Big trades boost week’s structured products volume to $502 million; Bank of Nova Scotia top issuer

By Emma Trincal

New York, Sept. 20 – Structured products issuance volume was strong for the second week of September as U.S. equity markets pushed to new highs and BofA Merrill Lynch executed sizable trades early in the month. Bank of Nova Scotia nabbed the two top offerings as an issuer.

Agents sold $502 million in 127 deals in the week ended Friday or more than twice the volume seen in the previous week, according to data compiled by Prospect News. BofA Merrill Lynch distributed a third of the week’s volume with 10 deals totaling $165 million.

Scotia

Bank of Nova Scotia ranked No. 1 as an issuer, leading the list of deals with two block trades. One nearing $50 million was distributed by Goldman Sachs. BofA Merrill Lynch priced the second for close to $38 million.

“The fact that they’re getting to do these larger deals could indicate that they have better funding than others,” a market participant said about Bank of Nova Scotia.

BofA Merrill Lynch closes its pricing cycle at the end of each month. But from time to time, the agent sells larger deals in the middle of the month as it did last week, sources noted.

“It could be a customized trade for somebody. Or they could have had a view they wanted to act on and they will execute in the middle of the month,” said a sellsider.

Robust year, slower month

Volume in the overall market continues to be up for the year even though the month is slower so far from last month, the data showed. Sales in the first half of September with $881 million dropped 27% from the same time in August. Compared to a year ago however sales are up 22% from $664 million in the first half of September 2016.

On an annual basis, the structured notes market in the U.S. appears very healthy.

Volume for the year through Sept. 15 is up 39.3% to $35.17 billion, according to the data.

On a 12-month trailing basis, sales to Sept. 15 amounted to $48.66 billion, a 31% increase from $37.23 billion a year earlier.

Pricing and demand

“Several factors are at play. You have a combination of factors from the demand perspective and also from the supply perspective,” said the sellsider.

“From the demand perspective, structured notes can monetize income. In a sideways market they can deliver higher return with the use of leverage.”

Leverage may be useful at a time when many in the market are trying to time the end of the long bull run, he noted.

“Most of the U.S. rally took place earlier this year. We had a sell-off in August, and the market has gone up recently, but it’s not like it has taken off.

“From a technical analysis standpoint and from most commentaries on the Street, it looks like we’re due for a correction.

“Since the market is not decisive, people are going to be looking at derivatives to find other ways to access the market.

“From a supply perspective, interest rates are going up. We still have challenges with low volatility but long-term volatility has been picking up a little bit, which for people who manufacture the deals helps make the terms a little bit better.”

Two big Scotia deals

Bank of Nova Scotia’s $49.82 million of two-year leveraged notes linked to the iShares MSCI Emerging Markets exchange-traded fund was the top deal last week. The return was two times the gain of the ETF up to a 22.24% cap. There was a 10% geared buffer on the downside. The agent is Scotia Capital (USA) Inc. with Goldman Sachs & Co. as dealer.

The second largest deal was Bank of Nova Scotia’s $37.91 million of three-year autocallable market-linked step-up notes linked to the Euro Stoxx 50 index.

The notes will be automatically called at par of $10 plus a call premium of 13.6% per year if the index closes at or above the initial index level on two annual call dates.

If the notes are not called and the final index level is greater than the step-up value, 130% of the initial index level, the payout at maturity will be par plus the index return. For any index price increase below the step level, the payout will be par plus the step-up payment, 30%.

If the final index level is less than the initial level, investors will have one-to-one exposure to the decline.

BofA Merrill Lynch is the agent.

Euro bet

There was more volume seen last week in Euro Stoxx index-linked notes than in deals tied to the S&P 500 index. Notional sales for the Euro Stoxx amounted to $86.33 million versus $75 million for the U.S. index.

On average the size of Euro Stoxx offerings (more than $17 million) exceeded the average size deal for the S&P 500 index, which was of only $6.25 million. These figures refer to single underlying indexes, not worst-of deals.

“U.S. stocks are at all-time highs and people are looking to take profits and move into international equity right now,” the sellsider said.

The market participant said that notes can be a better alternative to ETFs when investors seek access to a popular asset class, such as European stocks.

“Structured notes on the Euro Stoxx are a way to play European markets without being exposed to currency risk. People like that. Typically the terms are also fairly good,” the market participant noted.

Commodities

Commodities resurfaced last week in one big trade, the third largest one.

BofA Finance LLC priced $31.2 million of one-year floating-rate notes linked to the S&P GSCI Index Total Return.

The interest rate is one-month Libor minus 11 basis points, subject to a floor of zero. The rate resets monthly, and interest is payable at maturity.

The payout at maturity will be par plus 300% of the index return.

“It could be a high-net worth deal, maybe for a middle-market institution. A big institution could do it themselves,” said the sellsider.

The pricing of the floater off Libor brought no surprise despite recent official announcements in the U.K. that the interest rate benchmark would be replaced by alternative rates over the next few years.

“It’s not going to disappear. Deals continue to be done. People are treating Libor almost like it’s going to stay one way or the other. It’s unlikely they’re going to get rid of it,” the market participant said.

Exit opportunities

Looking at the top three deals, one on emerging markets, the second on European equity and the third on commodities, the sellsider discerned a common thread.

“It’s a combination of the dollar weakening and the toppish U.S. market that makes people want to be more cautious and diversify away from U.S. equity,” the source said.

“A lot of people are thinking there isn’t much left in the U.S. market in terms of value.

“As the dollar has been selling off, international equity, like emerging markets and Europe as well as commodities, are good ways to diversify a portfolio at this point.”

Following BofA Merrill Lynch, the No. 2 agent last week was Morgan Stanley with $84 million in 21 deals. It was followed by Goldman Sachs with 15 deals totaling $71 million.

Bank of Nova Scotia issued $97 million in three deals. In addition to its two top trades, this issuer also brought to market $9.1 million of three-year autocallable step-up notes tied to the Euro Stoxx 50 index. This deal was also distributed by BofA Merrill Lynch.

“Most of the U.S. rally took place earlier this year. We had a sell-off in August, and the market has gone up recently, but it’s not like it has taken off.” – A sellsider

“A lot of people are thinking there isn’t much left in the U.S. market in terms of value.” – A market source

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