Structured notes issuance tops $971 million in week; BofA tops with a flurry of Canadian issuers

By Emma Trincal

New York, April 29 – Last week recorded a strong volume of structured notes issuance, one week ahead of the end of the month, as Bank of America may have come to market slightly earlier, pricing more than half of total sales, according to preliminary data compiled by Prospect News.

Total volume hit $971 million in 160 offerings, slightly more than the most recently updated figures for the previous period ended April 17 showing $844 million in 347 deals.

BofA Securities last week priced $543 million in 17 offering, a 56% share of the market, a figure that is likely to be revised upward. The agent priced its deals on Thursday for settlement this week. This agent is likely to have priced more deals last week, which would not have yet been accounted for or plan to do more this week before the month ends on Thursday.

Canadian issuers made a strong comeback in the orbit of BofA Securities, which uses their credit almost exclusively in its distribution channel via an open-architecture platform.

April is down

Figures for the month through April 24 show a decline in volume some may attribute to the shutdown although it may also be the result of the incomplete data at press time.

Agents in April priced $3.024 billion in 927 deals, a 40% decline in volume from the same period in March.

As the lockdown in New York only started on March 22, sales were not affected by any business disruptions last month. Meanwhile the market was hitting bottom, providing opportunities to strike better-priced deals.

Twice more for the year

But volume has been so strong so far this year that it’s too soon to draw conclusions on what happened in the first three weeks of April, a sellsider said.

For one thing, this slight decline barely made a dent in totals for the year through April 24, which hit $24.528 billion, twice the $12.353 billion notional of last year.

Also spectacular is the jump of the number of offerings which accounted for 6,926 this year versus 4,173 last year, a two-thirds increase.

“We’re having a tremendous year. I’m not sure the month-to-month data is very representative,” said this sellsider.

“It’s true that with the coronavirus, supply has been disrupted, advisers can’t visit their clients. People can’t even go to the bank.”

And yet, this sellsider said he was not overly concerned about the impact of the lockdown on structured notes activity.

New York still at work

“In our industry, the disruption is minimal,” he said.

“From talking to my colleagues, people are still buying structured investments – a lot of it.

“Deals are getting done even though that’s not easy.

“Clients have more time to look at their investments. A lot of them are retired. They’re not living paycheck to paycheck.

“On the trading desks things are looking good. Everybody is working from home.

“Structured notes is not like buying toilet paper. You can do it on the phone.

He suggested looking at the “bigger picture,” pointing to the trailing 12 months as this data can give a better sense of the trend.

From April 25, 2019 to April 24, agents priced $65.176 billion, up from $48.859 billion in the previous 12-months. It’s an increase by over one-third in volume.

Simultaneously, the deal count rose by 30% to 19,604 from 15,113.

“We’re clearly in an upswing. When the problems created by the virus will be solved, hopefully we’ll get back on track,” he said.

The recent sell-off in March followed by a few weeks of rising stock prices have convinced some to look at alternatives to direct equity investments.

“Long term, I think all of this is good for structured notes,” he said.

“You can’t just close your eyes and go long equity when you had a sell-off like we just had.

“It’s a good thing to include protection in your investment.”

Leverage

Typical structures last week deviated from the average due to Merrill Lynch’s line of products, which tend to be more growth than income oriented. Despite this influence, autocallables remained the dominant play with 45% of the total versus 51% in average for the year.

Leveraged has been weak on average this year with less than 30% of total sales, of which a third represents leverage with barriers and buffers and two-thirds, leverage with no protection at all.

Last week showed a slightly different picture: leverage made for 38% of total notional. Within that structure type, investors elected some limited form of protection half of the time via buffers or barriers.

Buffers everywhere

“We see growing interest in the buffered stuff,” the sellsider said.

“It’s not just with structured notes. We see it with a number of structured investments, including ETFs and UITs.

“The wirehouses are not doing it yet. Merrill, UBS, JPMorgan are not jumping in the buffered ETF bandwagon. At least not yet. They move very slowly. They don’t want to change the status-quo.

“But fee-based advisers are doing it. If you want a buffer in a simple structure with liquidity and no credit risk, here you go.”

Indexes

Another sign of the presence of block trades underwritten by BofA Securities last week was the significant share of equity index-linked notes, which made for more than 85% of the total notional with $833 million in 84 deals.

The majority of those deals were over the $50 million mark.

