Month ends with a bang: 16 structured products deals top $30 million; BofA prices giant deal

By Emma Trincal

New York, Feb. 4 – It takes the final week to evaluate the strength of any given month, and last week wrapping up January, did not disappoint after a pretty slow volume seen earlier in the year, sources said.

Agents sold $1.86 billion in the week ended Friday, versus $745 million the week before, according to data compiled by Prospect News.

It was nearly 7% less than the $2 billion issued in the final week of January 2014. For the overall month, January’s volume of $3.79 billion dropped 7.75% from a year ago, with January 2014 at $4.11 billion.

Still, sources found the size of last week’s offerings encouraging.

There were 16 deals of more than $30 million in size last week. Two products were in the $91 million to $95 million range and one hit almost the $300 million mark, according to the data.

Bank of America contributed to the strength, capturing 53% of the volume in only 22 offerings out of 241 deals.

The top agent priced the top four deals, each in excess of $50 million, which represented $535 million. In just four offerings, Merrill Lynch took nearly 30% of the market share.

Nearly $300 million deal

But the landmark for the week was an unusually large issue: Bank of America Corp.’s $297.38 million of 0% Accelerated Return Notes due March 28, 2016 tied to the S&P 500 index. The structure featured a 300% participation rate in the upside up to an 11.85% cap and no downside protection.

“I’m very impressed with this deal,” a market participant said. “It’s probably one of the largest deals I’ve ever seen. Not the largest but one of the largest. It’s encouraging. It shows that people are comfortable with the S&P at least over the short term.”

For this market participant, leveraged notes on the U.S. benchmark are popular now as investors, while still bullish, expect lower single-digits returns over the short term.

“That deal is enormous. It tells a good story. Having leverage on the upside with that type of cap makes it very attractive because you can really outperform in a modestly bullish market. That’s how the power of structured products comes in.”

Rolls

Last year’s top offering, which priced in November, was JPMorgan Chase & Co.’s $311.34 million two-year return notes tied to the Bloomberg Commodity Index 3 Month Forward Total Return.

Bank of America’s offering last week exceeded in size last year’s No. 2, another Bank of America distributed-product tied to the Euro Stoxx 50 and sold on the behalf of Credit Suisse AG, London Branch for $260.29 million in April.

“These are maybe jumbo deals that get rolled over. You have to go back to one year ago,” the structurer said.

“It’s very typical to get massive deals in January, but this one is particularly impressive.

“It can be due to taxes. Some investors instead of selling at the end of the previous year prefer to wait for January to cash in so they don’t have to take the losses or gains in December. When they sell, they free up cash and can buy structured products and the cycle of rollovers goes on. It’s pure speculation on my part but it’s possible that people had money to roll.”

A distributor said he was not totally surprised at the success of Bank of America with this type of product.

“It’s what Merrill Lynch has in its network. It’s the bulk of its business. They do pure return enhancement notes and buffered return enhancement notes. It’s regular business for Merrill Lynch except the size of this one is huge,” he said.

The majority of the volume priced last week came from short-term leveraged notes with no downside protection. That structure type accounted for $765 million, or 41%, of the total. Equity underliers made for 93% of the total with equity indexes representing 84% of the total, according to the data.

The S&P 500 index remained the most popular benchmark with $339 million sold in 35 deals, or 18% of the total.

“One of the things that helps the U.S. market is where else are you going to put your money?” said the structurer.

“Europe has all sorts of problems. All you hear about Europe are bad news. How long will it take for QE to revive the economy there? Bond yields are low so you can’t put money in bonds. The U.S. market continues to be attractive.”

Russell

Other benchmarks however were seen as very popular as well.

The Russell 2000 index, for instance, used as a stand-alone underlier made for 10.5% of the volume in 23 deals totaling $193 million.

The top deal tied to the Russell 2000 index was the No. 4 deal, HSBC USA Inc.’s $50.25 million of 0% of 3X leveraged notes capped at 15.06% with full downside exposure. Merrill Lynch & Co. was the underwriter.

Goldman Sachs Group, Inc. also priced $40,742,000 of 0% return optimization securities due Feb. 29, 2016 linked to the Russell 2000 index. The No. 7 deal to price, it featured three-times leverage, a 15.35% maximum return and full downside risk exposure.

“Using other indexes like the Russell is a way to diversify a little bit from the S&P. Everybody is nervous as we’re at all-time highs,” the structurer said.

European stocks

Another widely used “non-S&P” benchmark was the Euro Stoxx 50, accounting for a total of $275.50 million sold in 26 offerings, or 15% of the volume. It was used in two top deals.

The first Euro Stoxx deal was Bank of America’s $90.84 million Accelerated Return Notes with a one-year maturity, 300% upside participation, 15.6% cap and full downside exposure. The deal ranked No. 3.

The second Euro Stoxx deal and the fifth largest deal last week was distributed by UBS. It was brought to market by Credit Suisse with $45,834,000 of 0% trigger performance securities due Jan. 30, 2025. It offered a 90% digital return and a 50% downside barrier.

“The levels on the Euro Stoxx are pretty good. It’s a matter of pricing parameters. Right now, it’s OK with this underlying,” the distributor said.

In many instances, deals mixed the S&P 500 index with the Russell 2000 or the S&P 500 with the Euro Stoxx, either under the form of baskets or through worst of payouts.

Oil plays in favor

Finally, plays on oil continued to be in favor. Investors used either the S&P Oil & Gas Exploration or Production index or a direct commodity bet with the S&P GSCI Crude Oil Index - Excess Return.

The second largest deal fell into that specific theme. Credit Suisse AG priced $96.14 million of 0% autocallable market-linked step-up notes due Jan. 27, 2017 tied to the S&P Oil & Gas Exploration and Production Select Industry index. The call premium was 19.25% at the initial price level. The step-up payment was 30%. There was a 5% buffer.

“Oil prices have dropped so much. A growing number of investors think oil has bottomed out,” the structurer said.

“This is a pure play on oil recovery.”

In fact oil prices rallied in the four days prior to Tuesday, jumping 20% from Jan. 29. But they have continued to slide since then.

The second agent after Bank of America Merrill Lynch was UBS, which priced $240 million in 87 deals, or 12.87% of the total. It was followed by Goldman Sachs with 10.05% of the market sold in 25 offerings totaling $187 million.

“Using other indexes like the Russell is a way to diversify a little bit from the S&P. Everybody is nervous as we’re at all-time highs.” – A structurer

“Oil prices have dropped so much. A growing number of investors think oil has bottomed out.” – A structurer

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