash. Some institutions faced liquidity issues and the Fed stepped in. In this pretty scary scenario, we were pleasantly surprised to see advisers allocating to structured products all the way down to pick up better terms.”

The market participant was slightly more cautious. In extreme scenarios, investors may just decide to sit on the sidelines, he said.

“Structured notes can do well under most circumstances except when the market goes into a free fall. Uncertainty, volatility are good things for structured products. But if there’s a crash, that’s a different story,” he said.

He did not rule out the possibility of a stock market correction in the coming months.

Hopefully we’ll have another big year in structured products,” he said.

“I can’t say I’m confident. But I’m hopeful.”

Rising interest rates

Last week’s intense bond market sell-off rattled the stock market, pushing down the Nasdaq-100 3.5% on Thursday as fears of inflation are reemerging.

Tech stocks were hit the most as investors moved into sectors benefiting from higher interest rates such as financials and energy.

The Nasdaq-100 dropped 8% from its mid-February high to Friday. Tech stocks incurred heavy losses as rising yields make growth stocks less attractive from a value standpoint.

On Thursday, the 10-year Treasury yield jumped to 1.61%, a strong move from 1.10% when the month began.

The week was dominated by the issuance of index-linked notes, accounting for more than 81% of the total.

The S&P 500 index alone accounted for more than half of the week’s sales volume. Stocks in comparison represented only 11% of the volume and ETFs, 8%.

Worth mentioning among stock deals was Morgan Stanley Finance LLC’s $21.33 million worst-of autocallable on Amazon.com, Inc., Tesla, Inc., Netflix, Inc. and Zoom Video Communications, Inc.

Separately, Citigroup Global Markets Holdings Inc. priced the largest single stock deal on Cisco Systems, Inc. for $14.6 million.

Accelerated Return

BofA Securities, Inc. placed two large leveraged notes offerings.

One was issued by Bank of Nova Scotia in an $85.71 million issue of 14-month Accelerated Return Notes linked to the S&P 500 index.

The payout at maturity is triple any index gain, up to a maximum return of 14.7%. Investors will be exposed to any index decline.

Next, BofA Finance LLC itself priced $48 million of 14-month Capped Leveraged Index Return Notes on the S&P 500 index as well.

The payout at maturity will be 2 times any index gain, up to an 11.04% cap.

The note offers a 5% buffer on the downside.

Scotia priced another leveraged deal for $39.14 million on the S&P 500 index with a two-year tenor. The participation rate is 200%, the cap, 14.52% and the buffer, 10%.

“Those leveraged deals, that’s what Merrill does, month after month,” the market participant said.

“Their emphasis is on simple deals, allocation deals. They’re not focused on the smaller, opportunistic deals.”

Autocallable step-up

Scotia was decidedly busy last week and issued two big market-linked autocallable step-up issues under the BofA Securities distribution channel.

One was a six-year note pricing $41.48 million. The annual call premium is 6.2%. At maturity, the return will be a step-up of 35% if the index is up but below the 135% step-up level, or the index gain if it’s above. The downside shows a 15% buffer.

The other was a similar autocallable step-up on the S&P 500 index but with a three-year maturity. It priced for $36.21 million. The annualized call premium is 9.95%; the step-up payout, 26%; investors have full downside exposure.

Among the noteworthy underlying, green energy funds have recently picked up in momentum. One of them, the iShares Global Clean Energy ETF was the underlying for a 14-month BofA Finance sold for $35.19 million.

The top agent after BofA Securities was UBS with $152 million in 57 deals, or 23.17% of the total. It was followed by JPMorgan.

Bank of Nova Scotia recorded a strong week as an issuer bringing to market $304 million in eight offerings, a 46.5% share.

BofA Finance was next with $122 million in five deals, or 18.7% of the total.

© 2015 Prospect News.
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