Summer turns out to be good; year-to-date volume up 2.3% despite slightly slower September

By Emma Trincal

New York, Oct. 2 - With the third quarter ended, structured products market participants looking back said that the summer was much better than they had anticipated.

The bulk of September's pricings took place last week. Agents sold $1.65 billion in 281 offerings, and Bank of America contributed half of the sales.

"Goodness! That's a big size," said Andrew Valentine Pool, main trader at Regatta Research & Money Management.

Big summer, weaker September

On a monthly basis, September's $2.93 billion volume was down by 9.5% compared to the $3.24 billion issued during the same month last year, according to data compiled by Prospect News.

For the summer as a whole, however, September's weakness was more than offset by three months of impressive growth starting in June. During that time, each month's volume surpassed that of the previous year at a rate of 25%, 38% and 16%, respectively, according to the data.

The summer "effect" finally pushed the year through Sept. 30 to a higher level of sales than last year. Sales increased by 2.29% to $28.38 billion for the first nine months of 2013 from $27.74 billion during the same period last year.

The last week of September was somewhat weaker than the $1.79 billion priced in the last week of August, even though the contribution of Bank of America remained the same at 49% of the total. Bank of America saw a 6.35% decline in its own sales between those two month-ending weeks to $825 million from $881 million.

Since the majority of the deals get priced at the end of the calendar month, September ended up not as strong as August. But the three prior months led the path upward.

"There's more faith in the long-term results of the stock market, a sentiment that benefits structured products. People are more bullish. They're more likely to use leverage without any downside protection. We didn't. But of course, many other people will," Pool said.

"I'm more optimistic about the structured products market now than I was a couple of months ago. I'm probably 65% optimistic.

"I think the economy is still doing better; people are still buying and using discretionary income. I still see homebuilding doing well. Also we're seeing less and less those reports on job cutbacks. These are all good signs which lead me to believe that a product maturing 21 months or three years out will probably be in the black versus red."

A sellsider said the issuance trend since June was "encouraging," although he was cautious about drawing early conclusions.

"We had a very good summer, that's for sure," this sellsider said.

"Even August was better than last year. So now, September is a little bit behind than a year ago, but overall since June, volume has started to move up. For the year, it seems like things are picking up. We're only up just a little bit more than 2%, so it's too soon to celebrate.

"You can never just focus on month to month. One month and the year-to-date issuance may fall behind the levels of the past year. In fact, the last three days of each month make a huge difference."

In August, agents sold $3.33 billion, versus $2.87 billion in the same month of last year.

In July, sales amounted to $3 billion, compared with $2.17 billion a year before. In June, volume grew to $3.10 billion from $2.47 billion in the previous year, according to data compiled by Prospect News.

The strength of Bank of America is always a factor in the monthly results, sources said.

The firm this year never contributed to less than a quarter of the volume in any given month, and its market share is in general comprised between a third and a half of the total, according to the data.

"Bank of America is huge. These guys, month after month, bring to market killer deals," the sellsider said.

"A lot of these offerings are sold through their own system. They're doing very well. It's very hard for smaller broker-dealers to compete with the likes of Bank of America Wealth Management. It's harder for them to embrace newer products because of the scrutiny of the regulators, whereas those guys have the resources to do so."

Stocks and baskets

One of the clearly identified trends this year has been the heavy bid on notes linked to single stocks as well as baskets of stocks, whose volume has nearly doubled to $550 million from $285 million for the period ended Sept. 28.

Baskets of stocks, however, remain insignificant in size as they account for less than 2% of the total.

"Unfortunately for us, we haven't seen enough supply with these baskets," Pool said.

"We made an order for a principal-protected product tied to a basket of stocks, and we only obtained half. The rest wasn't issued.

"I do like the idea of leverage on a basket of stocks. Those deals are going to shine better than the overall market.

"Single-stock issuance has been up. We see more deals tied to stocks in general because we're in a bull market, and in a bull market, people are more excited in doing their own stock-picking."

Single stocks represent more than 22% of the volume and have seen their volume grow by 18% in the year to date.

Meanwhile, equity indexes have not grown year over year. Their volume is $15.97 billion, compared with $15.88 billion last year, according to the data.

The sellsider drew a parallel between the regained momentum in issuance in general and the bid on single-stock deals.

"Anecdotally, I see some activity. I do see more email traffic. I talk to structured notes traders. It seems like things are picking up," he said.

"The main factor behind that is the uncertainty in the market. The stock market has been doing very well - look at the day after the shutdown. But you still have this element of uncertainty, which is always an opportunity for structured products.

"If the market moves in a straight line, it's not always good for structured products. But with the uncertainty, you can start looking at principal protection, either full protection or buffers, instead of putting money in stocks.

"This is one of the reasons I think stock deals have been up. Structured notes tied to single stocks represent an alternative to holding stocks. That's how you see those big Bank of America deals tied to one stock hitting the market month after month."

Top deals

Bank of America was the agent for the top 20 deals last week except for the fourth and the fifth.

The largest offering of the week was Bank of America Corp.'s $101.42 million of 0% market-linked step-up notes due Sept. 23, 2016 linked to the Dow Jones industrial average.

If the index finishes above the step-up level, 116% of the initial level, the payout at maturity will be par plus the gain. If the index finishes at or above the initial level but at or below the step-up level, the payout will be par plus the step-up payment of 16%. Otherwise, investors will be fully exposed to any losses.

Coming second was a leveraged note with no downside protection sold and issued by Bank of America: $87.22 million of 0% Accelerated Return Notes due Nov. 26, 2014 linked to the S&P 500 index. The upside participation rate is 300%, subject to a maximum payout of par plus 12.03%.

Barclays Bank plc issued the third largest deal with Bank of America acting as the agent. It was an $81.05 million issue of 0% market-linked step-up notes due Sept. 25, 2015 linked to the Euro Stoxx 50 index. The step-up value is 121.4% of the initial level. Investors have a 1-to-1 exposure to any decline.

JPMorgan priced the No. 4 deal on the behalf of HSBC USA Inc. with $65.41 million of 0% return enhanced notes due Oct. 16, 2014 linked to the MSCI EAFE index. Investors get double any gain in the index, up to a maximum return of 20%, and have no downside protection.

Finally, Goldman Sachs Group, Inc. priced $60 million of tracker notes due Dec. 31, 2013 linked to the Topix index. The payout at maturity will be par plus the index return, whether negative or positive.

"I'm more optimistic about the structured products market now than I was a couple of months ago." - Andrew Valentine Pool, main trader at Regatta Research & Money Management

"We're only up just a little bit more than 2%, so it's too soon to celebrate." - A sellsider

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