The bid on single stocks deals was weak with only $95 million issued in this asset class, another sign of the impact of BofA.

Oil and stimulus

It was another volatile week in the equity markets.

After a three-week rally, the averages finished negative with the Dow Jones industrial average down nearly 2% on the week.

But the market roller-coaster helped pricing.

“With such elevated volatility, terms are awfully good,” a market participant said.

Aside from the ongoing coronavirus crisis, one factor of instability was the collapse on Monday of the front-end oil futures contract falling into negative price for the first time in history.

But the passing of another stimulus package for $484 billion to provide relief for small businesses and hospitals and boost Covid-19 testing helped attenuate volatility.

CIBC’s $96 million

Canadian Imperial Bank of Commerce topped the deal list in size with $96.42 million of 14-month leveraged notes linked to the S&P 500 index. The payout at maturity will be par of $10 plus triple any index gain, up to a maximum return of 20.13%. Investors will be exposed to any index decline.

“We see a lot of short-term, highly levered stuff,” a buysider said.

“It’s catering to the crowds of brokers and their clients. They’re throwing that red meat to investors looking for that juice in the portfolio. But 14-month, 3x, capped 3X, and no downside protection is not appropriate for us.

“That doesn’t mean these aren’t good deals. Over the short-term you can make a lot of money on these things. They have their place in some portfolios. But they’re not for everyone.”

CIBC was by far last week’s top issuer, bringing to market 11 offerings totaling $313 million, or a third of the total.

BofA Securities, Inc. was the agent for all this issuer’s offerings.

Scotia’s $76 million on GLD

The second largest deal came Bank of Nova Scotia with $76.43 million of 14-month leveraged notes tied to the SPDR Gold Shares fund, which is listed on the NYSE Arca under the ticker “GLD.”

The payout at maturity will be par of $10 plus triple any fund gain, up to a maximum return of 23.85%. Investors will be exposed to any fund decline.

BofA Securities, Inc. is the underwriter.

This deal was the closest version of a commodity note even though the underlying is equity.

There were no commodities-linked notes last week. Investors for several years now have abandoned pure commodity underliers. The intense volatility in the oil markets last week is probably not an incentive. But for those seeking exposure to gold as a shelter against inflation, gold mining stocks are a typical play among structured notes investors.

Scotia was the second top issuer with $212 million in five offerings, or 22% of total volume. Just as with CIBC, this issuer was exclusively part of BofA Securities’ distribution network.

Canadian week

Those two banks alone represented more than half of the paper issued las week.

Canadian issuers have not been very present this month. But their comeback last week was significant.

Canadian banks issued 23 deals totaling $585 million, or more than 60% of the total. Nearly all of them were distributed by BofA Securities.

Toronto-Dominion Bank was also part of this agent’s distribution with a $6.5 million deal on the Euro Stoxx 50 index.

Royal Bank of Canada was also present but with its own distribution channel.

Market-linked step-up

BofA Securities priced on behalf of CIBC the third deal with $74.52 million of six-year autocallable market-linked step-up note tied to the S&P 500 index.

The notes will be called at par of $10 plus an annualized call premium of 10.75% if the index closes at or above the initial level on any annual observation date.

If the notes are not called and the index finishes above the step-up value, 135% of the initial level, the payout at maturity will be par plus the index gain.

If the index finishes at or below the step-up level but at or above the initial level, the payout will be par plus the step-up return of 35%.

Investors will receive par if the index falls by up to 15% and will lose 1% for each 1% decline beyond 15%.

This structure is popular among Merrill Lynch brokers and their clients. Scotia did a similar deal for $36.85 million.

Other big deals

Another big Scotia deal was sold by BofA with $67.89 million of two-year leveraged capped buffered notes on the S&P 500.

The leverage is double the return with a 22.6% cap. There is a 10% buffer on the downside.

CIBC issued a similar deal but on a 14-month tenor with a 16.82% cap and a 5% buffer. It priced at $51.13 billion.

The sixth deal was a $46 million autocallable contingent coupon note for $46 million issued by UBS AG, London Branch. The tenor is three years, and the underlying is the S&P 500. The quarterly contingent coupon offers 10.15% based on a 65% coupon barrier.

After BofA Securities, the top agents last week were UBS with 58 deals totaling $162 million, or 16.7% of the total. It was followed by Citigroup, which printed $112.34 million in 22 deals.

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