November ends with the seventh best week of the year at $1.34 billion, including a megadeal

By Emma Trincal

New York, Dec. 5 - A frantic pace of structured products issuance and the pricing of 20 deals over $20 million in size and a very large one made last week one of the best of the year, according to data compiled by Prospect News.

Bank of America captured more than half of the market and priced the top 15 deals as well as four others, leading sources to say that it was the main driver behind the unusually busy sales activity.

Agents sold $1.34 billion in 279 deals in the week ended Friday or nearly six times more than the previous week, which saw the pricing of 74 offerings totaling $239 million.

According to the data, last week's volume represented 4.1% of the total volume of the year. It was the seventh best week of 2012. The first one was the last week of March, with $2.2 billion, amounting to 6.7% of the year-to-date volume.

Monster deal

Bank of America Corp. priced last week an exceptionally large deal tied to the S&P 500 index reaching nearly $124 million in size. In addition to that, the agent sold an $87.65 million deal as well as a $60 million offering. Four other products sold had a size in excess of $40 million.

"Volume was huge, and Bank of America was the big driver of issuance," said Bob Lee, market participant and consultant in structured products, formerly with Charles Schwab.

In total, Bank of America captured 52.4% of last week's sales.

"They probably had maturing notes from the prior year because nothing really changed with respect to the market. But a lot of short-term leverage notes must have being redeemed," added Lee.

Leveraged return with no downside protection was indeed the prevailing structure last week, with 30% of the total.

The market share was due to the size of the two top offerings, both using that structure type.

Bank of America Corp. priced $123.88 million of 0% Accelerated Return Notes due Nov. 26, 2014 tied to the S&P 500 index.

It was the No. 1 offering. It gave investors three-times leverage with a 19.25% cap on the upside and no downside protection.

The No. 2 deal was Bank of America's $87.65 million of 0% Accelerated Return Notes due Jan. 31, 2014 tied to the S&P 500 index. Investors at maturity received par plus three-times the index return subject to a 14.31% maximum return with no protection on the downside.

Let it roll

Lee attributed the size of those deals in large part to rollovers.

"Investors who last year had a very good ride with a semi-flat or slightly up market saw the benefit of taking leveraged exposure. They must have tried to replicate those deals, which is why you saw volume soaring last week," he said.

"A lot of those non-downside protected leveraged notes probably roll off near the end of the month. Many investors must have been starting to plan for the reinvestment of their maturing proceeds around the middle of the month. Bank of America had ample time to prepare their customers for the upcoming maturities and help them find solutions."

Agents sold $775 million worth of notes linked to equity indexes in 89 deals, or nearly 60% of the total volume, with a third of the volume coming from notes tied to the S&P 500 index. In this equity index asset class, Bank of America alone sold about $510 million in 11 deals.

Top distribution

With two-third of the equity-index-linked notes market in only 12% of the deals, the bank signaled again its ability to distribute to a large market of retail investors, Lee said.

In particular, it took Bank of America only three big deals to grab the totality of the S&P 500-linked notes issuance totaling $252.65 million.

"They've grown their platform tremendously. It's a very powerful distribution network. Most of the notes are equity-linked. It goes back to the successful sales record of the Merrill Lynch model," said Lee.

Bank of America distributed the 15 biggest deals but did not issue all of them. Eight of those top 15 offerings were brought to market by other issuers, including Barclays Bank plc, Credit Suisse AG, Nassau Branch, HSBC USA Inc. and AB Svensk Exportkredit.

"They are channeling the distribution through quite a few others, using a variety of different credits. That's a big factor. It's a good distribution. You may not have the best products, but if you can distribute it more efficiently and reach more people you're going to sell a big portion of the market," said Andrew Valentine Pool, main trader at Regatta Research & Money Management.

The third largest deal was a single-stock-linked autocallable product. It was brought to market by Barclays Bank plc in $60.58 million of 0% Strategic Accelerated Redemption Securities due Dec. 13, 2013 linked to the common stock of Apple Inc.

The notes would be called at par of $10 plus an annualized call premium of 19.51% if Apple stock closed at or above the initial share price on three observation dates in May, August and a week prior to maturity.

If the notes were not called and the final share price was at least 95% of the initial share price, the payout at maturity would be par. Otherwise, investors would lose 1% for every 1% that the share price declines beyond 5%.

Bouncing back

The calendar explained in part the robust volume seen last week. It's not uncommon to see the final week of the month bringing over 50% of the monthly volume.

Agents in the last week of March for instance sold 53% of that month's volume. Fifty seven percent of September sales closed during the last week of that month, according to the data. Last week was no exception but other factors played as well, sources said.

"As the holiday season and the end of the year near, you may also have more pressure on the salesforce to book sales and help promote the bank's overall revenues. There is a bonus element into that. It's understandable. It's human nature. To some degree, the spike in issuance volume seen last week may be driven by sales motivation rather than investors need," said Lee.

Sandy, which hit the northeast region at the end of October, temporarily slowed down the action in November, he noted.

"The storm has badly impacted Wall Street operations, and as a result sales in New York were not taking place. We bounced back pretty nicely, but I think Sandy didn't help the first half of November," said Lee.

"The sales force last week must have been making up for a lot of the losses, which most issuers have incurred earlier in November. That's why we had so much going on last week."

Slow year

The year-to-date volume still lags 2011, according to the data, despite several big weeks seen as last week.

Agents so far this year have priced $32.93 billion, a 16.75% decline from $39.56 billion brought to market during the same period last year.

At the same time, the number of deals increased this year by 14% to 7,477 deals from 6,538 deals.

"The declining year-over-year figure is confusing somehow," said Pool.

"The year 2012 was a pretty darn good year for the equity market. Europe didn't have such a negative impact. Even the Arab spring didn't seem to have a major effect on stock prices. I guess the presidential election was the real factor, a wildcard, which created uncertainty. Many investors in structured products didn't want to be locked in and were hesitant to put money on the table without knowing where the country was heading."

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