Bank of America Merrill Lynch prices 47% of volume in week; sales down for year, June

By Emma Trincal

New York, July 5 - Bank of America priced nearly half of the volume in a vigorous week for structured products to close the month. Still, the downward trend continues to prevail for both the month and the year to date, according to data compiled by Prospect News, with all figures excluding exchange-traded notes.

Agents sold $1.04 billion in 222 deals in the week ended Friday, more than three times the amount sold the week before, which was $326 million.

Bank of America sold $485 million of last week's volume, or 47% in 24 offerings.

"Bank of America closes their deals at the end of the month unlike most people, including JPMorgan, that close their products fairly regularly through the month," a sellsider said. "Merrill is the largest distributor of structured products, so for them to do half of the market last week is not really surprising. Take all their deals done at the same time for the week, you easily get 47%," he said.

Challenging month, year

However, sales for June fell by 38% to $2.41 billion from $3.89 billion in May. The decline from a year ago, which saw $3.33 billion sold in June, was of 28%.

"It was a challenging month," said the sellsider. "Many of the big names were downgraded. Distributors must have taken a second look at what was on their platform. They may have cut some names. I think it caused a slowdown. At the very least, the downgrade of all the major issuers may have had an effect, hopefully, a temporary effect but nevertheless it dampened the enthusiasm."

The yearly trend is still not encouraging. Agents sold $19.4 billion year to date, a 17.37% decline from the first half of last year, according to the most recent data.

"A lot of fixed-to-floaters, capped floaters, step-up notes are not taken into account and their volume continues to be strong," a wirehouse source said.

Little conviction

But market sentiment and market conditions continued to play a role.

"There's a lack of conviction among investors. On the pricing front, it's hard to get any trade that has a profile that's going to be new," the wirehouse source said.

"You get a whole lot of accelerated return. But the lack of conviction except for core products makes it hard to bring new money.

"There's a standard bunch of buyers but you have to come up with something new in order to get new assets. That's very hard with rates as low as they are and volatility coming off."

He said that for instance, a five-year with full principal protection is nearly impossible to price in today's market. A "struggling CD market" is also suffering from market conditions. "It's very hard to get a CD working unless you go very long," he said.

"The tightening of the spreads, the lower rates, the low volatility make for a challenging environment for structured products," he said.

The second quarter has not been as good as the first, according to data compiled by Prospect News, with June being the worse month for the year and March's volume of $4.15 billion, the best. The second worse month was April with $2.87 billion followed by February with $763 million.

"As a whole the market can be skewed by the occurrence of bigger deals than usual," the sellsider said. "But as a pulse Bank of America could be used as an indicator of the market trend. They have the same clientele, the same advisers, similar products. If their sales go up, it reflects pretty much what happens in the rest of the market."

Bank of America's best month was also March with approximately 29% of the month's total. Its worse month was June with 24% of the market. April was the bank's second worse month, in line with the overall market calendar, with 22% of the total.

Two trends prevailed last week, in accordance with past patterns for month-end sales: equity indexes dominated the issuance and investors flocked into leveraged notes, in particular leverage products with no downside protection, according to data compiled by Prospect News.

Indexes versus stocks

Equity indexed notes jumped to $644 million, or 62% of the total last week, from $141 million, or 43% of the volume the week before, according to the data.

As last week was robust as a whole, stocks doubled up to $189 million from $94 million. However their market shares declined to 18% from 29%.

Sources saw in the big index push last week a sign of Bank of America's imprint on the market.

"Bank of America tends to use a lot of indexes and they pull out a lot of these at the end of the month when they price versus the single stocks that UBS does," the wirehouse source said.

"They're selling to these big channels. They have a lot of financial advisers. It's a lot easier to talk about a broad-based index that everybody knows than a stock. It's the easiest trade for the wirehouses. It will be the most sellable product.

"There's also research on the benchmarks, so you can create a note around the research. That makes it easier to sell too," he added.

The pattern between indexes versus single stock is not clear and varies depending on the periods, according to the data.

For instance, single stocks fared better than indexes on a month-to-date basis with stocks down only 9% and increasing their market shares to 20.5% from 14%. In comparison, equity indexes dropped by 48% and amounted to 57.5% of the volume, versus 69% the month before.

For the year, however, stocks have suffered the most, down 43% to 38.62% of the volume. Their market shares declined to 20% from 29% the year before.

Separately, equity indexes were up 29% making for 55% of the total versus 35% the year before.

"I think the year trend in some way reflects regulatory pressures. Single stock deals like reverse convertibles have been under the radar screen of the regulators," the sellsider said.

"That put a damper on the volume of single equity."

Equity indexes have been able to grow naturally to fill the void providing that the market does not work against their pricing, he explained.

"Issuers feel more comfortable with indexes," he said.

"There are some periods when you can do those deals, others when pricing becomes less attractive, and that's when you see more stocks.

"But in general, everybody down the chain, issuers, advisers, clients, feels more comfortable with indexes as opposed to single stocks," he said.

Top deals

Leveraged notes with no downside protection were by far the top sellers last week, according to the data, making for 22.5% of the total with $234 million. In comparison, the week before saw the pricing of only $15 million of such deals.

Bank of America, which priced the top six deals last week, contributed greatly to the success of this structure.

Fourteen deals offering pure leverage with no protection priced last week, with Bank of America closing 11 of them and selling $209 million of them, or 90% of the volume in this structure.

The No. 1 and No. 3 deals fell into the leverage without downside protection category.

The first was HSBC USA Inc.'s $54. 2 billion of 0% Accelerated Return Notes due Aug. 30, 2013 linked to the S&P 500 index. The upside leverage factor was three and the cap was 17.31%.

The third deal of the week was Bank of America Corp.'s $41 million of 0% Accelerated Return Notes due June 30, 2014 linked to S&P 500 index. It also offered a three times leverage factor on the upside. The cap was 27.75%.

On the other hand, the No. 2 deal, also leveraged, provided partial downside protection.

Barclays Bank plc priced $41.45 million of capped Leveraged Index Return Notes due June 27, 2014 linked to the S&P 500 index.

The payout at maturity was double any index gains up to a 24.8% cap. Losses were protected up to a 10% buffer.

Getting leveraged notes with or without protection is not so much a reflection of investors' appetite for a structure versus another, according to the wirehouse source.

"It's more of a function of the market than what investors are looking for. Most of the time investors want the protection, but it's not always easy to price.

"If you had higher rates and more volatility, issuers could provide more protection," he said.

The sellsider agreed.

"It's based on the kind of volatility you get in the underlying," he said.

"If the underlying is volatile they try to put some kind of a buffer. If it is not very volatile, like the S&P right now, which is at less than 20%, it's harder to do it.

"If you want to put a buffer you're trapped on the upside.

"Volatility is not very high, people figure the downside risk is not very high, let me get the highest possible cap. That's what's driving it.

"Based on the volatility, the issuer makes that type of proposal," he said.

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