Volume spiked to $1.34 billion in best week of year with Bank of America pricing big deals

By Emma Trincal

New York, June 5 - Agents in post-holiday mode put together the best week of the year in terms of volume, selling 205 deals totaling $1.34 billion, a 148% advance from the $559 million of sales seen in the prior week, according to data compiled by Prospect News.

Bank of America was the top agent by far as is almost always the case at the end of the calendar month, selling $781 million, or 56.5% of last week's volume, in 23 issues.

"I'm not surprised," said a sellsider, commenting on Bank of America's market share.

Bank of America priced all of its deals - except one small currency offering issued by HSBC USA Inc. - on Thursday.

The No. 2 agent for the week was Morgan Stanley with $137 million sold in 13 deals. It was followed by JPMorgan, which sold 47 products totaling $116 million, according to the data.

Bank of America brought to market a series of larger-than-usual deals issued under different names. The week's largest product was a Bank of America Corp.-issued leveraged notes offering for $131.7 million linked to the S&P 500 index. In the No. 2 spot, the bank issued $114.67 million of step-up notes linked to the S&P 500. The third-largest deal was Barclays Bank plc's $60.63 million of 0% Accelerated Return Notes due July 25, 2014 linked to the Euro Stoxx 50 index, also sold by Bank of America.

"Bank of America did a lot last week. But when you look at $132 million ... that's one deal. And they did a couple of other big ones, so it adds up," a distributor said.

Talking about the $132 million product, this distributor said: "I don't know if it was a rollover. It was probably distributed through the Merrill Lynch channel. All you really need in order to generate an extraordinarily successful offering is for the advisers to feel a sense of comfort. Once they learn the specifics of the deal and like the terms, they want to show it to their clients. The fact that Merrill Lynch is the distribution arm of the manufacturer of those deals is also helpful for them."

One piece of good news, thanks to last week, was the monthly performance going back up again. From May 1 to June 1, agents sold $3.19 billion versus $2.61 billion during the same time the month before - a 22% increase, according to the data.

Despite the robust monthly figure, volume for the year so far was still lagging in comparison to last year with $15.74 billion priced, an 8.25% decrease from $17.15 billion last year. Part of the decline in volume may be attributed to a 10% drop in the number of offerings: 3,332 deals priced this year versus 3,689 the same time last year. A 12.5% decline in the number of deals in excess of $10 million - to 385 from 440 - was also a contributor.

Mammoth deals

Bank of America priced 14 out of the 15 deals in excess of $20 million last week, or 97% of the offerings in this size group. Royal Bank of Canada priced No. 14: a $21.41 million offering of autocallable reverse convertibles linked to Dow Chemical Co.

"Merrill Lynch was a huge player going back in the days with its buffered notes and Accelerated Return Notes. It's hard to say if those big deals last week were rollovers. But it's possible something came due; plus if you had new orders it kind of pumped it up," the sellsider said.

As an underlying asset, stocks were fewer last week, making for only 22% of the total versus 68% for equity indexes, the data showed.

Among the issuers used by Bank of America in its 23 deals priced last week, AB Svensk Exportkredit came up twice for two leveraged note offerings with full downside exposure linked to the Russell 2000 index ($26.42 million) and to the S&P 400 MidCap index ($25.66 million). Bank of America issued nine of its own deals. It used the credit of Barclays five times; HSBC, four times and Credit Suisse AG, Nassau Branch, three times.

"With that channel of distribution and the size of their deals, they do have to open up their platform and allow other issuers out there," the sellsider added.

"If it was Bank of America alone that placed the deals and issued the paper, the credit risk would be a much bigger topic. By giving other banks the opportunity to issue their paper, they've done the right thing.

"These types of arrangements often come with an agreement to split the hedge. They're not giving away their distribution network to a competitor. They're selecting the best option prices. If the levels are close, they will split the hedge. If there is a big discrepancy between the prices, they have to pick the best, otherwise you have a fiduciary issue.

"They're not the only ones doing that. Most of the banks do that too. The idea is if we're going to give you access to our internal distribution channel, we want to participate in some of the profitability."

Leverage, step-ups

Investor appetite for some of the larger Bank of America deals was especially strong in two types of structures: leveraged notes with no downside protection and market-linked step-ups, both bullish trades, sources noted.

"When it comes to distribution, where you find the most acceptance of these deals is in the private wealth area of our industry, the fee-based distribution channel," the distributor said.

"Private wealth divisions can easy sell a couple of million of these.

"On the retail side, they shy away from any principal-at-risk or equity-linked returns. You're seeing an industry that's divided across multiple channels of distribution."

Leverage continued to be the main product offered by Bank of America.

In its close to $132 million deal, this issuer offered three times leverage on the upside capped at 11.85% with no downside protection. The maturity was one year.

"Leveraged notes with no buffers are popular because they offer some leverage on the upside and there is a strong likelihood that the upside won't be that strong. People are only partially concerned about a pullback. I'm sure advisers are also balancing the risk side as well," the distributor said

"If they're investing in the stock market, they are going to have downside risk anyway. They are offered the same downside risk with leverage, which can be very appealing if you're not overly bullish as the leverage comes with a cap."

The second top offering was $114.67 million of one-year market-linked step-up notes linked to the S&P 500 index.

"Step-ups are popular," the distributor said.

If the final index level was greater than the step-up value, set at 119.51% of the initial level, investors received the index return. If it was between the initial level and the step-up value, investors would get 19.51%. The structure provided a 20% buffer.

Another example of a large leveraged deal was the No. 3 product of the week, Barclays' $60.63 million of 0% Accelerated Return Notes due July 25, 2014 linked to the Euro Stoxx 50. It had a three times leverage factor, a 20.2% cap and no downside protection.

Chasing the bull

"We're seeing a lot of non-protected leveraged notes, and in some ways, it makes sense," the sellsider said.

"The S&P is already up 15% year to date. How much more can it grow? 1%, 2%?

"Plus there is talk about the end of the easing policy. Dodd-Frank is coming into play as well. Nobody really expects the same 15% growth for the remainder of the year. Instead, it's more like investors expecting a slightly up to flat market.

"If you've missed out the first 15% growth already, if there's only 1% or 2% left, you want to participate in that. And you want it with two or three times leverage. That's the beauty of this product.

"There are several kinds of approaches to investing. This one is more of the tactical play.

"The investor doesn't really believe in a big downside risk. He is still bullish ... so he'd rather get rid of the downside protection and get more upside. Maybe they're doing it as a hedge. They need an increase in return, but it doesn't mean that they haven't placed a hedge somewhere else in the portfolio."

One consequence of the popularity of leveraged plays with no downside protection is the decline in leveraged notes with a buffer or barrier, according to the data, which points to a 25% decline in volume year to date for this structure type.

Leverage with full downside risk, on the other hand, is now the No. 1 structure with 21.5% of the total. Volume in this category has gone up 23% from last year.

Autocallable reverse convertibles, the second most popular product type, have seen their issuance double, accounting for 17% of the total versus 8% last year.

"By giving other banks the opportunity to issue their paper, they've done the right thing." - A sellsider on Bank of America

"Step-ups are popular." - A distributor

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