BofA grabs two-thirds of structured notes issuance; tally for week $1.33 billion

By Emma Trincal

New York, April 3 – As a record first quarter for the equity market ended, BofA Securities priced the bulk of its monthly calendar with $886 million in 44 deals, or 66.4% of the week’s volume, according to preliminary data compiled by Prospect News.

Agents priced $1.33 billion in 123 offerings during the short week. The markets closed on Friday for Good Friday.

“That’s the usual thing. BofA comes out strong at the end of each month,” a sellsider said.

BofA’s market share is just 25.2% for the year through March 28 with $1.79 billion.

March was particularly busy for BofA as it sold half of its first quarter’s notional in that month.

Overall, March was the third-best month for structured notes issuance with $7.09 billion. The figure is preliminary and will be revised upward.

Structured notes issuance rose 13.6% this year from $23.09 billion to $26.23 billion.

A buoyant stock market helped sales of notes, triggering calls. The S&P 500 index was up 3.1% in March, bringing its year-to-date return to 10.2%.

For stock market participants and structured notes buyers alike the question remains: will this bull market continue and for how long?

Forget the coupon

Volatility has been compressed in a range for most of the year. But the market turned somewhat lower since last week with the VIX spiking to 15.43 on Tuesday.

As volatility remains well below its historical average, advisers have been complaining about the unappealing optics of their autocallable coupons and call premium. Some are even calling for more volatility.

It would be a mistake to look at pricing that way, the sellsider said.

“You should buy a note when you’re comfortable with the entry price of the underlying stock. Investors should disregard the coupon because the coupon will rise when the risk is higher. It’s a wash. There’s a reason why volatility spikes. Stock prices move so fast, faster than volatility. What really matters is your opinion on the stock or the index. Without it, you shouldn’t buy a note. Notes are not bonds. You should lock in the stock price that you want, not the coupon level,” he said.

In other words: retail investors should not engage in trading volatility, he added.

Vol under control

Still. The nagging question about the future direction of the VIX remains because advisers still look at coupon sizes for their clients.

“We have a VIX trading back to pre-pandemic levels. Since late October, the S&P had a tremendous run,” said Patrick J. O'Hare, chief market analyst at Briefing.com.

“The fact that there hasn’t been a lot of volatility helped. Vol was subdued because of the market’s enduring belief that the Fed would be successful in engineering a soft landing. At the beginning of this rally in October the 10-year pivoted, and yields went down.

“This was very positive for stocks.”

Lower yields are good news for growth stocks because future cash flows are discounted at a lower rate.

Creeping back up

“Here we are. The market closed at a record high at the end of the first quarter. But we’re now getting a little bit of volatility at the beginning of this second quarter,” he said.

Some indicators last week explained the reversal. They uncovered a stickier inflation than expected, an acceleration of manufacturing activity while oil prices pushed above $85 a barrel.

“The market is taking it all in. Investors have to rethink their rate cuts outlook. Maybe the Fed won’t cut rates in June. Maybe they’ll wait longer.”

The market should also take into account the reasons why the Fed would cut rates, he noted.

“It could be because the economy is growing, and inflation drops back to its target. Or it could be because the labor market is imploding, and the economy is weakening. That wouldn’t be good for earnings growth.”

Each scenario would have different implications for volatility.

Unanticipated fright

A spike in the VIX would help most structured notes which sell volatility, the sellsider said.

“Autocalls and income notes are short volatility. It doesn’t mean that investors should trade volatility. But it certainly means that the more premium you get in selling the options the higher the coupon,” he said.

“Even leverage can benefit from higher volatility, at least capped leveraged notes. While you may spend less on buying at-the-money calls, you typically get more in selling the out-of-the money calls.

“It’s for uncapped leverage that you need to rely on other things, mainly the dividends.”

Volatility has been trading in a range for a long time. But spikes tend to be related to unexpected events.

“Volatility is likely to spike if there is a risk factor that takes the market by surprise,” said O’Hare.

“Everyone has their own risk tolerance and timeframe. For some, more volatility would introduce prospects for higher coupons. For others, the risk of a loss on the stock would be the main concern,” he added.

While not a derivatives analyst, O’Hare said that the put prices are low, which could present an opportunity for conservative investors.

Inexpensive puts

“The VIX is at a fairly low level because there hasn’t been a lot of hedging being done to protect against the downside risk in portfolios. Put prices are cheap,” he said.

“One external factor could boost volatility at very high levels and very quickly as we’ve seen in the extreme with the unexpected pandemic in 2020.”

