Structured products issuance jumps for week to nearly $1 billion as BofA Merrill closes its month

By Emma Trincal

New York, May 30 – Agents priced $904 million of structured products in 170 deals in the week ahead of Memorial Day weekend, which is when BofA Merrill Lynch closed its monthly calendar. With eight offerings in excess of $30 million, the agent overall priced $565 million, or 63% of the total, in only 19 deals, according to preliminary data compiled by Prospect News.

It is very likely that BofA Merrill Lynch’s figures will increase as not all deals could have been reported by Friday ahead of the holiday.

Month, year

Volume for the month through May 25 is down 24% from April, but again part of the lag is probably due to some data gaps, which will be revised upward. Sales accounted for $2.62 billion this month through the May 25 versus $3.44 billion during the same time last month.

The year remains stronger than in 2017 so far as the end of the first half nears.

Issuers priced $24.24 billion year to date versus $20.96 billion in the year-ago period, a 15.65% increase. The number of deals is up 18% to 6,348 from 5,373.

BofA Merrill’s issuers

BofA Merrill Lynch priced the top 11 deals as well as 18 of the top 25 in size.

The list of issuers used by this agent remains diversified: Barclays was by far the most active not just by the number of deals it issued (six) but by their large size, with one nearing $100 million. BofA Finance itself issued four deals; Credit Suisse and HSBC did three each and Wells Fargo did one.

In addition, two issuers in the BofA Merrill Lynch distribution network caught sources’ attention.

AB Svensk Exportkredit made a comeback with nearly $60 million. This issuer is slowly reemerging within the BofA Merrill Lynch platform with slightly larger deals than last year.

Last week’s offering was the Swedish issuer’s second for the year after a $35 million deal early last month.

“I remember. We haven’t seen them in a while. At some point everybody wanted different entities. The market has absorbed all those new names and probably saturated. Now it looks like they’re coming back,” a market participant said.

SunTrust’s first

More newsworthy was SunTrust Banks, Inc. jumping into the fray in the notes market, according to data compiled by Prospect News, which counts all registered deals with the Securities and Exchange Commission.

SunTrust, which typically issues market-linked certificates of deposit, made its first foray into notes since 2011 within the Merrill Lynch platform. The offering was $12.78 million of five-year leveraged notes tied to the Dow Jones industrial average with uncapped leveraged upside at a rate of 1.13 and a 20% buffer. The deal priced on Thursday.

“That’s very interesting,” said Matt Rosenberg, sales trader at Halo Investing.

“They’re known for issuing market-linked CDs. That’s their bread and butter.

“By getting into the notes market, especially through a private bank, they’re testing the appetite for SunTrust credit.”

SunTrust has been contemplating the notes business for a while, an industry source said.

“As of the end of Q1, they had no interest in issuing structured notes because they had no need for funding. They wanted to grow the distribution of structured notes but not necessarily issue them,” this source said.

“Things have obviously changed. It’s probably because interest rates have increased. The economics of issuing structured notes based on zero-coupon bonds are more attractive right now.”

The market participant said that SunTrust’s first notes deal since 2011 reflected a more mature market.

“There are only so many structures you can do with market-linked CDs. People are more willing to take risk. In order to price a principal-at-risk product you need to go to notes. You can’t do CDs all the time,” he said.

“So better late than never.”

BofA’s footprints

Structures last week reflected the input of BofA Merrill Lynch.

Leveraged notes with or without buffers or barriers made for 58% of the total versus only 16% for autocallable products, the data showed. This distribution departs from the year-to-date average with equal amount for growth and income, each group making for 35% of the total.

BofA Merrill Lynch can have a big impact when they price their monthly calendar at the end of each month, said Rosenberg.

“Even though they only sell within their own channel the products they distribute will resonate across the market,” he noted, which explains the disproportional amount of growth products tied to equity indexes. Indexes made for 70% of the total issued last week.

At the same time, BofA’s influence is not disruptive for the rest of the market.

“Halo continues to be very successful with income products. We see more income notes on our end, reverse convertibles on single-stock names, in particular energy.

“But our distribution is different. We usually don’t serve the wirehouses,” he said.

Range bound

The U.S. equity markets ended slightly up last week despite a flow of geopolitical headlines from trade talks with Beijing to the cancellation of the summit with North Korea.

