Block trades, Merrill’s push, new market highs lead to $846 million of issuance in shortened week

By Emma Trincal

New York, Nov. 30 – Agents priced $846 million of structured products in 145 deals in the week ended Friday, and Bank of America alone sold 73% of the total notional in only 26 deals, according to data compiled by Prospect News.

It may have been Thanksgiving Week – the market was closed on Thursday and opened only half a day on Friday – but the top agent did not waste any time, pricing large block trades, including one $143 million deal.

Merrill taps three quarters

“Merrill is doing great as always when they close the month. We know that. Month after month, Merrill has been kicking ass. The question is not so much how come they’re doing so well but more like, why is the rest of the market doing so bad?” said a sellsider.

Other agents of course price their deals throughout the month and not all at once at the end of the month as Bank of America does.

Still, the pricing of nearly three-quarters of the volume is above average for this agent. BofA Merrill Lynch priced in the final week of August 47% of the market, 43% at the end of September and 35% in the final week of October, according to the data.

“I think it’s part of the culture and the scale. You’re going to have advisers answering the phone during the holidays. You’ll have people selling,” he said.

Bullish sentiment

The “post-election rally” entered its third week just ahead of Thanksgiving, and major equity benchmarks broke to new highs.

“It certainly helps when the market is up and sentiment is positive,” this sellsider said.

The S&P 500 index reached a new all-time high at 2,198.18.

This may explain the unusually high volume of equity-linked products, making for 98% of the total volume last week, according to the data. The average market share for equity so far this year is less at 90% even if it is more than previous years.

Bullish style

The style of Merrill Lynch’s popular structures defined the tone of the market. Leveraged notes made for 55% of the total. A greater proportion of those deals, reflecting the bullish brand of the firm and the mood of the market were offered with full downside exposure as investors expressed optimism.

BofA Merrill Lynch priced the top 10 deals of the week. All were linked to U.S. equities, mostly to the S&P 500 benchmark – as in the top four offerings – but also to the Russell 2000 index, to sector-bets in either stock baskets or exchange-traded funds.

As often is the case, the leveraged block deals were short term: between 14 months and two years.

The eighth biggest deal

Barclays Bank plc priced the top deal in $143.07 million of 14-month Accelerated Return Notes linked to the S&P 500 index. The payout at maturity was par plus triple any index gain, subject to a 12.21% cap. Investors were fully exposed to the downside. It was the eighth largest offering of the year, according to the data.

“It’s back to normal. The size is huge, but this is their bread and butter stuff,” the sellsider said.

“I don’t think the protection makes a difference. People are bullish on the market short term; sentiment is positive.”

A market participant said he was not surprised about the size of the transaction.

“It’s short-term. There’s a reasonable cap. The leverage can provide additional return,” he said.

Credit Suisse AG, London Branch issued the No. 2 offering with $59.23 million of 14-month Leveraged Index Return Notes linked to the S&P 500 index. The upside leverage was two times, the cap was 8.71% and the downside included a 5% buffer.

“The cap is low, but you have downside protection, and that’s why. Even though it’s only 5%, it is a buffer and the product is short-term. It’s only 14 month. So it seems about right,” the market participant said.

Step-up, leverage

The third-largest deal offered a different structure, one that is also very popular among investors buying deals from Merrill Lynch. HSBC USA Inc. issued $48.6 million of six-year autocallable market-linked step-up notes linked to the S&P 500 index.

The notes were automatically called at par plus a call premium of 6.4% per year if the index closed at or above its initial level on any annual observation date. The step-up – 35% – was paid if the index gained but closed below the 135% step-up threshold. Otherwise the return was the index gain.

The downside featured an 85% barrier observed at maturity.

HSBC USA also priced $42.17 million of two-year capped Leveraged Index Return Notes linked to the S&P 500 index. The leverage multiple was two, the maximum return was 14.54% and the issuer offered a 10% buffer on the downside.

Finally Barclays Bank priced $34.96 million of 14-month leveraged notes linked to a basket of equally weighted stocks – which were Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley.

The issuer offered triple the index gain at maturity up to a 24% cap. Investors were to lose 1% for each 1% decline.

The SPDR KBW Bank ETF, which tracks the return of U.S. bank stocks, has gained 19% over the past month, soaring in the post-election rally.

Sticking to basics

The S&P 500 index was used more than usual last week. Notes linked to this benchmark accounted for 54% of the total volume or $458 million in 23 deals. Bank of America priced 95% of this volume.

As a comparison, the U.S. large-cap index makes for about a third of the year-to-date volume, the data showed.

“With the post-election rally, people are thinking the U.S. equity markets will fare the best over the short term regardless of what policies come out,” the market participant said.

“Right now the market is pricing future changes even if it may take time for those new policies to get implemented.”

Month, year volume

Despite last week’s encouraging numbers, the yearly volume is on pace to be weaker than last year.

The $1.96 million sold in November through Nov. 25 showed a 6.55% increase from the same period in October. But compared with a year ago, November is down 34% from $2.97 billion, the data showed.

For the year, sales dropped nearly 17% to $33.89 billion from $40.79 billion through Nov. 25.

Not so great week

A closer look at last week’s data suggests that despite Bank of America’s strong push, the amount of sales was not all that impressive when compared with prior weeks in 2016. It was the 13th best week of the year.

Since 11 months have closed so far this year, which means 11 “big weeks,” this number indicates that volume at some point was greater in other parts of the month, which are supposed to be less robust.

It certainly illustrates that November did not close with a bang, except for Merrill Lynch, unless not all deals were filed on the Securities and Exchange Commission’s website by press time. This hypothesis given how the final week fell in the month seems unlikely at least for Bank of America, which had ample time to file before overlapping into the next month.

The holiday week might be a factor but not the full explanation, sources said.

Top agents, issuers

The top agents after BofA Merrill Lynch were JPMorgan with $99 million in 32 deals followed by Barclays with 14 offerings totaling $43 million, according to the data.

On the issuer side, Barclays was the top issuer, a logical ranking given the big block trade, bringing to market nearly 42% of the volume in 25 deals. HSBC and Credit Suisse were second and third, respectively. Those three issuers together contributed to 80% of the total issuance volume.

“It certainly helps when the market is up and sentiment is positive.” – A sellsider

“With the post-election rally, people are thinking the U.S. equity markets will fare the best over the short term regardless of what policies come out.” – A market participant

© 2015 Prospect News.
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