Agents sell $1.7 billion; BofA Merrill Lynch takes $1 billion slice; year-to-date sales up 6.4%

By Emma Trincal

New York, Feb. 5 - Agents scored a big week last week, pricing $1.7 billion, a volume that rivals some of the top weeks of 2013, according to data compiled by Prospect News.

BofA Merrill Lynch contributed to more than 55% of the sales, but the rest of the market was also in growth mode. The number of large offerings was high, even for the end of the month. BofA Merrill Lynch priced 17 of the top 20 deals, including the top three, the data showed.

Agents sold 255 deals in the week ended Friday totaling $1.72 billion, a 210% growth from the prior week.

"This is the end of the month. That's when Bank of America closes its big deals," a sellside source said.

But there was also a January effect, some said.

During the equivalent week in December (Dec. 22-28), BofA Merrill Lynch brought $492 million, which is about half of what the firm did last week for the closing of January, according to the data.

During the same week in December, the rest of the market as a whole sold $399 million while the volume rose 73% last week to $689 million.

So far this year, agents have sold $3.81 billion, a 6.4% increase from last year's $3.58 billion. The number of offering grew 17% to 771 from 658.

Last week was one of the best seen in over a year. It compared closely with last year's best week of record at the end of June, which saw $1.87 billion brought to market, according to the data.

New market environment

"The market has something to do with that," a structurer said.

"The market has been challenging in the past few weeks. Still, there are no clear alternatives. People say it's the end of the bull market. But where do you put your money?

"Whenever you have uncertainty as we have now, it's good for structured notes. If the market keeps going up like last year, what's the incentive of buying structured notes? You just buy the index.

"Structured notes in this new market environment are still bullish, which is good since most investors remain bullish, although cautiously so. Structured notes compete well against long-only positions. They offer a different payout, a buffer or a digital coupon, all different kinds of things that hopefully may allow you to outperform the market."

Bank of America

Last week saw a significant number of big deals.

The top two deals exceeded $100 million in size. The next two were in the $75 million-to-$100 million bracket followed by four offerings each comprised between $50 million and $75 million.

BofA Merrill Lynch priced 28 deals totaling $1.03 billion, or 56% of the total. Its market share was about the same in the closing week of December at 55%.

"Look, they distribute $10 billion a year. More months than not, they will show one billion in sales," the structurer said.

"Merrill is number one in this market for their distribution capabilities. They push everything at the end of the month. One of their strengths is to work with a large number of issuers," he said.

In addition to notes issued by Bank of America, BofA Merrill Lynch distributed notes last week issued by Credit Suisse, HSBC, Royal Bank of Canada and Barclays.

"It's important in this market because investors are increasingly looking at issuer's credit," he added.

"Unlike the period that just followed the collapse of Lehman, people now do take credit risk. But they want to diversify credit risk, especially when they have accumulated a large portfolio of structured notes. I think they can see the difference between taking credit risk and concentrating the risk on one name. Taking credit risk isn't bad. Putting all your money in one issuer is not wise. And they know it."

Wealth management

"Definitely, looking at the size of those deals, you can tell they're all going to wealth management," a distributor said.

"It's good to see that kind of pickup. It's an indicator of where the full-blown market is going to go.

"Deals are done by advisers in the know who will take action before the retail investors take action. It's more like you're talking smart money when you're talking about these wealth management divisions. Those guys are moving in a specific direction sooner than everyone else. Retail is usually following along."

Last week's top deal was Credit Suisse AG, London Branch's $111.37 million of 0% autocallable market-linked step-up notes due Jan. 27, 2017 linked to the Euro Stoxx 50 index. The deal was distributed by BofA Merrill Lynch.

The notes will be automatically called if the index closes at or above the initial index level on an annual observation basis. The call premium is 11% per year. At maturity, if the index closes above a 142.5% step-up value, investors will get one-to-one exposure to the index. If the index is between the initial price and the step-up, the payout will be par plus 42.5%. There is no downside protection.

