Bank of America Merrill Lynch pushes volume to new highs in pre-Labor Day week with big deals

By Emma Trincal

New York, Sept. 5 - More deals, bigger sizes and 2.5 times the volume of the prior week characterized the four days that closed the month of August just ahead of the Labor Day weekend.

No deal priced on Friday although the market was open.

Agents last week priced $794 million in 186 deals, compared with $328 million sold in 121 offerings the week before, a 142% volume increase, according to data compiled by Prospect News.

Three deals over $50 million in size were sold last week versus none the week before, and one was in excess of $100 million.

Bank of America

Bank of America Merrill Lynch routinely prices the bulk of its products at the end of the month, but last week was particularly strong for this agent. With $367 million sold in only 10 deals, Bank of America Merrill Lynch nearly took half of the market share with 46% of the week's total. The firm also sold the six largest offerings.

"They've been doing well," a structurer said.

"It's one of the few banks to have their own distribution channel. With the Merrill Lynch brokerage, they're in a very competitive position.

"It's a good firm. It has good distribution, and their pricing is very much on the ball. They are among the best, not always the best but consistently among the top ones for pricing. People like the consistency."

Sales in August amounted to $2.18 billion, flat from July. Compared to the $3.57 billion sold in August of last year, however, volume was down 39%.

For the year through August, agents sold $23.80 billion, down 22% from $30.52 billion priced last year.

"The whole industry is suffering right now," a distributor said.

While volume has declined for the year, the number of deals has gone up by 20% to 5,413 from 4,504.

The trend of pricing more and smaller deals is evidenced by the number of large offerings in excess of $50 million. There have been 48 of these deal so far this year versus 92 during the same time last year, a decline of nearly half.

"For sure, this year sizes have been smaller. It's tough for issuers. You'd rather see big deals than a whole bunch of small deals because it's sometimes, it's not really economically feasible," the distributor said.

Indexes, indexes

Equity indexes dominated the week. They were the top asset class with 72% of the total, or $571 million. This is just about three times the volume of the prior week.

In the month of August, equity indexes have grown by 8.55% compared to July and made for two-thirds of the total sales.

On the year-to-date basis, equity indexes and equity exchange-traded funds are the only asset classes to have shown some growth.

Equity indexes represent 57% of this year's volume, compared with 38% last year, and they have seen their volume rise by 15% year over year.

Meanwhile, single stocks have declined by 45% this year from last year. While they made for 28% of the total last year, they now represent less than 20%. The month of August compared to a year ago revealed a 38% decline.

The structurer said that it is not that easy to pick the right stock as an underlying asset and that the options are limited, which may help explain the downward trend.

"Single stocks must have a research dimension," the structurer said. "They have to be well-known stocks, and of course, it has to be in line with the firm's research.

"It has to be a moderately bullish stock. If it's a strong buy, you don't want that stock because you will limit the upside. You don't want a 10% coupon if the stock has a potential return of 20%. You don't want the opportunity cost.

"The stock has to be available to you too. If there's no activity on it, it can't be used.

"You also want a high-volatility and low-dividend stock, otherwise it gets very difficult to structure."

No buffers

A recent monthly and weekly trend shows that investors are bidding on leveraged products with no downside protection again, even though the volume for this kind of structure is down for the year.

Leveraged notes with full downside exposure accounted for 38.5% of last week's volume totaling $305 million, compared with only $6 million the week before. For the month to date, those deals have grown by 34% to $416 million while buffered notes or notes with a barrier declined by 22%.

Some attributed the recent change to the persistent market rally.

"Investors are more bullish. I don't think pricing has much to do with this," the distributor said.

"Leveraged buffered [notes] are not that difficult. You can argue that the downside volatility is more expensive, but normally it's not that big of a deal, especially with indexes and the usually rather very short terms, between 15 months and two years.

"It's more sentiment-driven. The emergence of more deals with no buffers and higher caps probably reflects a more bullish sentiment. When you don't have the buffer, you get a higher cap, and people value that," he said.

But the structurer said that the pricing conditions drove the trend.

"With a low volatility, when you try to add some downside protection, you're not getting it. You can't really price it in. The cost is so expensive, it's not worth it. You'd rather have more upside," he said.

Many of the deals were priced on Thursday and none on Friday. The market declined on Thursday and volatility rose, but sources said that the timing of those deals was not driven by the market but by the calendar.

"Deals are set up early in the month. In general, firms don't want to price on Friday because liquidity is not there and especially before a holiday weekend like last week when half of the desk isn't there," the structurer said.

Top deals

Bank of America Corp. priced a large deal last week with its $101.14 million of 0% Accelerated Return Notes due Aug. 29, 2014 linked to the S&P 500 index.

The payout offers a three-times upside leverage factor with a 24.8% cap. Investors are fully exposed to any index decline.

One feature that sources said may have contributed to the large bid was a look-back option: the initial index level will be the index's lowest closing level from the Aug. 30 pricing date through Oct. 30.

AB Svensk Exportkredit priced the second largest offering with $80.04 million of 0% Accelerated Return Notes due Oct. 25, 2013 linked to the S&P 500. Bank of America Merrill Lynch was the agent. The product features a 300% participation rate on the upside up to a 16.08% cap. There is no downside protection.

The No. 3 deal was an autocallable also sold by Bank of America Merrill Lynch but issued by HSBC USA Inc. It was a $57.16 million offering of 0% Strategic Accelerated Redemption Securities due Sept. 13, 2013 linked to the S&P 500. If the index closes at or above its initial level on any of three observation dates, the notes will be called at par of $10 plus an annualized call premium of 9.52%. The observation dates are Feb. 15, 2013, May 17, 2013 and Sept. 6, 2013.

If the notes are not called and the final index value is at least 95% of the initial value, the payout at maturity will be par. Investors will be exposed to losses beyond the 5% buffer.

The next three deals were also leveraged notes with no downside protection, including the fourth one, a commodities deal. Bank of America priced a $33.39 million offering of 0% Accelerated Return Notes due Oct. 24, 2013 linked to the Rogers International Commodity Index - Excess Return with a three-time leverage factor and a 14.58% cap.

The No. 2 agent for the week was UBS, which priced $108 million in 64 deals, or 13.63% of the total. It was followed by JPMorgan with $63 million in 24 offerings, or 7.91% of the volume.

"For sure, this year sizes have been smaller. It's tough for issuers." - A distributor

"The cost [of downside protection] is so expensive, it's not worth it. You'd rather have more upside." A structurer

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