September ends on strong note; BofA increases penetration rate to 56% by pushing big deals

By Emma Trincal

New York, Oct. 1 – Agents sold $1.46 billion in the week ended Friday, one of the best weeks for the year, but sources said it was to be expected given the closing of the month and quarter.

“People are back from the holidays. That’s certainly a factor,” a structurer said.

But the main factor was the enormous impact of BofA Merrill Lynch.

Top agent

As always when a month ends, BofA Merrill Lynch dominated the volume of priced deals. But its market share, 56%, was bigger than average. In the last week of August, BofA Merrill Lynch priced 48% of the notional amount, and its average for the year to date is 28%, according to data compiled by Prospect News.

“I assume they might need cash. They have pretty nice funding, which allows them to pay attractive yields,” a sellsider said.

“We know that structured products are not the main way to get funding for a bank. If you need $ 5 billion, obviously you issue a bond. We’re not talking about these sizes here. But if you want to tap the market only for a few million dollars, if you have a small mismatch between assets and liabilities, instead of issuing a bond, you may decide to raise the cash by other means. Structured notes are one option.”

Still, BofA Merrill Lynch is always by far the top agent at the end of its month, sources said, stressing the quality of its distribution network.

“Some might say the market is unbalanced,” the sellsider said.

“But first it doesn’t happen every week, and sometimes it can be biased by the existence of two or three jumbo deals.”

Month

September is stronger than August as of the 26th, which is the last Friday of the month.

Agents during that time sold $3.03 billion versus $2.32 billion in August. However, the analysis of the full monthly figures shows a different picture.

From Sept. 1 to Sept 30, sales amounted to $3.03 billion, compared with $3.69 billion in August. The difference is due to the calendar as August included three more trading days.

On a year-to-date basis, agents have priced $31.91 billion as of Sept. 26, a 12.37% increase from the same period of last year.

On a calendar basis – taking into account the full month of September – last year saw the pricing of $28.83 billion, which reduces the year-over-year growth to 10.6%.

“We’ve seen more volatility this week with the stock price of General Motors plunging on Monday as well as shares of Texaco and Chevron. In addition, there are the protests in Hong Kong. All those things have made the markets slightly more volatile,” the structurer said.

Asked about the potential effect of a volatility increase on volume, this source offered a mixed answer.

“We may see a slowdown in issuance volume with people fleeing all types of equity products for safe havens. Or we may see more business if pricing improvements helps meet demand for downside protection. It’s really hard to predict,” he said.

Bond King

Leveraged notes offering no downside protection were in favor last week.

Those products represented $422 million, or 27.5% of the total. The year-to-date average for this type of deals is only 16%.

“It’s always hard to say why people require buffers at certain times and decide to go without it other times,” the sellsider said.

“It might be the mood of the market or the new mood because a lot of things happened recently.

“I have in mind the move of Bill Gross, the Bond King, who can easily move the markets.”

Bill Gross, co-founder of the Pacific Investment Management Co., announced last week that he was heading to Janus Capital to run a new bond fund. At Pimco, he was managing the biggest bond fund in the world.

“Some already speculate that his departure from Pimco may trigger the end of the bullish run in the bond market,” the sellsider added.

“One thing is certain: Pimco has lost its sex appeal.

“Part of the cash outflow could follow him at Janus. But some cash could also go to equities. Some investors are going to get their money back from different funds at Pimco. When you get some cash back, you tend to reset your thinking. Do I still want to invest in bonds or do I want to go to equities? I doubt that 100% of the money will fly from Pimco to Janus. In some way, I believe this might be an opportunity for structured products.”

Equity momentum

“You also have a lot happening in Europe with potentially QE that might be official tomorrow,” the sellsider.

The European Central Bank will meet on Thursday and is expected to make an important announcement about its monetary policy.

Equity-linked notes represented a high portion of the volume last week at 88%. The average for the year is 83%, according to the data.

“All sorts of factors are fueling equity,” the sellsider said.

“I think we’re in a pretty good market. The equity momentum is pretty strong.

“Also there is a lot of uncertainty surrounding the equity markets because of geopolitical risks, because of the potential QE and because of the Fed considering raising interest rates. When you face this type of uncertainty and volatility goes up, structured products are the perfect tool to navigate through turbulent markets.”

Big deals

There were a number of larger deals last week. Three offerings were in excess of $50 million.

Credit Suisse AG, London Branch’s $154.79 million issue of 0% Accelerated Return Notes due Nov. 25, 2015 linked to the S&P 500 index was the top deal last week. It was distributed by BofA Merrill Lynch.

The structure offers three times leverage with a 10.56% cap and no downside protection.

“Investors may want to invest in equity with a short-term outlook,” the sellsider said.

BofA Merrill Lynch sold the top 20 deals except for the No. 2 and No. 4 ones.

JPMorgan Chase & Co.’s $70.11 million issue of 0% capped contingent buffered return enhanced notes due Aug. 20, 2015 linked to WTI crude oil futures contracts was the No. 2 deal. It offers a 1.5 times leverage factor on the upside up to a 15% cap and a 15% contingent barrier on the downside.

“It’s probably a geopolitical play. With what’s happening in Russia and in the Middle East, more people anticipate that oil could go up. It’s a very short-term deal with leverage,” a market participant said.

“If you go wrong, you have downside protection. It’s not such a bad play.

“I’m just surprised of the size. It was probably an institutional investor or a bigger RIA, or maybe it’s just the result of JPMorgan’s distribution.”

The third deal, also sold by BofA Merrill Lynch on the behalf of Credit Suisse, was $50.26 million of 0% autocallable market-linked step-up notes due Sept. 27, 2019 linked to the Russell 2000 index.

The notes are automatically called at par of $10 plus 7.4% per year if the index closes at or above the initial index level on any annual call date.

If the notes are not called and the final index level is greater than the step-up value, 135% of the initial level, the payout at maturity will be par plus the index return.

If the final index level is greater than or equal to the initial level but less than or equal to the step-up value, the payout will be par plus 35%.

If the final index level is less than the initial index level by up to 15%, the payout will be par. There is a 15% buffer on the downside.

“I assume they might need cash.” – A sellsider on BofA Merrill Lynch’s higher-than-usual market share

“With what’s happening in Russia and in the Middle East, more people anticipate that oil could go up.” – A market participant

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