Structured products agents sell $826 million in a ‘Bank of America week’; agent nabs 80% of market

By Emma Trincal

New York, Jan. 30 – Bank of America priced its block trades of structured products last week, including the largest deal for the year, taking 80% of the market share as a distributor, according to preliminary data compiled by Prospect News.

Overall, however, it was not an impressive week with a notional of $826 million of structured products in 93 deals. Some attributed the meager volume to the shortened holiday week as stock markets closed on Jan. 21 for Martin Luther King Day.

Too soon to tell

For the month, agents sold $2.1 billion through Jan. 25, a 22% drop from the previous month, which saw $2.69 billion. The comparison is odd, however: there are four more trading days in January while trades by Dec. 25 had already all been priced.

January through the 25th saw volume drop nearly two-thirds from $5.98 billion a year ago.

Even when taking into account a JPMorgan block trade tied to Voya Financial, Inc. last year, the gap from a year ago remains high.

Since it’s only the beginning of 2019, a look at the 12-month trailing period growth offers more insight. Volume in the 12 months to Jan. 25 from Jan. 26, 2018 is up 3.1% to $55.21 billion from $53.56 billion in the same period a year earlier, the data showed.

A different perspective

Those figures, which reflect the overall registered structured note market, do not necessarily match the experience of some distributors.

“We’ve seen a pretty strong demand in January,” said Matt Rosenberg, sales trader at Halo Investing.

“In December, you had a pretty high proportion of reverse inquiries as opposed to calendar deals. People were getting hit by the market; they were trying to reallocate their portfolios before the holidays.”

“Now the tone has changed.

“I’m seeing a shift. We’re back from reverse inquiries to the more traditional subscription-based offerings.”

January may not be great

Still, the trailing figures, which reflect the bigger picture, were concerning, according to a market participant.

“A 3% increase on a trailing basis. That’s not huge when you compare it to the end of December when we were up...I don’t know...10%,” he said.

Volume on a year-to-date basis jumped 9.3% to $56.84 billion last year, an all-time record compared to $52 billion in 2017.

“We’re still close to December so having a 10% increase year over year and all of a sudden we’re up only 3% on a rolling basis. that tells me we’re not having a very good January,” he noted.

“I mean it’s OK. We’re still doing well since we’re still up. It just means that a lot of the gains have given up.

“The 12-month to 12-month rolling is very telling early on in the year. It makes a difference. We know we had a terrible month.”

BofA tops

BofA Merrill Lynch distributed $667 million last week in 22 offerings, a whopping 80.7% of the total volume.

BofA priced 18 of the top 20 deals, including the first 11 ones. This may indicate that the warehouse’s presence was stronger than usual or that the rest of the market was not as active.

In just its first two deals, which it brought to market via its own issuing arm, BofA captured 28% of the total market in $232 million.

And the winner is...

BofA Finance LLC priced the top deal of the year with $133.93 million of 14-month Accelerated Return Notes linked to the S&P 500 index.

The payout at maturity will be par plus triple any index gain, up to a maximum return of 14%, but investors will be exposed to any index decline.

“Probably a rollover from a previous 14-month deal,” the market participant said.

“This is the traditional BofA offering,” noted Rosenberg.

“People have it as part of their asset allocation model. They’re used to buying it. They’re laddering these trades month over month, quarter over quarter.”

The market participant was not surprised to see that the large block trade offered no downside protection.

“A lot of their deals are no-buffer. They’re a well-oiled machine. It works for them, so why not? BofA is not known to reinvent the wheel. They have a massive amount of advisers who talk to a lot of different clients. Some like the no-buffer deals. Others want the protection. They do both,” said the market participant.

Almost $100 million

Indeed, BofA Finance issued another block trade – the second in size for the year with $97.75 million of two-year buffered leveraged notes on the S&P 500 index.

Compared with the previous one, the tenor was 10 months longer, both the cap and leverage factor were lower. But in exchange investors had access to a 10% buffer.

