BofA makes big push with $491 million of structured notes issuance; tally for week $560 million

By Emma Trincal

New York, April 5 – The last week of the month, which also ended the first quarter, tallied $560 million in 61 structured products deals, according to preliminary data compiled by Prospect News. Not all deals were filed with the Securities and Exchange Commission. As a result, the count is only a first estimate, which will be revised upward.

From the available data however, BofA Securities, which prices most of its inventory at the end of each month, naturally took the lead with the sale of $491 million, an 88% market share.

The bulk of this agent’s notional sales consisted of big Accelerated Return Nots (ARNs) with two- to three-times leveraged capped short-dated notes with or without buffers.

Block trades

The top BofA leveraged offering was Canadian Imperial Bank of Commerce’s $86.23 million of 14-month ARNs linked to the S&P 500 index, paying triple any index gain up to 17.01% with no downside protection.

BofA Finance LLC itself issued $43.41 million of the identical deal but on the Euro Stoxx 50 index, which led to a higher cap of 25.51%.

“International indices often give you better terms, mainly because they pay higher dividends,” said a sellsider.

Still distributed by BofA Securities, Bank of Nova Scotia priced another large leveraged deal for $39.33 million with a two-year maturity on the S&P 500 index. With 2x the upside capped at 21.46%, the structure offered a 10% buffer on the downside.

Leveraged structures last week made for 57% of total sales, versus only 15% for autocall structures. The unusually low share of callable notes is probably due to delays in filings. The large proportion of leveraged deals can be attributed to BofA’s footprint. But pricing and market conditions may also have been at play.

Leverage and volatility

“Most structured notes benefit from higher volatility, including leverage, and we’ve recently had a spike in volatility with the banking scare,” the sellsider said.

“When you structure a leveraged note with a cap, you buy at-the-money calls, which are more expensive when vol is high. But at the same time, you also sell out-of-the money calls, which also are more expensive,” he said.

The at-the-money calls correspond to the upside participation, which kicks in at or above the initial price. The out-of-the-money calls are set at a higher strike price, which is the cap level above which the call can no longer yield any gain.

“When you structure that type of note, you sell more calls than you buy, you’re net selling vol, meaning you get a net credit from that spread. The higher the vol, the more money you have to buy the calls. That’s how you get better pricing,” he said.

High volatility also helps autocall pricing since the position is net short volatility. Lower volatility levels on the other hand can improve the pricing of principal-protected notes although structures are more rate-sensitive than volatility-sensitive, he said.

Bulls are back

But the appeal of leveraged products was more driven by demand than pricing, said a market participant.

“The market is way up this first quarter. People are excited. They’re chasing returns. Doing uncapped growth bullet notes with leverage makes total sense,” this market participant said.

“Nobody was uncapped leverage in October of 2022 when the Nasdaq was down 32%.”

The Nasdaq index ended the first quarter on Friday up 16.8% and the S&P 500 index gained 7%. The Dow Jones industrial average however rose less than 1%.

“It’s the opposite of last year when the Dow was outperforming,” he said.

Equity markets rallied last week as banking fears eased up. The news over the weekend that First Citizens was buying Silicon Valley Bank contributed to calming nerves. Some of the previous week’s concerns over the widening of Deutsche Bank credit default swaps were also put to rest.

For the week, both the S&P and the Dow rose over 3% while the Russell 2000 index gained nearly 4%.

Rates swings

Less recession anxiety pushed bond yields higher as the flight to quality lost some momentum. The two-year Treasury note yield rose 29 basis points last week to 4.06% and the 10‐year increased by 11 bps to 3.49%.

However, the trend over the quarter is the opposite: Interest rates have fallen across the curve, which suggests that the bond market remains focused on a potential economic slowdown.

The market participant brought up another reason behind the decline in interest rates. He argued that stock investors are hopeful again that the Federal Reserve will lack resolve in its fight against inflation.

“Equities are up because people are less nervous about banks. Central banks have stepped in. The Fed has injected $300 billion in loans to the banks, reversing six to seven months of quantitative tightening,” he said.

“Rates are dropping because of a repricing of expectations. All of a sudden, the Fed is coming up with a massive stimulus. It just looks like they’re in a panic mode about the banks.

“The market doesn’t expect them to raise rates much. In fact, [Federal Reserve chair Jerome] Powell himself has announced that he’ll do another hike but probably will slow things down.”

As a result, buying bonds has become safer, he added, because investors no longer have to worry about the price of their bonds falling in a rising yield environment.

“People feel that the Fed is concerned about banks, that it’s done raising rates. Before, when the Fed was hiking, people were selling bonds and rates were going up. It looks like the opposite is happening now.”

Others disagree.

“Do you reasonably expect the FOMC to say, ‘Sure, we’ve whipped inflation, so let’s start cutting rates?’ Of course not,” Steve Sosnick, chief strategist at Interactive Brokers said in a research note.

PPN pricing

The extreme volatility of interest rates makes it difficult to reach a conclusive interpretation. But both the two-year and 10-year Treasury yields have finished lower this quarter. The 10-year Treasury yielded 3.28% on Wednesday, a 60 basis points drop from its level at the beginning of the year. The two-year dropped to 3.74% from 4.43% on Wednesday.

This trend may threaten the recent expansion of principal-protected notes, noted the market participant.

“With rates dropping, terms have definitely dropped,” he said.

He compared the pricing of two PPNs, one before the SVB crisis on March 8 and the other in the wake of the Credit Suisse merger with UBS on March 13.

The first deal was a three-year PPN at-the-money digital on the worst of the S&P 500 index and the Dow. Its digital payment was 35%. The second one was supposed to replicate the template. But its coupon had to be cut to 30% and its maturity extended to four years, he said.

Another factor playing against the pricing of some products –this time, autocalls – is the relatively muted level of volatility. Despite a spike over 30 on March 13, the VIX has remained muted, staying below its historical average of 20. Its 18.70 closing level on Friday remained nearly 50% off its 36.64 high of May.

“Anytime the VIX jumps, callables definitely benefit from it,” the market participant said. Unfortunately, those spikes have remained short-lived and the opportunities for higher coupons do not last.

Issuance volume

Volume for the first quarter is already down 22%, from $25.79 billion to $20.1 billion, according to the preliminary data.

“People have less confidence in banks and that could be the reason. But it’s pretty irrational. Confidence will come back. In fact, it has already come back somehow with regulators stepping in,” the sellsider said.

“The fall of SVB is not the contagion we had in 2008. At the time we had systemic risk due to bad mortgage loans. SVB’s failure is the result of interest rate risk mismanagement. Credit Suisse’s problems were due to poor decisions and bad bets,” he said.

But renewed concerns about credit risk are not helping the industry, he added. In fact, they could contribute to boost the marketing of competing products.

“BlackRock is about to launch buffered ETFs and that would be a big change in the ecosystem,” he said, referring to a recent news report.

The “good news” is that structured ETFs can’t really compete with all structured notes, he added.

“SEC rules won’t allow their sponsors to price autocalls. But on simple structures, like buffered ETFs, they could really become a real challenge to structured notes.”

The market itself also helped explain this year’s slow start in structured notes issuance, he said.

“Even though the market is up significantly, there are no perceived trends, therefore, no stories. Structured products are a way to express a view. If you don’t have a view, you don’t have a story. And if there is no story, there is no sale.”

The top agents after BofA were Morgan Stanley and JPMorgan.

The No. 1 issuer was CIBC with $148 million in seven deals, a 26.4% share.

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