Agents price $313 million of structured products for week; BofA tops with market-linked step-ups

By Emma Trincal

New York, Aug. 22 – It was a good middle of the month week with 136 new deals totaling $313 million, according to preliminary data compiled by Prospect News.

The seesaw trend in the stock market did not seem to hurt the action in structured notes. The equity market closed down on Monday then it was up on Tuesday, down on Wednesday and rose again on Thursday.

The roller coaster finished on a bright note as China confirmed it would resume trade talks with the United States.

The Dow Jones industrial average ended the week up 1.41%.

Headlines about earnings growth alternating with bad news on Turkey and trade talks successively easing and worsening helped to explain most of the choppiness. But for the most part the summer rally has run unabated.

Since the end of June, the Dow Jones industrial average has gained 7%.

This week on Wednesday the bull market, which kicked off in March 2009, has officially become the longest in history.

Bright mood

“This is a long month, which is helpful. Many are getting back from vacation, back to business,” said a distributor.

“People are hesitant to print into this rally. But the rally has been so strong, especially in the last few days, that you’re seeing a lot of decent products right now.”

Month, year

Volume this month through Aug. 17 is up 13% to $1.12 billion from July’s $991 million, according to the data.

Sales however are lagging from August 2017, down more than a 10%.

But the year so far is good. Volume since January has increased by 11.8% to $35.6 billion from $31.8 billion in the year-ago period.

It’s worth noting that the deal count is up too: 9,952 offerings were brought to market through Aug. 17, a 20% jump from last year’s 8,316.

Leverage reigns

As a sign of renewed confidence among investors, leveraged structures took the lead versus income deals last week as they made for more than a third of total volume.

In all, $88 million of leveraged notes with barriers or buffers with an additional $19 million of leverage with full downside exposure came in last week, showing investors’ willingness to participate in the upside.

They choose to do so primarily via benchmarks.

That is not to say that investors are not chasing yield.

Market choppiness with sudden albeit temporary volatility spikes help explain the resilient demand for capped structures providing income. Autocallable contingent coupon deals accounted for more than 22% of total notional with $70 million priced in 69 deals.

Indexes tops

Whether one refers to growth products or autocallables, the bid on equity indexes was strong. These underlying represented 70% of total volume versus 16.5% for stocks.

“Indices are always going to be more popular because everyone allocates the S&P or the Russell not to Facebook or Amazon,” said Matt Rosenberg, sales trader at Halo Investing.

People prefer U.S. benchmarks, he added.

“The Euro Stoxx may be more popular but I can sell the S&P all day because people are familiar with its components.... everyone has a large allocation to it,” he said.

Worst-of deals continued to be popular as well but only those built on indexes or exchange-traded funds.

Only three small worst-of deals totaling $3 million were tied to single stocks.

Four BofA deals

Last week’s top deals did not show large block trades as was the case in the last week of the calendar when BofA Merrill Lynch wraps up the month. And yet, the top four trades were distributed by this agent through four separate issuers. In each of those deals, BofA adopted the same structure – autocallable market-linked step-up notes.

Those notes get automatically called at a specific observation date at par plus a call premium. If the notes are not called and the final index level is positive but lower than a pre-defined step-up value, the payout will be the step payment, which is the equivalent of a digital payout. If the return is greater than the step level, investors get par plus the index return.

On the downside some of those structures provide for a buffer. Some don’t.

“We’re definitely seeing demand for these types of structures from the advisor’s community as well as the broker’s community,” Rosenberg said.

S&P, Russell 2000

Bank of Nova Scotia priced the top one with $27.9 million of six-year market-linked step-up notes linked to the S&P 500 index. The call premium is 6.12% per year payable annually.

The step-up value is at 130% of the initial index level. There is a 15% buffer.

“It’s a good ticket size,” he said..

“I personally like these with a higher call premium. But if you hold to maturity maybe you get that digital coupon.

HSBC USA Inc. came next with $16.56 million of five-year autocallable market-linked step-up notes linked to the Russell 2000 index.

The annual call premium was 5.95% a year, the step-up level, 135%, the buffer, 15%.

Credit Suisse AG, London Branch issued the third autocallable market-linked step-up notes, still distributed by BofA Merrill Lynch, for $13.86 million in a three-year deal linked to the S&P 500 index.

Back to the Russell 200 index exposure, Barclays Bank plc priced another three-year autocallable market-linked step-up notes deal for $11.26 million.

“BofA calls them market-linked step-up. It’s also known as “digital plus.” Personally speaking, the term “plus” makes the most sense to me. It says what it is. You have a digital and one-to-one with no cap,” Rosenberg said.

Digital and no cap

Those structures are popular but are not the monopoly of BofA distribution, he said.

“It just happens that BofA has been offering these types of notes for a while. People are comfortable with it. But others are doing it too,” he said.

Citigroup and Morgan Stanley for instance have priced similar products.

“Essentially people like it because it’s a unique structure with a captivating payout. The digital can enhance the return and you’re not penalized on the upside.”

Another reason behind the bid on those autocallable market-linked step-up or “digital plus” notes was their efficiency in bringing exposure to a single index.

“People want indices, and you usually need to go with two or three indices in a worst-of in order to get a good return. This structure allows you to get decent terms with a single index,” Rosenberg said.

Top agent, issuer

Last week’s top agent was BofA Merrill Lynch with those four autocallable market-linked deals totaling $70 million, a 22.2% market share.

It was followed by Morgan Stanley and UBS.

The top issuer was GS Finance Corp. with 24 offerings totaling $51 million.

JPMorgan Chase Financial Co. LLC is No. 1 this year with $5.57 billion in 1,381 deals, a 15.7% share.

© 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.