Structured products issuance $335 million in slow week; BofA generates 55% of volume

By Emma Trincal

New York, Jan. 21 – As U.S. equity markets recorded their second week of sell-off ahead of the long holiday weekend, investors showed a limited appetitive for structured notes, according to data compiled by Prospect News. Agents sold only $335 million in the second full week of January, which is typically the busiest month of the year.

BofA’s early input

The large contribution of Bank of America Merrill Lynch, which priced alone 55% of the weekly total so early on in the month, suggested an even weaker picture for the rest of the market.

It’s not unusual for Bank of America to be nearly absent during the first half of the month. Last year at the same time – in the second week of January – it sold only $25 million or 6% of the volume but sales amounted to $783 million for that week.

Bank of America with $176 million sold last week may have had a busier week than usual, sources said.

But the 55% market share also suggested that other agents did very little. “There were no Bank of America rollovers last week,” a source said.

Hedging

Volatility was high last week for the second week in a row and U.S. equity markets declined.

Several news items triggered the sell-off, such as the continued falling oil prices, a disappointing report on December retail sales and the Swiss National Bank’s unexpected decision to abandon its franc/euro parity cap, allowing its currency to rise beyond it, which it did.

“You’ll see people continuing to buy structured notes this year, but if volatility remains high, they’ll do it in a different way,” a market participant said.

“Someone owns a stock. They know the market is probably a bubble in the making. They don’t want to sell their position but they’re going to use a structured note as a hedge. They’ll look for a barrier or a buffer to offset their long position. It’s similar to buying a put and you could do it yourself I suppose. But how many people know how to buy a put? And not every rep is licensed to do options. We’ll see a use for structured notes in this market but a lot of that will be done as a hedge.”

Fewer deals

Another sign of weakness was the number of offerings. While the top deal priced for about $61 million, a higher figure than the previous week’s No. 1 at about $20 million, the number of offerings brought to market dropped 42% to 65 from 112, the data showed.

Equity remained the overwhelmingly dominant asset class with 80% of the volume.

“Part of the problem is that you have very little secondary market with equity-linked notes,” said the market participant.

“Most of the bond market, corporate bonds, municipal bonds and fixed-income step ups have shifted into the secondary market. It’s cheaper, more attractive. It’s due to a number of things, supply and demand, funding, interest rate, yield curve.

“It’s not true for equity-linked notes. Most of those notes are situational.

“I may like a stock or a sector today. I may like the strike today. I’m not going to take two to three weeks to market it. You have a lesser marketing period and the result is that most of the deals are going to be smaller in size. That’s another limitation. Issues are too small and they’re also too short. The way they’re set up, look at autocalls. You buy it, you get called, you’re out. Secondary market is not going to happen.”

Currency wars

Deutsche Bank AG, London Branch’s $19.4 million of two-year notes tied to the dollar relative to the euro offered two times the appreciation of the dollar up to a 26.6% cap with no downside protection. It was the fifth largest deal in size.

This deal’s size contrasted with the average.

Last year for instance, only 93 currency offerings hit the market with 87 of them lower than $20 million in size, according to the data.

Some sources said that with the dollar strengthening amid the global currency wars in Europe and Asia, currencies may be a theme on which more investors will focus this year, eventually leading to a boost in issuance.

“Somebody has a view and you may see more deals. The U.S. dollar will continue to be stronger. We could even see the euro and the dollar back to parity. So I wouldn’t be surprised to see more dollar bullish notes,” the market participant said.

Following steps

Two autocallable market-linked step up deals were high on last week’s list of deals, both issued by Credit Suisse AG, London Branch and distributed by BofA Merrill Lynch.

The No. 1 deal was a $61.32 offering of three-year notes linked to the Euro Stoxx 50 index. It was callable annually at a 13.22% premium when the underlying closed above its initial price. The step payment was 35% for any growth below 35%. Above the step level and below the initial price, investors had a delta one exposure to the reference asset.

Credit Suisse priced another three-year deal, similar to the precedent but tied to S&P 500 index. The annualized call premium was 8.6% and the step-up payment was 25%.

Bids on single-stock notes were muted, especially compared to the previous week when they made for nearly half of the volume versus 21% last week.

Energy basket

The top single-stock deal – and the second in size for the week – was Barclays Bank plc’s $28.39 million of 8% notes due Oct. 28, 2015 linked to the common stock of Twitter, Inc.

Finally investors continued to be attracted to energy bets but favored equity. The example was last week’s No. 4 deal, Barclays’ $21.96 million, which gave investors exposure to an equally weighted basket of three energy stocks. The basket consisted in Exxon Mobil Corp., Occidental Petroleum Corp. and Hess Corp. The 14-month product offered a 300% participation rate in the upside with a 20.45% cap. Investors were fully exposed to losses.

“They pick value,” said the market participant, noticing that most recent oil deals were based on single assets whether an energy sector index or an oil stock.

“When you introduce contingency, I mean when one stock can really perform badly and destroy the overall performance, when three things have to move together, you’re getting more pricing power. You can introduce some downside protection. In this case, they raised the cap and made the structure shorter,” he said. The notes had a 14-month tenor.

After Bank of America Merrill Lynch, the second agent was Goldman Sachs with $46 million in eight deals, or 13.75% of the total. It was followed by Barclays with $26 million in two offerings, or 7.85% of the volume.

“You’ll see people continuing to buy structured notes this year, but if volatility remains high, they’ll do it in a different way.” – A market participant

“The U.S. dollar will continue to be stronger. We could even see the euro and the dollar back to parity. So I wouldn’t be surprised to see more dollar bullish notes.” – A market participant

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.