BofA brings structured products issuance up to $1.27 billion on the week; year breaks a record with $52.38 billion

By Emma Trincal

New York, Dec. 5 – The month of November had a nice finish with $1.27 billion structured products issuance in the week ended Friday, a result attributed to Bank of America’s impressive volume as well as a sharp market rally, seeing the S&P 500 index rising 4.8% on the week, erasing November losses.

“It’s the month-end pricing. It’s the end of the monthly calendar with Merrill bringing its huge trades,” said Matt Rosenberg, sales trader at Halo Investing.

BofA Merrill Lynch priced $883 million or 70% of the total in 30 deals.

“The size of their distribution dominates the market. Bank of America has been doing it over and over for years,” a sellsider said.

“There isn’t much innovation in what they do. They do simple deals. That’s their bread and butter. But they do it over again and people go back to the same things over and over again.”

Record year

The bigger news, however, comes from the year’s full picture: 2018 is now officially the best year ever since Prospect News began tracking issuance flows in 2004.

The notional sales amount recorded for this year’s first 11 months is $52.38 billion. It is higher than the full year of the preceding record, which amounted to $52 billion. That previous “best year” was 2017.

“We’ve seen a lot of uncertainty in the market during the entire year. The truth is that it’s a good thing for structured products,” said Rosenberg.

“People have benefited from much better entry points during periods of volatility. You had a greater number of products, smaller products, but with the new technology platforms, it scaled up the business in general.”

Way to go

How much better will this year be compared to last year? The next three or four weeks will tell.

Volume this year through Nov. 30 is up 9% from $48 billion during the same time last year.

Two factors will be key for the final count. First, the data for November at this early stage of a new month is probably underestimated and will be subject to upward revisions. On the other hand, sales in December 2017 were on the high end with $3.94 billion. A lot of this year’s advance can be attributed to the pricing of giant synthetic convertible offerings in January and February. However, the good news remained unchanged: 2018 has broken a record and is now the best year for U.S. structured notes issuance.

“We didn’t see a bull market this year. We saw a lot of ups and downs, especially with our president. Just look at Monday’s rally after the trade truce with China and now, yesterday...a big selloff after he began to talk about tariffs again. The market doesn’t really like that,” said the sellsider.

“On the other hand, when you really have no idea which way the market is going, it’s a really good thing for structured products. That’s why we had a successful year.”

Top six, all BofA

BofA Merrill distributed all of the top six offerings last week.

First, BofA Finance LLC priced $148.78 million of 14-month leveraged capped notes with no downside protection on the S&P 500 index. The leverage factor was three and the cap was 13.92%.

It was the year’s third largest deal, excluding the series of bulky synthetic convertible note offerings of the first quarter, whose sizes ranged from $232 million to $600 million.

The $148.78 million deal was a repeat of one issued the previous month by Scotia Bank, also via BofA Merrill Lynch, which had priced for $148.40, showing the same maturity and terms.

“This is just a note they do every month. It’s a core part of the allocation. They will always have large notional sizes on those deals,” said Rosenberg.

Second was BofA Finance LLC’ $94.37 million deal, a two-year note with double leveraged exposure up to an 18% cap. Investors will benefit from a 10% buffer on the downside.

“That one is interesting. A 9% per annum is impressive and you will outperform on the downside. If you expect a more neutral market, the two times leverage is a big plus,” said Rosenberg.

Buffered

The next two deals – the third and fourth – were leveraged buffered capped notes. One, issued by Wells Fargo & Co. priced for $78.51 million. It was another deal on the S&P 500 index. The five-year note showed 1.25 times leverage, a cap of 58.37% and a 20% buffer.

“A five-year with downside protection makes sense for a lot of people...advisers, brokers, banks...this type of product always has a place in anyone’s portfolio,” Rosenberg said.

The other, Bank of Nova Scotia’s $62.53 million deal was another 14-month issue, as with the top deal. The notes will pay par plus double the index gain, up to a maximum return of 10.96%. There is a 5% buffer on the downside.

Step ups

The fifth and sixth deals were autocallable market-linked step ups with annual observations paying a call premium.

If the notes fail to call, investors will receive a step-up value at maturity if the index is positive. If the gain is above the step-up level, the payout is the index return.

HSBC USA Inc. priced one for $59.91 million. It is a six-year note with a 7.25% annual call premium. The step-up value is 130%. The notes offer a 15% buffer on the downside.

Bank of Nova Scotia did the other one, a three-year note for $40.66 million. The annual call premium is 9.8%, the step-up value, 121%.

For this one, investors will be fully exposed to losses.

All-American League

While the S&P 500 index is by far the most popular underlier, sources noted that it is unusual to see all top deals linked to the U.S. large-cap index with hardly any other big trade on either the Euro Stoxx 50 index or other broadly diversified benchmarks.

The top six deals were linked to the S&P 500 index. Only on the seventh ranking was there some variance, Credit Suisse AG, London Branch’s $38.67 million notes offering on the Euro Stoxx 50 index, also via BofA Merrill Lynch.

Deals on the S&P 500 index accounted for 42% of last week’s volume versus only 7% for the Euro Stoxx 50 index, according to the data.

“People use structured products as a good way to complement or substitute existing holdings. Every investor has a majority of U.S. large-cap exposure in their portfolios. So, it’s not surprising that you’ll see most of the issuance on this index,” said Rosenberg.

“While the Euro Stoxx 50 can offer more attractive terms, it’s not necessarily your core holding.”

“People also like the S&P for its diversification. It’s 500 stocks versus 50 for the European index.”

Top players

The top agent last week after BofA Merrill Lynch was UBS with 67 deals totaling $189 million, or 14.9% of the market share. It was followed by Morgan Stanley and JPMorgan.

While it used six different issuers for its trades last week, BofA Finance LLC was still the top issuer with $311 million, a quarter of the total volume issued.

JPMorgan Chase Financial Co. LLC remained the No. 1 issuer for the year with $7.84 billion in 2,048 deals or 15% of the total.

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