Unlimited upside

"These types of structures are representative of a relatively new trend," the structurer said.

"For many investors, the key is not so much downside protection. The key is to not underperform the index. Those investors don't want to be missing out. That's why you're seeing more of those deals with no downside protection but also no cap, like this one. The return enhancement is offered through a digital return like in those step-ups or with leverage.

"In a way, this type of risk profile is more comparable to buying stocks. It shows that investors remain bullish, at least for now. If they were not, you would not see these deals in such large size. You would see bearish notes, although those rarely get done anyway."

Euro frenzy

Last week's issuance showed how popular the Euro Stoxx 50 has become among structured notes investors, according to the data. Twenty three offerings out of 255, or 9% of the products, were linked to the Euro Stoxx 50 (either through the index or the exchange-traded fund). Notes linked to the Euro Stoxx amounted to $503.73 million of the total notional, or nearly 30% of the volume, according to the data.

These figures do not even include the partial use of this index within a basket as was the case with the No. 3 deal, Bank of America Corp.'s $86.18 million of 0% market-linked step-up notes due Jan. 27, 2017 linked to a basket comprising the S&P 500 index with a 40% weight, the MSCI EAFE index with a 30% weight and the Euro Stoxx 50 index with a 30% weight.

Another big Euro Stoxx deal, the No. 5 issue for the week in size, was HSBC USA Inc.'s $72.93 million of 0% market-linked step-up notes due Jan. 29, 2016 linked to the Euro Stoxx 50 index. The step-up value is 121% of the initial level. There is no downside protection. BofA Merrill Lynch was the agent.

Other top deals

Leverage was not totally forgotten.

The second largest deal was a leveraged capped product, Bank of America's $108.29 million of 0% Accelerated Return Notes due March 27, 2015 linked to the S&P 500 index. The upside participation rate is 300% and the cap 11.64%.

"The big notional size you're seeing in any of those large deals clearly shows that they're designed for wealth management. It's all internal distribution," the distributor said.

"You're never going to see a $200 million Morgan Stanley deal distributed to every regional distributor, every Schwab or broker-dealer on the Street. What you're going to see is HSBC on the phone with Bank of America. They're discussing the deal. They're issuing the product, and Bank of America distributes it internally. That's how it works with those big offerings."

JPMorgan brought the fourth largest deal on the behalf of Barclays Bank plc, $80.16 million of 0% buffered return enhanced notes due Feb. 17, 2015 linked to palladium. The leverage factor is 1.21 subject to a 12.1% cap. There is a 10% geared buffer on the downside with a factor of 1.111 for every decline beyond 10%.

There were only three commodities offerings last week, with the two others smaller than $5 million.

Top structures, asset classes

Market-linked step-up notes were the most popular structure seen last week, amounting to $500 million in 12 deals, or 30% of the total, according to the data.

For the year, agents have increased the volume of leveraged deals with partial downside protection (barrier or buffer). Those are up 45% in volume compared to January last year. They now account for 20% of the volume versus 14.75% a year ago.

"Volatility definitely helps with the buffers. These structures will never go away. Just because we see more uncapped deals with no protection doesn't mean that a very large segment of the demand doesn't remain focused on buffers and barriers," the structurer said.

Single-stock-linked notes volume has grown 23.5% so far this year to $948 million from $768 million a year ago, according to the data. Meanwhile, issuance volume for equity-index notes is flat, down 0.85%.

Equity index underliers represent 51% of the volume versus 25% for single stocks.

"It's not so much that we're seeing less volume in indexes. Volume is the same. It's that we're seeing an increase in single-stock deals. But it's only a month, and the market is changing. Let's see what we have in a few months," the structurer said.

JPMorgan was the second agent with $192 million in 34 deals, or 10% of the volume last week. It was closely followed by UBS with $175 million in 88 offerings.

"Definitely, looking at the size of those deals, you can tell they're all going to wealth management." - A distributor

"For many investors, the key is ... to not underperform the index." - A structurer

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