Agents price $1.04 billion of structured products during week; BofA grabs nearly half of volume

By Emma Trincal

New York, March 1 – The week ended Friday was short and sweet for the U.S. structured notes market. Agents priced $1.04 billion in 218 deals, a sharp increase from $776 million the week before, according to data compiled by Prospect News.

Bank of America had a big lead with 47.6% of the total, or $498 million in 17 deals. Such input was not surprising: the agent closed its month last week, setting the tone for the month-end. In the last week of January, Bank of America priced $864 million and captured 40.5% of the market.

“These are BofA’s monthly offerings out there. These have been out there for the month. It’s always massive,” a sellsider said.

Till the fat lady sings

However, these figures both for the top agent and its peers, are skewed until all the offerings are filed with the Securities and Exchange Commission, which is unlikely to happen before all deals settle, three days after the end of the calendar month.

Case in point: the year-to-date volume of $7.25 billion, up 18.5% from last year’s $6.12 billion, should be read cautiously. It only reflects sales for the year through Feb. 24. But in February 2016, for instance, about $1 billion priced on the 25th and on the 26th of this month.

Still, sources said the numbers are encouraging.

Leverage

“Look, we have an extensive equity market rally. The Dow is hitting 21,000 today. The markets are really strong. Rates continue to rise. It’s a good environment to be investing,” the sellsider said.

“The lack of volatility takes away some of these benefits if you’re selling vol. But if you want to be long something, the low volatility helps a lot.”

Leveraged deals accounted for half of last week’s sales or $513 million issued in 44 offerings, according to the data. The flow was equally spread between leveraged notes with downside protection (barrier or buffer) versus unprotected structures. BofA Merrill Lynch priced two-thirds of the total issuance of leveraged products in just 10 deals.

Leverage is always a high component of volume when Bank of America hits the market at the end of each month since the structure is one of the most popular among its brokers and clients alike. But the current bull market is a strong contributing factor, the sellsider said. Most of the upside can be attributed to new policy expectations.

Trump trade

“Love him or hate him, tweeting or not tweeting, Trump drives this rally because he seems to be extremely pro-growth,” he said.

“Until something breaks, people are very bullish.

“We all know that what goes up must come down. It’s the law of gravity. But investors are confident right now.

“We haven’t seen a major correction since Brexit. The market is very upbeat.

“Is there too much complacency among investors? Probably. Do people need to be a little bit cautious? I think so.

“Anytime you keep on picking something because it’s going up, hoping to make the money you made last week, it’s always a red flag.”

Search for yield

Income products continued to do well. Autocallable contingent coupon notes represented more than 20% of last week’s volume with $211 million in 132 deals, according to the data.

Despite the unfavorable pricing environment due to low volatility levels, those products are in high demand, he said.

“You get an OK coupon...not bad...but not that great. Then it’s a matter of: is this rate enough for the risk I’m taking?” he said. “Well, when the 10-year Treasury pays 2.46% and you can earn 6% on a five-year note, guess what? People buy the note linked to the equity and they think it’s worth taking the risk.

“Rates are up a little bit but not that much.

“Income is always going to be the story as long as rates are staying low.”

Top deals

HSBC USA Inc. issued the top deal with $98.67 million of 14-month Accelerated Return Notes linked to the S&P 500 index.

The payout at maturity was par plus triple any index gain, up to a 10.32% cap. If the index fell, investors would lose 1% for each 1% decline. Merrill Lynch & Co. was the agent.

The second largest deal offered one-to-one exposure to a European equity benchmark. GS Finance Corp. priced $60 million of two-year notes linked to the Stoxx Europe 600 EUR Net Return index.

“The client probably did this trade to hedge against currency risk,” said a structurer.

“Your index is invested in euros but you keep the same weightings in the dollar instrument. It’s a quanto trade, meaning you remove the FX risk.”

The Euro edge

Last week’s appetite for European equity exposure was notable. A notional of $288 million in 21 deals, or 26% of the volume, was linked to a European benchmark or featured a significant indirect exposure to this market, according to the data. Some notes were linked to the Euro Stoxx alone. Others were worst-of based on three indexes, which were the Euro Stoxx 50, the S&P 500 and the Russell 2000 indexes. Finally a number of notes were linked to an international basket of equity indexes in which the Euro Stoxx was the top component, weighing either 37% or 40%.

Those trades may offer more premium than a purely U.S. equity play, the sellsider said, hence, their appeal.

“The French elections are coming up. What if Le Pen is elected? It could be as significant as Brexit,” the sellsider said.

The far-right candidate to the Presidential elections in France has vowed to quit the euro, which has stirred fear in European and global markets.

“A separation from the European Union would be dramatic. The fear factor is rising. Volatility is up in Europe,” he said.

“It helps pricing. When clients are asking for a certain kind of yield and volatility is not there, you have to find the risk somewhere. There is risk in Europe, political risk. It sweetens the deal. That’s probably why you’re seeing those trades.”

Step-up

The third deal was also issued by HSBC and sold by BofA Merrill Lynch. It was $46.06 million of five-year autocallable market-linked step-up notes due Feb. 28, 2022 linked to the Russell 2000 index.

The autocall at the initial price was observed annually, paying a 7.1% premium. If the notes were not called at maturity but closed above the step-up value of 135% of the initial price, investors had a long, uncapped exposure to the underlying. If it closed up but below the step, investors received the 35% digital payment. There was a 15% buffer on the downside.

On the issuer’s league table, HSBC USA Inc was No. 1 last week with $319 million in 11 deals, or 30.5% of the total. The issuer was the most widely used name by BofA Merrill Lynch as it represented 55% of its sales in eight offerings.

In terms of top agents, Barclays and JPMorgan came after BofA Merrill Lynch, each pricing $97 million in 18 and 27 deals, respectively.

“We haven’t seen a major correction since Brexit. The market is very upbeat.” – A sellsider

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