Structured products issuance $817 million in holiday-shortened week; BofA nabs 75% of volume

By Emma Trincal

New York, Feb. 27 – Was last week the closing week for Bank of America or will there be much more to come in the present week?

The answer is not clear. In all, 112 deals totaling $817 million priced in the shortened holiday week ended Friday. Bank of America priced on its own nearly three-quarters of it with $603 million. It did so in only 24 offerings, or just about a fifth of total deal count, according to preliminary data compiled by Prospect News.

This week, last week

“That they did three-quarters of the volume last week is pretty impressive. We know that they price their whole deals one week in the month. They’re not in the market consistently. But still. I am surprised they did so much,” said Andrew Valentine Pool, main trader at Regatta Research & Money Management.

The high market share of Bank of America points to the assumption that the giant agent booked its monthly calendar last week.

On the other hand, more deals could have been pricing this past Monday and still settle in February.

Also, total notional appears thin for the close of a month. Last year for instance, the average volume for each week that saw Bank of America pricing its monthly supply was $2.15 billion, according to the data.

It remains possible that last week’s volume figures may be incomplete by press time, especially for the rest of the market. Next week’s revised data will offer an answer.

Alternatively, volume may simply have been slow, said a sellsider.

“People are caught in the headlights with the market especially after December. It’s a short month too,” he said.

Top issuer too

Bank of America was the agent for the first 14 deals except one Goldman Sachs issue ranked fifth in size.

Another surprise by Bank of America was how it climbed to the top of the issuers’ ranking last week. Its BofA Finance LLC finance unit issued half of the volume in 13 deals, the data showed.

This goes against this agent’s typical tendency to use other issuers than itself for its large block trades, in particular the Canadian banks such as Canadian Imperial Bank of Commerce (only 2.26% of last week’s volume) and Bank of Nova Scotia (absent last week).

Perhaps the trend is worth watching. For the year to date, BofA Finance has grabbed the first ranking among issuers with $782 million, a 13.8% market share, slightly higher than JPMorgan Chase Financial Co. LLC, which is now second with $752 million.

A better February

Volume for February was robust compared to January.

Agents sold $1.98 billion through Feb. 22, a 43% increase from $1.38 billion during the same period last month.

“January was such a slow month for issuance,” said Pool.

“We had October. Not a good month. November: a pretty bad month. Then December... an awful month.

“Clients who normally are willing to buy new structured products issues every month, by that third bad month might have called their advisers to tell them they’d rather keep their money in cash or go to a different type of investment.

“In December, people were not talking to their advisers. It was the holidays.

“Then the market rallied in January but people didn’t really know if it was not going to be a short-term rebound leading to another pullback. There was just not enough conviction.”

Rally goes on

To be sure, the bulls regained control this year. Week after week the U.S. market continued to rise. For the year, the S&P 500 index is up more than 11%.

Meanwhile, the CBOE Volatility index, or VIX, has plunged 58% to 15 from 36 on Christmas Eve when the market bottomed.

The low volatility, which is back to its levels prior to the October sell-off, may be one of the explanations for the thin amount of income products last week, which rely on shorting volatility to raise the coupon. Autocallable notes made for 11% of the total versus 58% for leveraged notes. Within leverage, two-thirds of the products came with either a buffer or barrier.

Leverage reigns

A more plausible explanation for the prevalence of leverage could be the imprint of Bank of America, which uses this structure for the majority of its trades. Since those are linked to indexes, the volume of equity index-linked notes was 85% last week, higher than average by about 10 percentage points.

But deteriorating pricing conditions as the market rallies (and volatility decreases) along with investors’ need for protection might also have been at play to tilt issuance toward leverage.

“Most advisers are trying to protect their clients’ portfolios. Leveraged products can easily be buffered while autocallables are based on barriers. I wouldn’t call a barrier downside protection,” said Pool.

Unchartered territory

The rally has persisted in February, which may have helped volume.

Last week, the Dow Jones industrial average was up 0.7% on its ninth week of bullish run.

“Things have improved in February. Clients trust the rally a little bit more, but not entirely,” said Pool.

What comes next is anyone’s guess. Many agree that the lack of conviction or clarity about the market is putting the brakes on issuance.

“Because the past three months were just so nasty, people remain concerned. How many advisers are willing to tie up their money in structured products without having a clearer picture of where the market is heading to?” said Pool.

The market roller coaster is part of the current anemia.

