Despite Bank of America’s strong input, November is year’s laggard with $3 billion in volume

By Emma Trincal

New York, Dec. 3 – November ended on a decent note for structured products issuance, thanks to the contribution of Bank of America, which priced 60% of last week’s volume, according to data compiled by Prospect News.

But it was not enough to make November a robust month. As it turned out, November so far is the worst month of the year for issuance, based on data compiled on Wednesday.

Agents last week brought to market $1.30 billion in 193 deals, which amounted to nearly 45% of the entire notional for the month. Bank of America priced $778 million of it in just 25 offerings. It is not rare for this agent to account for more than half of the volume in the final week of the month, when its deals hit the market. Bank of America contributed to 49% of the sales during the final week of October; 48.5% at the end of September; and 51% at the end of January for instance.

Worst month

But last week’s particularly high contribution in percentage of the total, even for Bank of America standard, may indicate the softness of the overall market, according to sources said.

“I think volume is very weak,” a structurer said.

“It probably shows that other issuers were not doing much.”

Agents sold $3.03 billion in November versus $3.77 billion in October, a 19.5% decline, the data showed. Bank of America’s notional accounted for 27.50% of the monthly total, which is consistent with its yearly average.

November followed very closely behind June, which recorded $3.06 billion. The third worst month was March with $3.41 billion while January was the best month of the year with $4.11 billion.

“It’s interesting to see that last month was pretty bad,” a sellsider said.

“November can be impacted by Thanksgiving but that’s true every year,” he said, commenting on the year ago monthly figure, which showed a 9.5% decline in November from last year.

The constant resurgence of the bull market after short periods of volatility may hold some of the answers, this sellsider explained.

“We had a volatility spike mid-October and then the market went back up,” he said.

October was the third best month of the year after January and July, according to the data.

Since the Oct. 15 sell-off, the S&P 500 has already gained 10%.

“Maybe the same dynamic that applies to the need to use leverage is at play here to explain last month,” he said.

“The Dow just broke another record on Tuesday. It creates a euphoric top. Either people jump back into stocks or they think, I missed out on the rally, and stay on the sidelines,” he said.

A structurer agreed that sales were disappointing last month.

“The market was weaker. There are probably many reasons for that. One I think was the impact of GT Advanced Technologies. The stock blew up, and it didn’t help. A lot of banks had deals on it because it had a high volatility,” he said.

GT Advanced in focus

Thirty one deals tied to this stock priced this year, totaling $84 million, according to the data.

Most of them were small in size, but the pool of deals was spread across a wide number of issuers, including UBS, Royal Bank of Canada, Citigroup, Deutsche Bank and Barclays. UBS was the agent for most of them.

GT Advanced Technologies Inc. filed for bankruptcy in early October. Its stock was suspended from trading on Nasdaq on Oct. 16.

Issuance of products tied to equity indexes prevailed last month, accounting for more than 50% of the total, in line with the yearly average.

The proportion of equity index deals was significantly high last week, at 80% of the total, according to the data. Bank of America priced 65% of the $683 million tied to this asset class. Out of the 103 offerings tied to equity indexes, this agent priced 21 deals.

The top seven deals in excess of $35 million were all priced by Bank of America.

Other than being Merrill Lynch’s best-selling products, those structures also reflected the mildly bullish market sentiment of many advisers, the sellsider said, citing the “fear of missing the Bull Run.”

Those big deals used one of two structures – either highly leveraged, short-term notes with no downside protection and a relatively high cap or market-linked step up products, which offered uncapped participation above the step level, a digital payout below it and full exposure to the downside.

3X leverage

The No. 1 offering was a three-times leveraged product. Bank of America Corp. priced $139.98 million of 0% Accelerated Return Notes due Jan. 29, 2016 tied to the S&P 500 index. The cap was 10.23%, and investors will lose 1% for every 1% decline in the index.

“We see a little bit of that. This 3X is typical of Bank of America. We do something similar because we see greater demand for leverage,” said the sellsider.

“Three times indicates that as the market keeps going higher and higher, investors see less likelihood for big gains next year, so the rationale is to multiply small gains.

“I don’t know why more firms are not doing that type of structure. These products are attractive in a toppish market, which is where we are right now. They make sense.”

A structurer said he saw similar products but usually with less upside leverage.

“Other firms do it. You’ll see 2X rather than 3X. Some have protection, some don’t. Depending on where the cap is, what the term is, there are a number of ways to structure these types of deals,” he said.

The second biggest offering was also a leveraged note.

Barclays Bank plc priced $72.38 million of 0% Accelerated Return Notes due Jan. 29, 2016 linked to the S&P Oil & Gas Exploration and Production Select Industry index. The participation rate was 300% on the upside and 100% on the downside. The cap was 21.15%.

Also in the three-times leverage category, Barclays Bank priced the No. 4 deal with $54.734 million of 0% Accelerated Return Notes due Jan. 29, 2016 linked to the Euro Stoxx 50 index. The cap was 15.75% and investors will be exposed to any losses.

Step ups

Another very popular type of deal were market-linked step up notes.

An example was the No. 3 deal: Credit Suisse AG, London Branch’s $58.46 million 0% autocallable market-linked step-up notes due Nov. 28, 2016 linked to the S&P Oil & Gas Exploration and Production Select Industry index.

The notes will be called at par of $10 plus a call premium of 14% if the index closes at or above the initial level on the observation date on Dec. 4, 2015.

If the notes are not called and the index finishes above the step-up value – 144.2% of the initial level – the payout at maturity will be par plus the index gain.

If the index finishes at or below the step-up level but at or above the initial level, the payout will be par plus the step-up payment of 44.2%.

Investors will be fully exposed to any index decline.

“This is really an interesting structure. I’m sure people will pay attention and try to replicate it at some point if the pricing makes sense. I’m not sure why it hasn’t been the case so far. We don’t see a lot of products that give you a digital plus full upside participation above a certain strike,” the structurer said.

Contrarians

Both the second and third deals used an energy index underlier, the sellsider noted.

The S&P Oil & Gas Exploration and Production Select Industry index, while a stock index, tracks the performance of the oil and gas exploration and production of the energy sector.

“To see these big deals linked to energy doesn’t surprise me at all,” the sellsider said.

“Oil has been in bear market territory, and some investors get a sense that oil prices are bottoming up.

“Barron’s had a recent article on that, and they said the sector is oversold based on technical analysis factors.

“The index and some big oil stocks have actually bounced back recently.

“The recent volatility and the odds that oil may be a buying opportunity can certainly explain the size of those deals.”

Volume so far this year has been rising, up 11.25% to $39.304 billion from $35.331 billion.

While sources said the year’s volume is likely to exceed last year’s, they are cautious about the final stretch.

“December is uncertain. I’m not particularly optimistic, given the volatility that we have,” the sellsider said.

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