BofA pushes up structured notes tally to $1.26 billion for week, grabs 55% market share

By Emma Trincal

New York, March 6 – The month ended on a high note both for structured notes issuance totaling $1.26 billion in 197 deals last week and for the stock market hitting fresh record highs on Friday.

BofA was the leading player pushing up total sales above the $1 billion mark as the agent prices the bulk of its monthly inventory on the final week of each month.

BofA Securities sold $689 million in 56 offerings, a 55% share of the week’s total, according to preliminary data compiled by Prospect News.

The S&P 500 index scored a new all-time high on Friday as the Nasdaq beat its November 2021 record. In addition to the continued excitement around artificial intelligence, inflation was another trigger for last week’s rally with the core PCE gauge in line with expectations.

Big ARNs

BofA pumped up last week’s numbers with its arsenal of large “Accelerated Return Notes” or “ARNs, which offer high leverage over short tenors with adequate caps paid for by removing the downside protection.

As a result, the flow was dominated by index-linked notes, which made for 75% of the total. The top three trades (all sold by BofA Securities) totaled $205 million and were linked to a single index. Leverage accounted for 40% of the week’s total versus 20% on average this year.

Bank of Nova Scotia issued the top three deals, all via BofA’s distribution platform.

The top one was Bank of Nova Scotia’s $96.28 million of 14-month ARNs linked to the S&P 500 index. The payout at maturity is triple the index gain, up to a 13.22% cap. Investors will be exposed to any index decline.

Scotia issued another 14-month deal for $47.96 million with the same downside exposure and leverage multiple but linking the return to the Russell 2000 index, which lifted the cap to 20.1%.

While capped, those leveraged trades are a touch bullish given the lack of any protection on the downside, sources said.

“People continue to ride this bull. The market still has legs. The economy is relatively strong. The earnings are good. When you have good earnings, the market is doing well,” said Samuel Rosenberg, managing partner at Lutetia Capital.

Playing it both ways

But last week reflected the bulky pricing of one prevailing agent. A more accurate picture observed over the past few weeks revealed a broader diversification across structures as if advisers were becoming a little bit more cautious, sources said. While not always visible by the numbers, some structuring patterns seemed to indicate a greater need to hedge or to gain from both directions of the market.

One illustration of this is how most digital payouts are constructed. Out of the $79 million of digital notes issued last week, 85% or $67 million were priced “in-the-money,” meaning that investors will get paid the digital at or above a strike below the initial price. The result is the ability to earn the payout if the underlying is both positive and negative as long as the final price stays above the digital strike.

An example was last week’s JPMorgan Chase Financial Co. LLC $31.56 million of one-year digital buffered notes on the S&P 500 index. The payout at maturity will be par plus 7.05% if the index gains or declines by no more than its 15% geared buffer.

Flexible absolute

Absolute returns fit the bill when it comes to getting paid on the downside. The issuance volume of such notes has recently increased. Last week for instance, the structure amounted to $146 million, or 12% of total sales in just 12 deals, by far exceeding the digital tally.

Scotia priced the top absolute return issue for $70.77 million consisting of 14-month capped notes on the S&P 500 index paying the index gain up to a 10% cap and an absolute return for any index decline within the 8.75% buffer zone.

Unlike this product, some issuers are giving their absolute return notes a bearish edge by stretching the size of the buffer, giving investors more gain potential from a negative market than they could earn on the upside up to the cap.

Such was the case with Barclays Bank plc’s $8.26 million of two-year notes on the S&P 500 index paying par plus the index gain capped at 15.55%. Investors received the absolute return up to a 25% decline, the equivalent of a 25% buffer range.

Sharks

Bear notes are not much visible at the moment. But structures giving the upper hand to bears have been spotted, such as the so-called “shark” notes.

GS Finance Corp. for example priced $1.6 million of three-year notes on the S&P 500 index featuring a double American barrier, one at 70%, the other at 130%. If the barrier is breached (on any day), investors will get a 12.5% bonus at maturity. If not, they will receive the absolute return within the -30% to +30% range. Principal was guaranteed.

Those products are bearish on a relative basis. Gains can be made on the upside too. But the potential to outperform is the greatest on the downside.

“The market is so toppish, people are increasingly interested in having participation in the downside,” said a structurer.

“Sometimes you want both sides of the market. Those digitals or absolute return notes reflect a rational decision. If you’re concerned about the market, you want to be able to outperform on the downside.”

Exercising caution

Issuers overall will show a variety of structures reflecting different, sometimes opposing views, he added.

“You’re going to have all kinds of notes. There’s no such thing as a consensus in the market. If you and I had the same views, we wouldn’t be able to trade.

“If we all agreed there wouldn’t be a market,” he said.

More investors however are showing concerns about the explosive bull market driven by AI, fearing the reemergence of another bubble similar to the dot.com crash of 2000 or the “Nifty Fifty” stocks of the 1970s.

“Some people are beginning to be careful. It’s an Election year. Inflation remains hotter than expected, which dampens the expectations for rate cuts,” said Rosenberg.

Deflated Magnificent

“We had such a run up ever since the last quarter of last year. The S&P’s performance last year was outstanding; the month of January was very strong; we’ve pushed to all-time highs in February.

“Nvidia is making strong imprints on the S&P, so it makes sense to consider that maybe this equity bull run has run its course.

“Things don’t go to the moon.

“Apple, which has been the darling of the stock market, now is starting to give back.”

The share price of Apple Inc. has dropped 11% in the past month.

“Nvidia has been leading the pack, pushing the S&P up, but among the Magnificent Seven, Tesla is down a lot.”

The carmaker’s stock price has dropped 30% this year.

“We’re starting to see cracks in the system and some people are thinking maybe this bull market has extended its stay,” he said.

Always positive

Whether investors are turning more pessimistic, increasingly cautious or even bearish, structured notes are not the best place to express negative views, said Rosenberg.

“You’re going to see hedging or bearish bets mostly in the institutional market, not so much with retail investors and it’s the retail market that buys structured notes,” he said.

Institutional traders have so far been successful in shorting volatility, he noted.

“Now that vol. is so compressed, we’re starting to see the reverse. Some hedge funds are long volatility.

“But you won’t see notes that are short or long volatility. It’s more of an ETF play.

“In theory you could price notes on the VIX. But it’s not being done.

“What people do is to play the downside of the market. Autocalls, letting you earn a coupon if the market is down, that’s one classic example. It’s been a successful one so far.”

As an example from last week, Morgan Stanley Finance LLC priced $39.85 million of callable notes linked to the least performing of the S&P 500 index, the Russell 2000 index and the Euro Stoxx 50 index. The 10.05% contingent coupon was based on a 70% daily-observation barrier. The barrier at maturity was set at 60%.

Top agents, issuer

Morgan Stanley & Co. LLC was the agent, and UBS Financial Services Inc. acted as dealer.

The top agent last week after BofA Securities was UBS with $213 million in 60 deals, 16.9% of the total.

It was followed by JPMorgan.

Bank of Nova Scotia was the No. 1 issuer, bringing to market 22 offerings totaling $503 million, which represented nearly 40% of the total.

Issuance volume is up 10.4% this year through March 1 with $17.24 billion in 3,279 deals compared to $15.61 billion in 4,525 offerings, according to the preliminary data.

© 2015 Prospect News.
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