“This is more in line with what we see. Clients expect greater volatility and they want downside protection even if it’s only a 10% or 5% buffer. Advisers love it because it’s a good story for their clients,” said Rosenberg.

Top issuer, too

These two deals gave BofA Finance the top ranking as issuer last week with nearly a third of the total volume issued in four deals.

Rosenberg noted that BofA usually does not try to push too much volume for deals they issue themselves.

“They do such a big chunk of the volume, there’s only so much BofA paper they want to go into BofA distribution,” said Rosenberg.

“That’s why they use a bunch of different issuers. Last week they did more of their own stuff perhaps because we’re starting fresh in January. Perhaps there is more flexibility or demand.”

Scotia, CIBC

The third and fourth deals of the week came from Canadian issuers. Both were large trades sold by the Merrill Lynch distribution channel as well.

Bank of Nova Scotia priced $72.04 million of another 14-month trade on the S&P 500 index with double the index gain up to a cap of 11.5%. Given the short tenor, the buffer was only 5%.

Canadian Imperial Bank of Commerce priced the next two deals in sizes of $44.55 million and $38.52 million.

The first deal is a five-year note based on the S&P 500 index with 1.25 times leverage up to a 68% cap. The downside pays in absolute return terms for the first 20% decline on a one-to-one basis. Interestingly the 20% protection is offered via a buffer, not through the prevalent barrier.

In its second deal, CIBC priced $38.52 million of three-year notes linked to a basket of indexes, which included the Euro Stoxx 50 index with a 40% weight as well as the FTSE 100 index, the Nikkei Stock Average index, the Swiss Market index, the S&P/ASX 200 index and the Hang Seng.

The payout at maturity will be par plus 166.1% of any basket gain.

Again, this structure over a longer tenor combined an absolute return payout and a buffer, whose size was 15%.

“The forwards are cheaper on some of those foreign indices. Interest rates are lower or negative, dividends are usually higher. It helps with the pricing,” the market participant said.

Goodbye Euro Stoxx

This deal offered a rare occurrence of the use of the Euro Stoxx 50 index albeit a partial one since it was just a basket component.

Last year, the high-yielding Euro Stoxx was in favor, although the volume of deals tied to this index has always remained lower than what is priced on the S&P 500 index, according to Prospect News data.

But last week continued to point to a new trend showing that investors are moving away from the euro zone. Notes solely linked to the Euro Stoxx index last week accounted for less than 1% of the total in only three deals while S&P 500 products made for 57% of the total in 19 offerings.

“I think this has more to do with sentiment than pricing. Maybe people are not as comfortable with Europe as they used to be given a number of problems... think Brexit,” the market participant said.

“Maybe they also over-allocated to the Euro Stoxx. People are already fully invested in the asset class.”

Earnings calls

The week started on a volatile mode but ended up rather flat. The S&P 500 index finished down less than 1% over the same sources of uncertainty: mainly concerns over global growth and pending trade talks with China. A temporary end of the U.S. government shutdown on Friday had little impact on the market.

Because of the imprint of Merrill Lynch offerings, which are leveraged products, the typical 50/50 balance between autocallable and leverage was off. Autocallable notes represented less than 7% of the volume while leverage made for two-thirds of it.

However, the earnings season offered interesting plays for investors who bet on single names, said Rosenberg. “We saw an uptick in income deals. A lot of tactical trading on FANG names in particular,” he said.

FANG is an acronym referring to Facebook, Amazon, Netflix and Google’s parent, Alphabet.

“Structured notes show better pricing before earnings because of the volatility spikes. After the earnings, the uncertainty goes away and pricing is worse,” he added.

“Some names or sectors have retraced and provide good entry points.

“The most opportunistic time to get into tactical plays when you use structured notes is during the earnings season.

The top agent after BofA Merrill last week was JPMorgan with 18 deals totaling $43 million, or 5.2% of the market. Morgan Stanley was next with $37 million in seven deals, a 4.42% share.

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