Structured products issuance tops $1.21 billion for week; Bank of America grabs 60% of market

By Emma Trincal

New York, May 4 – April was not a good month for structured notes, but at least it ended well, as figures for last week suggest.

Agents during the week ended Friday, which wrapped up the month, priced $1.21 billion in 208 deals, according to data compiled by Prospect News.

If it had not been for Bank of America, volume would have just been $480 million. In only 25 deals, or 2% of the total deal number, the top agent priced 60% of the total volume.

Compared to the closing weeks of previous months this year, volume last week as a whole was by no mean remarkable.

It finished near the same level as the final week of February, which registered $1.19 billion in sales but behind the end of March ($1.35 billion) and further behind the final week of January ($2.82 billion).

Monthly totals revealed that February – despite a two-week correction in the first half of the month – was decent for structured notes issuance. It was the second best month with $2.14 billion after January’s 4.68 billion.

April on the other end, despite a couple of rallies, ended up being the worst month with $2.12 billion, a 24% decline from March.

The year-ago monthly total picture is worse: April sales have dropped 41% from $3.61 billion a year ago.

Market and volume

Some noted that the best two months for structured note issuance – January and February – were also those when the market was under the most pressure. The S&P 500 index from the beginning of the year to its low on Feb. 11 lost 10.5%.

They concluded that issuance appears to follow sales and seasonal patterns more than market input.

“It’s hard to say how the market influences volume. I would tend to think that given the current global markets, with the uncertainty especially around oil and also over politics in the U.S., you would think investors would be more attracted to structured products just for the sake of getting some protection,” said a sellsider.

Yet the year-to-date figures show a different picture. Sales so far have dropped 25% from last year to $12.38 billion from $16.55 billion, according to the data.

“You would think that people would jump into structured products. But this is not what the figures suggest,” he said.

The S&P 500 index is flat for the year but has shown a succession of rallies and sell-offs.

Issuance volume for structured notes has suffered from the clear lack of direction in the S&P 500 index, he noted, as the market’s choppiness makes investors uneasy about putting money to work.

With a lack of clear direction, investors are more inclined to bid on products guaranteeing a fixed return on the upside, the data showed.

Those may take the form of step-up payments, digital returns or capped leverage. In exchange for the limited upside, investors may in some cases participate to the downside via a dual directional or trigger note.

Big deal

Such was the case of the top deal last week, which offered positive returns on the downside above a trigger.

Barclays Bank plc priced $121.2 million of one-year digital notes linked to the S&P 500 index. If the index return was at least negative 15%, the payout at maturity would be par plus a 4.84% return. The downside offered a 15% geared buffer with a 1.1765 multiple. The agent was Barclays.

“This illustrates both the fears and the needs of many investors today,” the sellsider said.

“They’re concerned about the market being down and they want to get paid to a certain extent if it happens. They also want the protection.

“In exchange they’re willing to accept a smaller coupon if they feel that the probabilities of getting paid are higher.”

Andrew Valentine Pool, main trader at Regatta Research & Money Management, agreed.

“We’ve been very defensive ourselves and it’s starting to pay off. The market has been volatile. It can go either way up or down. People are starting to get antsy,” he said.

Investors’ expectations are not bullish anymore. The need to get a return, albeit a modest one, with some protection is now a prevailing trend, he said.

“We had for several years a very strong bull run. Statistically, we’re due for a pullback. Even if you’re only getting 2%, 3% or 4%, it’s better than nothing and definitely better than losing money.”

Yield substitutes

Investors may seek similar payouts when investing in shorter-dated notes with high leverage and a cap, sources said.

The second offering followed this rationale but without the downside protection.

Canadian Imperial Bank of Commerce priced $106.4 million of 0% Accelerated Return Notes due June 30, 2017 linked to the S&P 500 index. The payout at maturity was par of $10 plus 300% of any index gain, subject to a maximum return of 11.91%.

The index only had to rise by less than 4% in order for investors to achieve the maximum return.

While the upside is not a fixed coupon or digital, it can easily become one, sources said, since “getting capped out” can happen relatively easily with the leverage multiple.

A common trend of the top products priced last week was to offer coupons or fixed payments that had some chances to get paid, they said.

“The underlying issue is that there is still no yield out there,” said Pool.

“We’re much more focused on income plays right now, and that’s a very good reason to use structured products.

The search for yield continues to be one of the main investment themes.

“I’m so surprised about how overvalued, overpriced bonds are out there. With rates so low, no wonder people would be willing to take a little bit of risk in a structured note to generate income,” Pool said.

Bond bubble

He gave the example of two investment-grade bonds he recently decided not to buy due to their high price.

The first one was a Cummins Inc. bond maturing in 2023 sold at a 107 premium with a yield to worst of 2.57%. The second, issued by Tyson Foods, Inc. with a 2024 maturity, was shown at 107.84 with a 2.85% yield to worst.

“Investment-grade bonds are overpriced. What wealth manager is going to stay in business investing if he buys things like that?

“That’s why we’re seeing more structured products with fixed returns. They can supplement the income in a portfolio.”

More block deals

The third offering was a classic leveraged buffered note with a cap.

Bank of America Corp. priced $89.64 million of two-year notes linked to the S&P 500 index, which paid par plus double any index return, capped at 14.8%. There was a 10% buffer on the downside.

The fourth and fifth largest deals, also issued by Bank of America were short-term notes with no downside protection.

The first one, for $61.82 million, was a one-year tied to the S&P 500 index. It delivered three-times upside leverage up to a 24.3% cap.

The other one, also a one-year product, was a $44.81 million deal tied to the Euro Stoxx 50 index. The market-linked step-up had a 115.5% step level. Between the initial price and the step, investors received a 15.5% return. Above the step-up, they had 100% participation to the upside.

“I would be cautious about those two because they’re both short and lack any protection,” said Pool.

“I would feel more comfortable with at least a 10% buffer or if I could go out probably at least three years.”

BofA Merrill Lynch was the agent for the top 25 deals with the exception of three: one was the top deal, the second were two small offerings of approximately $15 million each sold by Goldman Sachs and Credit Suisse, respectively.

Index frenzy

Equity index represented 88% of the total, which is more than the 81% average for the year. In comparison, single-stocks accounted for only 4% of the volume, according to the data.

The S&P 500 index and the Euro Stoxx 50 were the most widely used.

“When there is such uncertainty everywhere – the U.S. Elections, the next move by the Fed – you want to go back to fundamentals. Indices that you know are the way to go,” said the sellsider.

Two-thirds of the total volume was linked to the three following indexes – S&P 500, Euro Stoxx and Russell 2000. The S&P 500 index made for 46% of the weekly volume; the Euro Stoxx, 13% and the Russell 2000, 7%, according to the data. These underliers were single-indexes as opposed to baskets of indexes or index components in a worst-of.

“I would tend to think that given the current global markets, with the uncertainty especially around oil and also over politics in the U.S., you would think investors would be more attracted to structured products just for the sake of getting some protection.” – A sellsider

“We’re much more focused on income plays right now, and that’s a very good reason to use structured products.” – Andrew Valentine Pool, main trader at Regatta Research & Money Management

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