In a research note, Patrick O’Hare, analyst at Briefing.com, put it that way: “the lack of conviction can be attributed in part to all of the conviction that has been shown since October. There was selling conviction that took the S&P 500 down 20% and then there was buying conviction that subsequently took it back up 20%.”

Big yearly drop

The slowing of the issuance pace seen in the past three months (November through January) has already dented the 12-month trailing figures.

The total volume for the trailing 12 months from Feb. 23, 2018 to Feb. 22, 2019 was $52.12 billion, which represents a 6.7% drop from the previous 12-month trailing period of $55.83 billion.

The tally for the year to date is far from encouraging.

Volume so far through Feb. 22 is down 45.5% to $5.67 billion from $10.40 billion.

This decline is accompanied by a steep reduction in the number of deals, which are down by one-third to 1,633 from 2,434.

“It’s scary for everyone and for us too. You don’t get paid if there’s no business,” the sellsider said.

“It’s more the December scare I think. Maybe February has improved and we’ll start coming back up. By March, with the Powell put, investors hopefully will feel more confident.

“People realize that the Fed can never shrink its balance sheet. They’ve started to figure that out.”

He was referring to Federal Reserve chairman Jerome Powell’s switch to a more dovish stance in the immediate aftermath of the December sell-off, which has been reaffirmed several times since the beginning of the year, including on Tuesday during the Fed’s semiannual testimony before Congress. The change in tone from rate hiking to “patience” has contributed to reassure the market (hence the term Fed “put”), pushing stock prices back up.

Top deals

The top deal last week was the third largest of the year.

BofA Finance LLC priced $95.8 million of 14-month leveraged notes with no downside protection linked to the S&P 500 index. The payout at maturity is par plus triple any index gain, up to a 12% cap.

“There’s no protection. You have to be confident. Good for them. I wouldn’t do that...not where we are in the current market cycle,” said Pool.

“There is a reasonable chance to believe that in 14 months, where the market is going to be is a bit questionable.”

It was also BofA Finance that issued the top two deals of the year at the end of January for $133.93 million and $97.75 million. Both structures were also leveraged bets on the S&P 500 index.

Back to last week, BofA Finance’s $83.1 million of 14-month notes was the second largest deal. Also tied to the S&P 500 index (as were the top six deals priced by this agent), the structure offered two-times the upside up to a 9% cap with a 5% buffer on the downside.

“It’s a bit weak on the downside. We prefer 10% buffers. That’s just our management style,” Pool said.

Extending the maturity to two years, BofA Finance priced $72.3 million with double the upside up to a 15.9% cap and a 10% buffer on the downside.

“That’s definitely better than the 5%. We know that you have to extend maturities to get more downside protection. We think it’s worth the tradeoff,” Pool said.

Still sold by Bank of America, the next large trade was issued by HSBC USA Inc. The $44.4 million of five-year notes on the S&P 500 index pays 1.25 times the return in the upside up to a 53.27% cap.

The downside features a 20% buffer with absolute return on the downside for any decline of 20% or less.

Big commodity

The fifth deal offered a surprise: it was relatively large in size and based on commodities, one of the most unloved asset classes in structured notes along with FX.

GS Finance Corp. priced $41.05 million of 0% notes due March 27, 2020 linked to the Bloomberg Commodity index.

The payout at maturity will be par plus any index gain. Investors will be fully exposed to any index decline.

Two step-ups

Finally, BofA issued $35.98 million of six-year autocallable market-linked step-up notes tied to the S&P 500 index again.

The notes are automatically called annually above initial price at a premium of 6.7% a year.

If the index finishes above the step-up level – 130% of the initial level – the payout at maturity will be par plus the index gain. From 100% to 130%, the payout will be par plus the step-up payment of 30%.

If the index falls by up to 15%, the payout will be par. Investors will be exposed to any losses beyond 15%.

“I like the concept of a 6.7% premium if you’re up. But if you don’t get called what are the odds that you’ll end up positive and benefit from the 30% boost?” said Pool.

“My concern is the 15% barrier.”

Bank of America distributed another step-up on the behalf of HSBC USA for $32.86 million.

The annual call premium of 9% is paid above initial price. As a three year, the shorter product lacks the downside protection.

The top agents after Bank of America last week were JPMorgan and Goldman Sachs, with each pricing $44 million in 19 and three offerings, respectively, or approximately 5.4% of the total volume each.

HSBC was the leading issuer after BofA Finance, bringing to market $198 million in 12 deals, or 24.2% of total issued.

“Things have improved in February. Clients trust the rally a little bit more, but not entirely.” – Andrew Valentine Pool, main trader at Regatta Research & Money Management

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