Structured products issuance $1.08 billion for week; BofA leads with a 63% share

By Emma Trincal

New York, Nov. 1 – Agents priced $1.075 billion in the last week of October as BofA Securities sold the bulk of its monthly calendar as it does at the end of each month, data compiled by Prospect News showed.

BofA Securities priced 32 deals totaling $678 million, a 63.1% market share.

Last week’s total notional sales followed the issuance of $1.77 billion during the previous week ended Oct. 15. This last figure suggests that last week’s tally will likely be revised upward as final weeks tend to be the biggest in volume.

Big index deals

The dominant underlying category was equity indexes with $841 million, a 78% share. Within this asset class, the surprise came from the prevalence of single indexes as opposed to worst-of.

Single index deals were particularly large overall. In volume, they accounted for $493 million, but the deal count was only 34. Single index notes made for 60% of all index products in volume.

Among the top 10 deals totaling $460 million, seven were tied to a single index – the S&P 500 and the Russell 2000. The $367 million tally for those seven offerings represented more than a third of the total issued for the week.

Few stocks

In contrast, notional sales of single-stock notes were weak with less than 2% of the total versus 13% for the year-to-date market share. This may come as a surprise as the earnings season was in full swing last week. Volatility increases during that time due to the uncertainty and last week was no exception. The VIX index surpassed 23 on Monday. Meanwhile the S&P 500 index fell into correction territory on Friday. Some advisers like to buy stock-linked notes when volatility spikes, a source said.

But it was not true last week.

Catalysts

“What drives people to buy structured notes on stocks is not so much volatility but catalysts in the news,” said a structurer.

“People are chasing themes. For instance, if you believe that Tesla shares will rebound you may buy a note on Tesla to reflect your view.”

For this structurer, investors don’t really use structured notes to play the earnings.

“If you want to gamble on earnings, you buy the stock, not the derivative. You’ll be either right or wrong and the result will come out very quickly,” the structurer said.

Private banks

A market participant attributed the small notional in stocks to the dominant position of BofA Securities as the top agent.

“When BofA comes out and prices its inventory, you always have more indices and fewer stocks,” he said.

“You see more stocks from the big wealth management shops, the Morgan Stanley, the Goldman, and the UBS.

“These are very big players. Their advisers are more aggressive. They cater to clients who love to reach for yield. So those firms sell a lot of notes tied to stocks.”

While BofA is also a “huge private bank,” its style is different, he said.

“BofA is conservative by nature. They do indices.”

Accelerated return

Leverage was popular last week, again due to BofA’s footprint. This structure type was employed in 20 deals totaling $322 million, a 30% share, well above the 20% year-to-date average.

Interestingly, leveraged notes with full downside risk exceeded the volume of those providing some kind of protection via buffer or barrier. Unprotected leverage trades accounted for 19% of the total versus 11% for buffered/barrier notes.

This trend is not unusual at the end of each month. Does it mean advisers are overly bullish?

The structurer did not think so.

“It’s not about complacency. When you do 3x leverage, you don’t really need protection. You just put less money in there. Say you have $300 to invest, you just buy $100 in a note. Yes, you could lose that $100. But what happens to your $200? You can put that in Treasuries. That’s your buffer,” he said.

Equal weight

ETF-linked issuance was notable last week with 13 deals totaling $164 million, or 15.3% of the week’s notional compared to 8% for the year to date.

About half of this ETF tally – or $83 million – went to three deals tied to the Invesco S&P 500 Equal Weight ETF. This ETF and the index it replicates have been increasingly popular.

The index equally weights the stocks in the S&P 500 resulting in an exposure to smaller companies with diversification. Investors use the S&P 500 Equal Weight to remove the overconcentration in seven of the biggest high-growth U.S. tech stocks in the S&P 500 index. Those nicknamed “the Magnificent Seven” account for 28% of the S&P 500’s value.

But issuers also have their own rationale behind the use of this underlier.

Cheaper hedging

“You do get better terms because issuers are loaded with SPX, INDU and RTY,” said the market participant referring to the tickers for the S&P 500 index, the Dow Jones industrial average and the Russell 2000 index, respectively.

“Hedging the same indices over and over is expensive for the banks. They have to carry that risk, buy those puts, sell those stocks. The marketplace knows they have to hedge so they bid up that risk,” he said.

The use of the equally weighted version of the S&P 500 index is recent, he noted.

“The trend picked up about three months ago. It’s still not very common. At first, banks could not price it because it was not in their models yet. Now the word got out. The hedge is much cheaper because the banks are not stuffed with it. If the trend intensifies with all the copycats, in a year the game is over,” he said.

Top offerings

Toronto-Dominion Bank priced the top deal in $93.84 million of 14-month notes tied to the S&P 500 index. The upside offered one-to-one participation up to 10%. A 14.05% buffer was provided at maturity with absolute return.

Canadian Imperial Bank of Commerce priced the second largest deal with $90.87 million of 14-month leveraged notes on the S&P 500 index. The payout at maturity was 3x the index gain capped at 17.25% with full downside exposure.

TD Bank also issued a $44.61 million issue of six-year snowball notes paying a 9.4% annualized call premium and featuring a 15% buffer.

Meanwhile, CIBC priced $40 million of two-year leveraged notes tied to the S&P 500 index providing 2x leverage capped at 24% and a 10% downside buffer.

Canadian issuers

BofA Securities, Inc. was the agent for those deals.

The top agent after BofA Securities was UBS with 19 deals totaling $218 million, or 20.3% of the total.

It was followed by Morgan Stanley.

The top issuer for the week was CIBC with $328 million in 15 deals, a 30.5% share.

Canadian issuers grabbed 32% of the market.

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