BofA prices $1 billion of final week of May’s $1.83 billion; short leveraged deals dominate

By Emma Trincal

New York, June 3 – May ended on a strong note as agents brought $1.83 billion in 253 deals during the final week of the month. The size of the deals – seven offerings exceeded $50 million – and the strong input of BofA Merrill Lynch, which sold nearly all of the top 20 deals and priced $1 billion of notes in only 25 offerings, contributed to the robust volume, according to data compiled by Prospect News.

Bank of America

“With BofA, it’s really their distribution. I’m not talking about the number of brokers they have. A lot of firms have a lot of brokers, but they don’t do structured products. The brokers at Bank of America do a lot of structured products,” a sellsider said.

“And look at the number of issuers they use: Barclays, Credit Suisse, Deutsche Bank, HSBC, RBC. For retail clients who constantly worry about credit risk and credit diversification, that’s really important.”

Year up

The “good news” is the trend for the year, the sellsider said. Agents sold $20.69 billion through the end of May versus $18.27 billion last year, a 13.20% increase.

“We’re up. It’s always good. We’re only five months into the year, not even halfway through it. ... We should be able to beat last year and hopefully reach $50 billion or the high 40s,” he said.

Volume last year amounted to $42.57 billion, according to the data.

Protection or no protection

With global uncertainty due to geopolitical threats, volatile crude oil prices and fears around Greek debt, the summer could certainly be volatile and the risks of a stock market correction are looming, he noted.

But the effects of a potential correction on investor behavior remained unclear.

“It’s hard to say if a down market is a positive for our industry. Sometimes a bit of uncertainty helps as long as people are not really losing a lot of money. When people are still bullish but nervous, then it’s a good thing for us. When they’re nervous but not bullish, it doesn’t help anything or anyone.”

Bears will hide

While in a down market some investors make short bets, the same does not apply to investors in structured products, he noted.

“I’ve been more than 20 years in this business, and investors just don’t do bearish notes. It’s not in their mindset. It’s something only professionals do,” he said.

“So if the market really drops, it won’t be good.

“But let’s put it that way: we’re up now at the end of May. And it’s better to be up even if we have a bad summer. We could be down in volume and have a cheerful summer ahead of us. It wouldn’t help.”

3x, short tenor

Investors’ strongest bid went to short-term, highly leveraged notes with reasonable caps but no downside protection, one of Bank of America’s signature structures.

Just last week, unprotected leveraged notes in general accounted for 36.50% of the volume versus 22.75% for leveraged notes featuring either a barrier or buffer, the data showed.

Asked whether investors should use products with full downside exposure at a time when so many worry about record-high valuations and the ensuing risk of a correction, this sellsider said, “Look, if everybody thinks that way, everyone is selling.”

The biggest risk for investors in leveraged notes is to “miss on the upside” due to the cap, not the downside risk, he said.

“I see those structures as defensive actually even with no buffer or barrier. If you have $100 to invest, you only put down $30. That’s risk control. The leverage does not apply to the downside. People always see those products as tools for weaker bulls willing to cap their upside because they don’t expect much. It’s also about your use of capital. This form of asymetrical leverage is something you can only do with structured products. You can’t do it with stocks or with ETFs. When you’re three times in an ETF, it’s three times up and three times down.”

Top deals

The No. 1 offering was Bank of America Corp.’s $178.65 million Accelerated Return Notes linked to the Euro Stoxx 50 index.

If the index return is positive, the payout at maturity will be par plus 300% of the index return, subject to a maximum payout of par plus 15.54%. Investors will lose 1% for every 1% decline in the index.

The No. 2 deal, also issued by Bank of America, offered the same terms, but the underlying index was the S&P 500 index and the cap, 10.11%. It was $157.11 million in size.

The No. 4 offering followed the same template but was issued by Barclays Bank plc and tied to the JPX-Nikkei 400 index. The cap was 13.05%. The size was $77.8 million.

Barclays issued the next deal for $61.5 million. This one had a basket of unequally weighted indexes as its underlying, which consisted of the Euro Stoxx 50, the FTSE 100, the Nikkei Stock Average, the Swiss Market index, the S&P/ASX 200 index and the Hang Seng index.

Commodities

Amid the wave of giant deals sold by Bank of America, JPMorgan distributed the third largest one in size, Barclays’ $111.11 million of 0% daily liquidity two-year notes linked to the Bloomberg Commodity Index 3 Month Forward Total Return.

The underlier uses a special technique to prevent losses due to the positive slope of the futures contract, a risk for the investor called contango.

“There’s a lot of talk about commodities contango. It can be done in various ways. This index is probably an attempt at reducing it,” the sellsider said.

Contango is a risk of incurring higher costs, hence lower returns for the commodity derivatives investor when the cost of rolling expiring futures contracts increases due to differences in price on the futures curve.

Banks and index providers have created algorithms to limit the impact of what is known as the negative roll yield.

“People who bought this delta one product probably wanted to limit contango,” the sellsider said.

“I would bet it is a retail deal. I’m not sure, but the fact that the issuer is not JPMorgan makes me guess that the client is concerned with credit diversification, which is typically a retail investor’s preoccupation since they’re the ones who buy every month. It would be more efficient for JPMorgan, who is the agent, to deliver its own paper, and an institutional client wouldn’t care about that.”

Euro Stoxx 50

Investors continued to be attracted to the European equity markets with the volume of deals linked to the Euro Stoxx 50 exceeding that of those linked to the S&P 500 last week.

Last week, agents sold 28 deals linked to the U.S. benchmark totaling $195 million. In comparison, 24 Euro Stoxx offerings priced totaling $206 million.

While the difference is modest, the S&P 500 used to dwarf most other equity indexes in the past, according to the data.

One factor, a source said, is the “story” around Europe with its quantitative easing program, which investors see as a booster for stock prices.

A market participant invoked pricing: the Euro Stoxx has a high dividend yield, which facilitates pricing.

“The forward is much lower because of the 3.50% dividend. The options are cheap,” he said.

“Let’s say you price a deal with a 20% barrier and a two-year maturity. Your real barrier is 14% because you already discounted 7% from your forward barrier.

“Obviously, the S&P with its lower volatility and lower dividend is not going to give you terms that are as attractive.”

The second agent after Bank of America was UBS with $230 million in 81 deals, or 12.53% of the market. JPMorgan was next with $161 million, or 8.76% of the total, priced in 33 offerings.

“We should be able to beat last year and hopefully reach $50 billion or the high 40s.” – A sellsider on 2015’s volume

“Obviously, the S&P with its lower volatility and lower dividend is not going to give you terms that are as attractive [as the Euro Stoxx 50].” – A market participant

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