In one month between February and March of that year, the VIX surged from today’s levels to 85.

“When that happens, you get a big sell-off. It has to result from an external factor, but which one? The future is inherently uncertain.”

The market has been focusing on interest rates for two years. But other and less predictable variables abound.

“You can pick up geopolitical tensions in the Middle East. You can imagine Russia attacking a NATO country. You can scare yourself in many ways. But from a portfolio management standpoint, from a risk management standpoint, you could hedge now at cheaper levels. The market moves so fast. By the time you put on that protection, the price of puts will be more expensive to buy.”

Single index tops

Last week’s landscape for structured notes reflected in large part the prominence of BofA.

Index notes made for three-quarters of issuance with $989 million in 70 deals, according to the data. Out of this notional, $732 million came from notes on single indexes while $146 million only were worst-ofs. Weighted basket-linked notes totaled $111 million, an unusually high level.

The prevalence of single-index underliers reflected the “best-selling” structures of BofA, which typically are highly leveraged notes and snowballs. Leverage as a whole accounted for 44% of sales against 19% for the year to date.

Last week’s top deal was a leveraged structure. BofA Securities priced on the behalf of Toronto-Dominion Bank $77.62 million of two-year leveraged notes on the S&P 500 index paying twice any index gain, up to an 18.06% cap with a 10% downside buffer.

Coming next, BofA priced on the behalf of Canadian Imperial Bank of Commerce $59.62 million of three-year snowballs linked to the S&P 500 index. The notes will be called at par plus a premium of 8.86% a year on an annual observation date on the initial price. If the notes are not called, investors will be fully exposed to the decline of the index.

Income, absolute return

Callable notes (phoenix and snowballs) made for only 38% of last week’s volume compared to their 53% market share so far this year. BofA priced the top three callable notes, all issued by CIBC including a $35.34 million deal on the S&P 500 index and a $34.95 million one the Russell 2000 index.

Absolute return structures have resurfaced not just last week but over the past month.

Those issues totaled $112 million in 10 deals, or 8.5% of the total.

“Is it pricing or is it demand? I don’t think it’s driven by pricing. I think there’s a bid on absolute return because the market has become so toppish,” the sellsider said.

Single names

Single stocks and baskets of stocks took an 11% share last week.

Only one deal was spotted on Nvidia Corp., but its size was above average for a single-stock issue.

It was Royal Bank of Canada’s $13.03 million of 17% STEP Income Securities due April 11, 2025 paying the fixed rate quarterly plus an additional bonus of 9.65% at maturity if the stock finished above 117%.

Investors are fully exposed to losses. BofA was the underwriter.

Nvidia is the third-largest single stock underlier this year commanding a $672 million notional behind Amazon.com, Inc. ($775 million) and Microsoft Corp. ($1.13 billion).

“The share price of Nvidia has almost doubled in the past three months. My neighbors keep bragging about how much they made,” the sellsider said.

He added that notes on the stock made sense.

“There is a good story behind it. It’s a speculative play, but unlike crypto, AI is a real thing and Nvidia is well positioned in the race to dominate this market.”

Baskets, ETFs

Weighted baskets were more visible than usual last week. The top deal in this category was HSBC Bank plc’s $ $30.24 million of three-year autocallables linked to an equally-weighted basket consisting of Goldman Sachs Group, Inc., JPMorgan Chase & Co. and Morgan Stanley. The annualized call premium was 14.25%. Investors were fully exposed to the downside. BofA Securities, Inc. was the agent.

ETF underliers do not tend to generate large notional sizes. Last week was the exception with BofA Finance LLC’s $58.43 million of 15-month leveraged notes on the iShares U.S. Aerospace & Defense ETF. The payout was triple the gain up to a 13.2% cap. No protection was offered on the downside.

ETF-linked notes amounted to 13% of issuance volume last week, or twice their year-to-date market share.

Canadian players

The top agent after BofA was UBS, which sold $160 million in 26 deals, or 12% of the total.

It was followed by Morgan Stanley.

The No. 1 issuer was CIBC, bringing to market 11 offerings totaling $263 million or 19.7% of the total.

The four Canadian issuers (CIBC, Royal Bank of Canada, Bank of Nova Scotia and TD Bank) dominated the market with the issuance of 54 deals totaling $748 million, a 56% share.

A subset of $577 million of notes issued by those Canadian banks were priced within BofA Securities open architecture platform.

© 2015 Prospect News.
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