Structured notes issuance $822 million for week as BofA closes calendar month; Scotia top issuer

By Emma Trincal

New York, June 3 – Structured products agents priced $822 million in 154 deals during the holiday shortened week with BofA Securities Inc. tapping two-thirds of the flow as top agent, according to preliminary data compiled by Prospect News.

Bank of Nova Scotia issued $325 million in five offerings, capturing about 40% of the notional as the No. 1 issuer.

Volume for the year is at $29.85 billion, a nearly 50% increase from last year’s $19.99 billion. The deal count has jumped by more than a third to 8,823 from 6,550.

Year, month

“We’re still up for the year. It’s not up 100% as we were a while ago. But it’s still good,” a market participant said.

A sellsider said some new recent trends have influenced sales.

“We’re seeing some new shifts from the sellside,” he said.

“They’re offering more deals. We’re in a different market than we were in March.

“We’ve seen a few different approaches – smaller calendars, more calendars, shorter-term offerings.

“It may have an impact on volume.”

May remained the weakest of the year with $3.62 billion of issuance, a 23% decline from April’s $4.72 billion.

April’s volume was already substantially weaker than any of the first three months of the year, all in excess of $7 billion.

“We saw volatility come off from where it was in February and March,” the sellsider said.

In May, the S&P 500 index jumped 4.5%.

“Many people are sitting tight wanting to see what’s happening in the market.

“At first, people were talking about a V-shape recovery. Now more are saying: maybe it’s a W-shape type of recovery.”

Seasonal factors may be at play as well.

“It’s kind of typical to see volume soften in May as we head into the summer months,” he said.

More leverage

The market rallied for the second week in a row last week ahead of the Memorial Day weekend with the S&P 500 index up 3% as investors are hoping to see the reopening of the economy.

Leveraged notes issuance was greater than usual.

One reason is that Bank of America, which dominated the flows last week, typically produces more of such products. BofA Securities, the agent, sold $407 million worth of leveraged notes in block trades last week.

Second, volatility was too low to favor the pricing of autocallable notes.

“If the market continues to go up, we’ll see more growth. If we have a pullback, there will be more tactical plays, more autocalls. It’s a week to week mentality,” the sellsider said.

Less protection

Within the total notional amount of leveraged notes sold last week, non-protected structures dominated at a rate of 60% versus 40% for leverage with buffers or barriers.

The top two offerings for instance fell into the full (or nearly full) downside exposure category. Both were distributed by BofA Securities.

Bank of Nova Scotia brought to market the first one for $80.73 million. The 14-month leveraged notes tied to the S&P 500 index pay at maturity par plus triple any index gain, up to a cap of 14.58%.

The same bank issued $76.88 million of 14-month leveraged linked to the S&P 500 index. The payout is par plus double any index gain, up to a maximum return of 11.62%. While there is a downside buffer, its size at 5% is limited.

“These are short-term growth notes without protection. Everyone is entitled to their opinion of the market,” the sellsider said.

Dancing at the top

Some found it odd to see investors taking market risk exposure while structured notes are usually seen as a means to get downside protection when the market overheats.

“There are plenty of signs – the stimulus for instance – that lead people to be bullish. The economy is starting to recover. People are buying these big deals because it’s part of a scheduled laddered position in their portfolio.

“I know many advisers buying these big trades every month,” he said.

Last week’s dominance of leverage with no downside protection does not reflect the yearly trend. There have been twice as many leveraged buffered or barrier leveraged notes this year than leverage with full principal at risk,

The strong market rally since the lows of March 23 (the S&P 500 has gained more than 42% during that time) is puzzling for many.

“I have no idea why the market is behaving this way,” said the market participant.

“More than 40 million people lost their jobs in the past two months; the coronavirus is still a threat. There are protests across the country.

“But the market keeps going up. It’s amazing. Hopefully, the economy will reopen, but, in the meantime, there is a lot of risk. If there’s really one time you need protection, it’s now.”

The buffer war

This market participant is convinced that long-term, buffers will be used outside of the notes industry.

“The market is buying buffers but they’re not buying buffers through structured notes as much as they used to,” he said.

“They’re using buffered ETFs and buffered UITs.

“Of course, the structured products market is much bigger, but the market is starting to move over to 1940 Act product, which are not notes.”

The Investment Company Act of 1940 is an act of Congress which regulates investment companies, which include unit investment trusts (UITs), mutual funds and exchange-traded funds.

The sellsider said there are just as many reasons to be bullish than to be cautious at this juncture.

“It’s a very uncertain environment. Local businesses were shut down due to the lockdowns. Now with the riots, they’re boarding up. While it’s a different situation depending on the state, it’s a drag on economic activity,” he said.

“On the other hand, there are a number of positive factors: we had a stimulus. A fiscal stimulus may be coming down the pike. The Fed is still expanding its balance sheet, purchasing more and more assets. So that’s the silver lining.”

Other big deals

Bank of Nova Scotia also did two large autocallable market-linked step-up trades.

The first one, Bank of Nova Scotia’s $62.59 million of six-year autocallable market-linked step-up notes linked to the S&P 500 index, had a 15% downside protection via a hard buffer.

The notes will be called at par plus an annual call premium of 7% if the index closes at or above its initial level on any annual call date.

If the index finishes above the step-up value – 135% of the initial level – the payout at maturity will be par of $10 plus the index gain.

If the index finishes flat or gains by up to the step-up level, the payout will be par plus the step-up payment of 35%.

Scotia’s second autocallable step-up deal was also on the S&P 500 index, this time with no downside protection. The $46.93 million has a three-year maturity, an annual call premium of 11% and a 126% step-up value. It was the fifth largest deal of the week.

Back to growth products, Scotia again sold $58.03 million of two-year index return notes linked to the S&P 500 with 2x leverage up to a 16.01% cap and showing a 10% downside buffer.

“They auction issuers. Terms from Scotia must have been more aggressive,” said the sellsider talking about last week’s dominance of the Canadian bank as an issuer.

All these Scotia deals were sold within the BofA distribution channel.

Finally, BofA Finance LLC priced $35.77 million 14-month leveraged notes linked to the S&P 500 index with 3x upside, a 15.03% cap and no downside protection.

Also, BofA priced on the behalf of Credit Suisse AG, London Branch $27.73 million of 14-month leveraged notes linked to the SPDR Gold Trust.

The payout at maturity will be par plus triple any fund gain, up to a maximum return of 15%. Investors will be exposed to any fund decline.

BofA Securities priced $531 million in 13 deals, or 64.6% of the total.

It was followed by UBS and Goldman Sachs.

After Scotia, the top issuer last week was Barclays Bank plc with $137 million in 24 deals.

© 2015 Prospect News.
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