Agents price $1.76 billion in March; BofA prices nearly two-thirds of week’s total volume

By Emma Trincal

New York, April 1 – The last full week of March was not the best end of the month so far this year, but it was strong enough to allow the year to record a good advance from last year, according to data compiled by Prospect News.

Agents in the week ended Friday priced $1.76 billion in 244 deals. Compared to the final week of January (over $5 billion) and the week closing February ($3.69 billion), the final days of March were a bit slower, according to the data.

It is possible that some large deals may have printed on Monday or Tuesday, but their settlement would overlap into April.

March

Among the factors contributing to the relative strength of volume was the pricing of eight deals in excess of $50 million.

But even with the largest one at around $200 million, deal sizes were smaller in March than in January, which saw two deals from JPMorgan together total more than $1 billion and another price for about $300 million.

A second factor was the higher-than-average participation of BofA Merrill Lynch even for a calendar-end period. This agent alone sold almost two-thirds of the volume issued totaling $1.08 billion in only 24 offerings.

The top three deals of the week, which together made for more than a quarter of the volume, were distributed by BofA Merrill Lynch.

“It could be that the others didn’t do that much,” a structurer said.

“Or it could be a tactical positioning. They may be positioning their reps in response to all the talk about interest rates going up that has been going on forever.

“Also there’s been some volatility in the market. It helps.”

A market participant attributed BofA Merrill Lynch’s market share to the agent itself.

“They’re the textbook example of how to run a powerful structured notes business. It’s hardwired into the firm’s DNA. Notes are an alternative, and often superior, way of gaining exposure to an index. Bank of America Merrill Lynch’s senior management gets it, supports it and promotes the investment class throughout the entire system,” he said.

Skew

Volume on a monthly basis is trending slightly downward since the beginning of the year with January the best month and March the weakest one. Volume is down nearly 10% from March 1 to March 27 compared to the same period in February. However, for the same period, which does not include the entire month, March this year was up by nearly 14% from a year ago.

“The billion-dollar JPMorgan private bank [deal] of January is distorting the league table,” the market participant said.

Thanks to a robust January, volume for the year as of March 27 is also higher, showing a 12% increase from last year, according to the data.

Leverage, no protection

The most commonly used structures last week were leveraged notes and market-linked step-ups with or without an autocallable feature. Leverage represented more than 55% of the total, with two-thirds of that going into products with principal fully at risk and one-third in leveraged notes incorporating buffers or barriers.

The two largest deals were leveraged notes with full downside exposure.

Bank of America Corp.’s $201.44 million of 0% Accelerated Return Notes due May 27, 2016 linked to the Euro Stoxx 50 index featured a 300% upside participation rate up to a 19.05% cap. Investors were fully exposed to the downside. It was the top offering.

Bank of America also issued and sold the No. 2 deal, $193.53 million of Accelerated Return Notes linked to the S&P 500 index. It was another 14-month issue with the same structure except for the maximum return, which was set at 11.16%.

Both structures were short-term plays with a higher leverage factor and no downside protection.

It did not surprise the structurer.

“What happens is that if you put some protection on the downside, the cap comes down significantly,” he said.

“That doesn’t look attractive in the current environment. You may be able to introduce a small amount of protection, but 5% is a little bit of a tricky buffer and 10% will definitely kill the upside.”

Autocallable step-ups

Autocallable reverse convertibles, which are not the most widely used structure coming from BofA Merrill Lynch, took the back seat last week, accounting for only 6.75% of the volume. There were 74 deals totaling $119 million. The main agents were JPMorgan and UBS.

However, BofA Merrill Lynch has been increasingly adding an autocall feature to its market-linked step-up notes, a structure it has been selling for a while but originally not with an autocall.

The No. 3 offering was part of this category of products. It was Deutsche Bank AG, London Branch’s $110.35 million of 0% autocallable market-linked step-up notes due April 3, 2018 linked to the Euro Stoxx 50.

The notes were called at par of $10 plus a call premium of 12.26% per year if the index closed at or above the initial level on any annual call observation date.

If the index finished at or above the initial level, the payout at maturity would be par plus the greater of the step-up payment of 35% and the index return. Investors were fully exposed to any index decline.

BofA Merrill Lynch was the underwriter.

“At first you have a very simple structure. It’s a step up. A point-to-point payout with a minimum positive return. If you introduce more complexity, it’s simply to be able to offer better terms,” the structurer said.

“You add the callability and you get a little bit of a better coupon. Plus investors have the opportunity to get their money sooner. They like that because they can lock in a higher return and there is no more risk on the table. Brokers like it too because they can make more money. Everybody likes the autocall. Bank of America is not responding to competitive pressure, I don’t think. It’s simply a way to adjust to a challenging pricing environment.”

Going international

The fourth-largest issue was brought by Barclays Bank plc. It priced $69.55 million of 0% Accelerated Return Notes due May 27, 2016 linked to the JPX-Nikkei 400 index.

The fact that three out of the week’s four top deals offered exposure to the European or Japanese equity markets indicated that investors’ interest in non-U.S. equity products continued to be strong.

“The billion-dollar deal done by JPMorgan private bank and issued by Barclays and Goldman was based on a research recommendation to diversify by investing in non-US equities,” the market participant said.

He was referring to the pair of very large deals sold in January – a $547.55 million offering of notes issued by Barclays and $497.52 million issued by Goldman Sachs Group, Inc. Both products were linked to an equity basket consisting of the Euro Stoxx 50 index (58% weight), the FTSE 100 index (21% weight) and the Topix index (21% weight).

“European stocks are considered by several analysts and economists as undervalued compared to the record highs of the S&P, the Russell and the Dow Jones. Also, the U.S. dollar is strong against the euro, which creates an FX arbitrage – the buying power of the U.S. dollar makes investment in the Euro Stoxx a compelling opportunity,” he said.

Barclays’ Accelerated Return Notes linked to the JPX-Nikkei 400 had a payout of three-times the index gain capped at 14.91% with downside exposure to any losses. BofA Merrill Lynch was again the agent.

“The need to look for foreign equity indexes is driven by pricing constraints. There is just not enough volatility in the U.S. If you go to Europe or Japan, you find more vol and as a result more upside potential,” he said.

He compared the three big leveraged notes distributed by BofA Merrill Lynch, which had in common a 14-month tenor, lack of downside protection and three-times leverage factor on the upside.

The top deal, linked to the Euro Stoxx 50, offered a 19.05% cap. Barclays’ notes linked to the JPX-Nikkei 400 allowed for 14.91% on the upside. But Bank of America’s notes based on the S&P 500 had a cap of only 11.16%.

“Those caps on the same structure illustrate the point. The S&P doesn’t give you much room on the upside,” he said.

The top single-stock deal ranked No. 5 on the list and was brought to market by Goldman Sachs. It was $60 million of 8% equity-linked notes due March 31, 2016 linked to the common stock of Laboratory Corp. of America Holdings.

Behind BofA Merrill Lynch, the top agent, was UBS with 80 deals totaling $165 million, or 9.37% of the total volume. It was followed by Goldman Sachs, which brought to market $141 million in 16 deals, or 8.05% of the total.

“They’re the textbook example of how to run a powerful structured notes business.” – A market participant on BofA Merrill Lynch

“What happens is that if you put some protection on the downside, the cap comes down significantly.” – A structurer

© 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.