These conditions, as long as investors remain confident, are prone to range bound plays, which can be found with autocallables as well as highly leveraged notes with caps.

“You would think that with all these headlines, people would want to revisit being in the market. I don’t know if the market is discounting this noise but it certainly doesn’t discourage people from buying structured notes,” he said.

“Conditions are good for income-oriented structures that will pay higher coupon with decent downside protection. We see that especially in the energy sector but the same thing is going on with tech stocks.”

Top deals

The top two BofA Merrill Lynch-distributed deals were typical: short-term, no protection, attractive cap and high multiples. The first two featured a similar, quasi-identical structure.

Barclays Bank plc’s $99.6 million of 14-month Accelerated Return Notes linked to the S&P 500 index was the top issue. The notes will pay triple any index gain up to 10.65%. Investors will be exposed to any index decline.

The second deal – AB Svensk Exportkredit’s $59.79 million – had the same maturity date, the same downside exposure and also three-times the upside as the previous one. But the underlying was the Euro Stoxx 50 index rather than the S&P 500. The cap was 23.13%.

“We know why the same deal prices with a much better cap on the Euro Stoxx. It’s mostly the forward price. Euro rates are negative. Right now the one-year is -20 basis points versus 2.2% on the one-year Treasury,” the market participant said.

Barclays again priced another large-size deal in $55.03 million of two-year leveraged notes linked to the S&P 500 index. With double the index upside return and a longer maturity than the two previous ones, the structure included a 10% buffer on the downside.

“There are a lot of things going into the mix. For one, it’s a slightly longer-dated note. When you extend the maturity you’re foregoing interests longer...You have more to buy the derivatives. It’s also less leverage. That’s why they were able to put a 20% buffer in there,” the market participant said.

The fourth offering came from BofA Finance LLC with $52.71 million of 14-month market-linked step-up notes linked to the Euro Stoxx 50 index.

If the index finishes above the step-up level – 115.2% of the initial level – the payout at maturity will be the index gain.

If the index gains by up to the step-up level, the payout will be par plus the step-up payment of 15.2%.

Investors will be exposed to any losses.

Finally, another big Barclays’ deal – and the fifth largest one for the week – was $44.06 million of three-year leveraged notes linked to an equally weighted basket consisting of the Dow Jones industrial average and the Euro Stoxx 50 index. The deal features 1.4 upside leverage, uncapped returns and a 20% buffer.

“It helps to throw the Euro Stoxx in the basket. We know the Euro Stoxx is cheaper, so you get a nice buffer,” the market participant added.

Innovative structure

All top deals were template, block trades most investors and advisers are familiar with whether they are part or not of BofA Merrill Lynch’s distribution network.

On the other end of the spectrum Credit Suisse Securities (USA) LLC sold a very innovative and small-sized product.

It was Credit Suisse AG, London Branch’s $1 million of 9% three-month step reverse convertible linked to the common stock of Stamps.com, Inc. with monthly interest payments of 2.25%.

If the shares finish above their initial price, investors capture an extra 1%.

If they finish lower, the payout will depend on an American barrier (observed any day) situated at 67.58% of the initial price.

If the shares finish below the initial level and close below the 67.58% knock-in level any day during the life of the notes, investors will receive a number of shares equal to $1,000 divided by the initial share price or, at the issuer’s option, an amount in cash equal to the value of those shares.

If the shares finish below the initial level, but never close below the knock-in level, the payout will be par.

“Looks more like an institutional deal despite the fee,” the market participant said.

The fee is 1% for the term.

“I don’t see how a retail client would go so short term.

“It’s probably an institution that can only get income through a coupon.

“Interesting structure.”

Top agent, issuer

Last week’s top agent after BofA Merrill Lynch was UBS with 72 deals totaling $86 million. It was followed by JPMorgan.

Barclays Bank plc was the top issuer with $259 million, or 29% of the market in 19 deals.

The top issuer for the year is JPMorgan Chase Financial Co. LLC with $4 billion in 862 deals, or 16.5% of the overall issuance volume.

“They’re known for issuing market-linked CDs. That’s their bread and butter. By getting into the notes market, especially through a private bank, they’re testing the appetite for SunTrust credit.” – Matt Rosenberg, sales trader at Halo Investing, commenting on SunTrust Banks’ participation in the market

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