Structured products issuance volume sturdy with BMO’s $250 million Raymond James deal

By Emma Trincal

New York, Dec. 21 – It was a strong yet skewed volume in U.S. structured notes sales during the week ended Friday as a Bank of Montreal’s $250 million deal hit the market on Tuesday. The notes were linked to a basket of best stocks put together by Raymond James equity analysts.

The offering was the third largest deal of the year.

Alone, BMO boosted the monthly volume. Agents priced $1.13 billion through Dec. 16, a 17.5% increase from the same time in November, according to data compiled by Prospect News.

For the year, agents have priced $36 billion, a 14% decline from last year’s $42 billion. Volume year over year, however, has improved in the second half. The negative gap from last year was 25% in the early part of the summer.

Best Picks series

Bank of Montreal priced $250 million of 0% notes due Dec. 21, 2017 linked to a basket of 17 equally weighted stocks selected as Raymond James Analysts’ Best Picks for 2017. The notes offered exposure to the basket on a one-to-one basis minus fees. Raymond James was the dealer.

Bank of Montreal sells this product twice a year in December and January. The December product is linked to the upcoming year’s best picks and the January issue reflects the same basket at the start of the year. This is the first part of the series linked to the 2017 Best Picks to be followed by another one in January.

“It’s a unique structure, that’s a delta one with the capacity to generate alpha not just derivatives-based,” an industry source said.

“It’s always a very popular offering because of the impressive track record of Raymond James’ stock pickers.

“This compares very favorably with a UIT.”

The Raymond James’ Best Picks have generated excess returns over the S&P 500 index 81% of the time since 1996 with only four years of underperformance, according to Raymond James’ website. The average excess return during the 21-year period has been 17%.

Unfinished business

The U.S. equity markets ended flat for the week with the Dow Jones industrial average nearing without hitting the 20,000 mark.

The momentum created after the Elections slowed as the Federal Reserve Bank, aside from its well-anticipated rate hike, announced more tightening rounds for next year. But some sectors, notably financial stocks, continued to drive the rally.

The timing for the month end with Bank of America’s key input is unclear. Sources said it is likely to occur this week ahead of the Christmas holiday weekend to avoid settlement overlaps into next year. This is the most likely assumption given the holiday schedule. However large deals could still price next week, which remains a full stretch of December.

“You never know with December. I don’t think it’s very predictable especially right now with so many potential factors. Just look at the news,” a market participant said.

Last year’s December with $3.1 billion was the third worst month of the year before August and September. The best ones were January, May and March.

This year, the top months were January’s $4.70 billion followed by September and October.

“Volume is often a function of how many rollovers and big rollovers you have in any given month. In December people would rather not roll. They don’t want the tax liability in April,” said a source.

Hot banks

As the general market outlook remains uncertain, investors are increasingly showing interest for stock picking, as evidenced by the size of the Bank of Montreal deal, which exceeds those linked to Raymond James’ 2016 Best Picks. The December 2015 issue was $165 million and last January’s deal was $185 million.

Sector bets have also grown extremely popular amid the Trump rally with investors bidding on financials, energy, industrials and materials.

Bank stocks have been the big winner in advisers’ recent allocations. It came as no surprise that the second offering last week reflected the theme.

“People are more optimistic about the financial sector. It looks like the person elected is against regulations, he’s actually anti-regulations, which is always better for banks,” the market participant said.

“Also interest rates may go up: another benefit for banks.

“It makes for a good story. You take advantage of the theme. You’re issuing interest-rates related structures.”

Top deals

JPMorgan Chase Financial Co. LLC priced $41.50 million of 14-month digital notes linked to the S&P Banks Select Industry index.

If the index return was above negative 10%, the digital return at maturity was 8.5%. Otherwise, investors would lose 1.1111% for every 1% that the index declined beyond 10%.

“It expresses a neutral view: not too bearish, not too bullish either,” the market participant said about the notes.

“It’s really a reverse convertible without the fixed coupon. There is no autocall because it’s short term.”

The No. 3 deal was also related to banks although tied to a single stock.

GS Finance Corp. priced $15.2 million of three-year contingent income autocallables linked to Bank of America Corp.

The coupon barrier with a quarterly observation was 75%. The contingent coupon was 10.85% per year.

The notes were automatically called if the stock closed at or above its initial price on a quarterly basis.

The final barrier was also 75% of the initial price.

“This one is like the JPMorgan except that it’s longer so you have the autocall. Some advisers don’t mind being called after four months. Others do mind. You don’t get the full coupon. Autocalls look good on paper. It’s good for the adviser. But it’s better to give investors a chance to make the first year coupon. To do that you can either make it short term or include a non-call on a longer term note,” he said.

The top agent last week was BMO Capital Markets Corp. with its large deal. It was followed by JPMorgan and Goldman Sachs.

The top two deals this year ahead of last week’s $250 million BMO deal were Goldman Sachs Group, Inc.’s $1.07 billion leveraged notes linked to a basket of international equity indexes. It priced in January. The second one was Credit Suisse AG, London Branch’s $270 million issued in March, a digital buffered note offering tied to the S&P 500 index.

“It’s always a very popular offering because of the impressive track record of Raymond James’ stock pickers.” – An industry source, commenting on Bank of Montreal’s new 0% notes due 2017 linked to a basket of 17 stocks selected by Raymond James analysts

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