Agents generate second-best week of year; BofA's $284.5 million deal is largest of year so far

By Emma Trincal

New York, July 3 - The first half of the year ended with the second-best week on record for 2013 and the pricing of the largest offering for the year as well, according to data compiled by Prospect News.

Agents sold 287 deals totaling $1.57 billion in the week ended Friday, compared with $361 million in 109 offerings the week before.

The week of May 26 with $1.66 billion was the only week to surpass last week.

Sales last week amounted to 8.33% of the total for the year.

"The Fed-induced turmoil created stagnation. There was some cash buildup on the sideline that came back into play," a distributor said.

Fed or business as usual

The number of large offerings was unusually high: four deals in excess of $50 million were brought to market versus none the week before. Agents also sold 15 deals of $20 million or more versus only one the week before, according to the data.

"Interest rates have jumped a couple of weeks ago. That could explain some of the uptick, especially with leverage, participation and buffers. You can create more advantageous-looking deals when interest rates are higher. The recent rise in interest rates afforded traders to create products that are more appealing," this distributor said.

On Thursday, Bank of America Corp. priced the year's largest deal so far with its $284.49 million of 0% Leveraged Index Return Notes due June 29, 2018 linked to the Dow Jones industrial average. The five-year notes offer an uncapped upside with a 1.22 times leverage factor and a 30% buffer.

Bank of America contributed to most of the bigger deals. The agent sold $890 million, or 57% of the volume. The bank's 26 deals represented only 9% of the overall number of offerings, the data showed.

The No. 2 agent was Morgan Stanley with $140 million in 27 deals, or 9% of the total, followed by UBS with $110 million in 76 offerings, a 7% market share.

Volatility as measured by the VIX index saw a spike on Monday, hitting a record level of nearly 22 intraday before finishing the week lower.

A market participant said that the surge in volatility was unlikely to have caused the issuance boost.

"If it's a spike on just one day, it's not a market conditions change and it's very unlikely that people took advantage of it," he said.

"With structured products, volume often has nothing to do with the market. You have deals getting ready to go. It might go this week or the next week. Sometimes investors are not ready yet, or the documentation is not ready yet. The market conditions are not the main trigger."

Because last week was so strong in volume, the year-to-date volume gap from last year has narrowed compared to recent weeks, according to the data.

Agents this year sold $18.83 billion as of June 29, a 3.27% decrease from the $19.47 billion brought to market during the same time last year.

Meanwhile, the number of deals dropped 5.6% to 4,050 from 4,292.

"This is not as bad as it was just a few weeks ago," the market participant said.

"We caught up a little, being down just 3%. Hopefully, we are going to catch up with last year. The year 2012 was not a good one. We had a double-digit volume decline in 2012 versus 2011. Obviously, to be worse than 2012 would be very disappointing."

Volume last year was $35.20 billion, a 15% decline from $41.33 billion sold in 2011, according to Prospect News data.

Indexes, buffers

Last week's deals did not reflect the year-to-date trends as the emphasis was on buffers and indexes.

For instance, 78% of the products priced last week were linked to equity indexes. For the year, however, this asset class only represented only 55% of the total (versus 22.5% for single stocks) and has declined by more than 3% while stocks have gone up by nearly 10%, according to the data.

"Usually, index deals are not institutional deals. They are retail deals. If it's a retail deal, it's usually a calendar deal, so it makes sense that it comes toward the end of the month," the market participant said.

Another difference between last week and the year trends was the disproportionate volume of leveraged notes with partial downside protection versus leverage with pure exposure to the downside.

For the year, leveraged deals with a barrier or buffer have declined by 12% and account for only 17.32% of the total. Meanwhile, leveraged structures with no downside protection have seen their volume grow by 28% to represent nearly 21% of the total.

Last week, however, 56 products offering leverage with partial protection hit the market totaling $523 million, or more than a third of the week's total volume.

The largest issue, which belonged to this category, accounted for more than half of it, but 55 other products fit into this category.

For the market participant, last week was not conclusive as a trend.

"The trend is toward less and less protection. You have to look at the big picture, the year picture," he said.

Top deal this year

The top deal last week was said to have been popular because of the size of its buffer. Yet the 30% buffer came at a price: a five-year maturity.

Some sources said that they are seeing more longer-dated products designed to offer appealing downside protection and that investors are interested in the trade-off. Others disagreed.

"Extending the maturity can help issuers provide bigger buffers. The longer the maturity, the more dividends you get, which adds value. Any time you're giving up something, you get more money for a buffer. But whether this is going to be a trend, whether investors are going to accept longer terms for more protection ... that's hard to say," the market participant said.

"This deal was probably popular because it gives you a chance to outperform the market. The investor, if you ignore dividends, is going to beat the index. You have a bit of leverage and some buffer. The only thing you're giving up is the dividend."

Big step-ups

Bank of America priced a number of large market-linked step-up notes last week. This product type was the most popular structure.

For instance, the second largest offering was Bank of America's $90.47 million of 0% market-linked step-up notes due June 22, 2018 linked to the S&P 500 index. If the index finishes above the step-up value - 134.85% of the initial value - the payout at maturity will be par plus the index return.

If the index return is zero or positive but the index finishes at or below the step-up value, the payout will be par plus the step-up payment of 34.85%.

Investors will receive par if the index falls by up to 20% and will lose 1% for every 1% decline in the index beyond 20%.

"These notes are a good fit for investors who are no longer ultra-bullish, people who lack strong convictions but who still want to benefit from the upside. You don't have a cap, and you do have some downside protection," the market participant said.

Using the same structure type, HSBC USA Inc. brought to market $60.18 million of 0% market-linked step-up notes due June 26, 2015 linked to the Dow Jones Global Titans 50 index. In this offering, the fourth largest one of the week, the step-up value is 118% of the initial level. There is no downside protection. BofA Merrill Lynch was the agent.

Those step-ups can also offer an autocallable feature. It was the case with the fifth largest deal of the week, Bank of America's $46.31 million of 0% autocallable market-linked step-up notes due July 6, 2015 linked to the PHLX Housing Sector index. The notes will be automatically called at par plus a 10% call premium if the index is at par level on June 27, 2014. If not, the step-up payout applies with a step-up value of 135% of the initial level and a 5% buffer.

The No. 3 deal last week, also sold by Bank of America Merrill Lynch, was a leveraged note with no downside protection.

Barclays Bank plc priced $86.53 million of 0% Accelerated Return Notes due Aug. 29, 2014 linked to the S&P 500. Investors will receive par plus 300% of the index gain, subject to a 12.66% cap.

For the distributor, the size of last week's deals had to do with the dealer market distribution network that originated them.

"The vast majority of those large deals are sold to private wealth management groups," he said.

"All of the big broker dealers, national firms like Merrill, JPMorgan, Royal Bank of Canada, UBS or Morgan Stanley, have internal private wealth groups with higher-end private wealth divisions that have the ability to place one million a pop to 20 different accounts. Often, they have discretion over these accounts. They don't have to call all their clients. They're the ones handling the portfolios on their behalf.

"Large-quantity deals are most of the time big private wealth groups. The wealth management group will negotiate a $50 million or $100 million deal. They will buy it and distribute it internally.

"These deals are big tickets. The dealer market distribution is great for volume," he said.

"With structured products, volume often has nothing to do with the market." - A market participant

"Large-quantity deals are most of the time big private wealth groups." - A distributor

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