Issuance volume hits $1.38 billion despite Thanksgiving holiday in one of best weeks of year

By Emma Trincal

New York, Dec. 4 - The three days prior to the Thanksgiving holiday generated the seventh most active week so far this year with $1.38 billion sold in 184 deals. One offering neared $200 million in size, which made it the No. 4 in size so far this year, according to data compiled by Prospect News.

"Sales are not always based on holidays," a sellsider said.

"When the money is ready, the money is ready. When there is a rollover and people have money to invest, who cares if it's the week of Thanksgiving?"

Big week, big deals

Tuesday in particular was the heaviest trading day. The top 10 deals of the week, two of which exceeded $130 million in size, were all sold on that date.

Those 10 transactions amounted to $638.5 million, which was nearly half of the week's volume, the data showed. BofA Merrill Lynch was the agent for all 10 along with 11 others for a total of $779 million, or nearly 57% of the entire market.

"You could have a big roll. We don't know for sure. Bank of America would know," the sellsider said.

"But one thing is sure: The strong appetite for structured notes is coming back."

Year up 5.5%

Earlier in the year, volume was disappointing. At the end of July for instance, sales were flat, even slightly lower than the previous year, according to the data.

Given the recent larger deals, issuance picked up and the year-to-date volume as of Nov. 30 has now grown by 5.5% to $34.92 billion this year from $33.10 billion for the same period of last year, according to the data.

These figures only include U.S. registered notes and exclude exchange-traded notes and lightly structured plain-vanilla fixed-income deals.

"If we're up 5.5% for the year, it's good. It's very encouraging. Hopefully, we'll finish the year strong," the sellsider said.

Confidence factor

The stock market rally has been a strong growth factor, sources said.

Last week, both the Dow Jones industrial average and the S&P 500 posted gains for the eighth consecutive week.

"I guess the volume increase has a lot to do with market appreciation," said Michael Davis, partner at Varick Asset Management, a firm that creates derivatives-based solutions for its clients.

"In general, most products in most markets experience a volume pickup when people get more comfortable investing, period.

"The story this year is that people early on were not participating in the rally. The market was up and they were missing on significant gains. One of the ways for investment banks to try to get them to participate has been through structured notes.

"People still have a hangover from 2008-2009. They were hesitant to re-engage in the market. A great way to encourage them to get back in was to issue structured notes as they offer solutions with risk control; they can more specifically accommodate a certain market view versus just buying a portfolio of stocks or mutual funds."

Credit diversification

BofA Merrill Lynch was the top agent last week, but several issuers were used for its sales.

Bank of America Corp. only issued 13 of the 21 offerings sold by BofA Merrill Lynch.

Three large BofA Merrill Lynch deals - they were $79.98 million, $58.6 million and $37 million in size - were issued by HSBC USA Inc., which also issued more.

In addition, BofA Merrill Lynch used the credit of Credit Suisse AG, London Branch, Barclays Bank plc, AB Svensk Exportkredit and Royal Bank of Canada.

This diversity of credit, according to the sellsider, has always been part of the success formula of this agent.

"You hear, repeated all over and over, whether from users or distributers, that structured products are great but the concern is credit," the sellsider said.

"You can't buy this thing repeatedly from the same issuer. Bank of America, if I'm not mistaken, has seven issuers at least on their platform. There's a reason for this: They can offer different kinds of credit, and as a result, they can do more."

Top deals of 2013

Deals were particularly large last week, and large deals are usually why certain weeks end up being stronger than others leaving aside the end-of-the-month calendar factor, the sellsider noted.

The top week of the year, the last week of June, also saw the sale of the largest deal of the year. It was Bank of America's $284.49 million of 0% Leveraged Index Return Notes due June 29, 2018 linked to the Dow Jones industrial average.

The second largest deal this year hit the market last month, helping November's volume reach $2.94 billion. While November notional was flat compared to October, it was 16% higher than November of last year, according to the data.

This second largest deal, a commodities-based product, priced on Nov. 22 and was brought to market by JPMorgan Chase & Co. It was $234.65 million of 0% return notes due Nov. 27, 2018 linked to the J.P. Morgan Enhanced Beta Select Backwardation Alternative Benchmark Total Return index.

"November was a big month, and perhaps last year at the same time we had another couple of big deals," the sellsider said.

"It's hard to say really what drives volume up. Typically, a well-preforming market makes people more comfortable, and that usually helps."

Back on Oct. 24, Bank of America priced the No. 3 deal of the year, $229.77 million of 0% market-linked step-up notes due Oct. 28, 2016 tied to the Euro Stoxx 50 index.

Finally, using the same underlying index but with a slightly different version of the same structure, Bank of America issued last week the fourth largest deal, $196.41 million of 0% autocallable market-linked step-up notes due Nov. 25, 2016 linked to the Euro Stoxx 50. The notes featured two annual call dates with an annual call premium of 12% in addition to the step-up payout with the step value at 137% of the initial price.

Trends

A very large portion of sales came from equity index-linked notes last week. Those products amounted to 80% of the total, which is much higher than the yearly average of 55%.

The use of single stocks dropped to 12% last week from 23% the week before.

Single-stock deals have increased by 17% year to date and make for 22.5% of the total.

Autocallable reverse convertibles were not the main structure last week as leveraged deals and step-ups dwarfed them in volume. But for the year, this structure type has gone up 65%, making for 17% of the total volume, according to the data.

Davis said that the appeal of those products is not surprising.

"These are income trades, and these transactions have always been popular with income-oriented investors. It's not just in the U.S. We're seeing it on a global basis, in particular in Latin America, Asia, Japan especially," he said.

"People are very income-sensitive because there is no income to be found anywhere. You either have to go pretty [far] down the credit curve to find some yield or you have to extend the maturity of your investments.

"Autocallables and reverse convertibles, those are products that allow you to generate income with a different kind of risk. You're not taking on more credit risk by going on the lower end of the credit spectrum. You're not taking a long duration view. It's really a volatility view, which is a different way of generating income.

"In a low interest rate environment, it's not surprising to see those products rise in popularity."

Top deals of the week

The second largest deal last week was Bank of America's $130.74 million of 0% Accelerated Return Notes due Jan. 30, 2015 linked to the S&P 500 index. The structure offered 300% participation on the upside up to an 11.43% cap but no downside protection.

BofA Merrill Lynch sold the No. 3 deal on the behalf of HSBC with $72.97 million of 0% market-linked step up notes due Nov. 27, 2015 linked to the Euro Stoxx 50. The step-up value was 120.35% of the initial level. There was no automatic call provision and no downside protection.

Finally, HSBC priced $58.6 million of 0% Leveraged Index Return Notes due Nov. 30, 2018 linked to the Dow Jones industrial average. The upside participation rate was 111.3%. There was no cap. The product featured a 20% buffer. BofA Merrill Lynch was also the agent.

"When the money is ready, the money is ready." - A sellsider

"Autocallables and reverse convertibles, those are products that allow you to generate income with a different kind of risk." - Michael Davis, partner at Varick Asset Management

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