Structured products agents price $1.32 billion during week; BofA grabs nearly half of market

By Emma Trincal

New York, Oct. 5 – Structured products issuance for September ended on a decent note with the traditional push of Bank of America in the last week of the month. This time, however, the top agent made an even greater dent, pricing alone roughly one-half of the issuance volume, or $645 million in only 26 offerings, according to preliminary data compiled by Prospect News.

The total volume for the week was $1.32 billion. Agents priced 289 deals.

“They’re the most efficient. Pricing fewer deals but huge deals and doing that much volume, from a practitioner’s standpoint, from a dealer or manufacturer’s standpoint, it’s very efficient,” a market participant said.

“I’m not surprised by those numbers. The people I spoke with last week told me it was very busy.”

As the final week of the nine months of this year to date, last week ranked No. 6. The last week of January for instance with $2.82 billion was the best, followed by the final week of August at $1.79 billion.

September

September as a month was average. Agents priced $3 billion. It made September the fifth best month out of nine, shortly behind March with $3.15 billion and August with $3.19 billion. This year’s summer was exceptionally good with July coming as the second best month ($3.31 billion) after January’s $4.68 billion, the data showed.

The gap between Bank of America and its competitors was notable last week. Coming second was JPMorgan with $193 million in 67 deals. It represented 14.6% of the total issued compared to 48.8% for Bank of America. Goldman Sachs was third with $92 million in 24 offerings, or 7.0% of the volume. Those figures are subject to change as not all deals were filed with the Securities and Exchange Commission website at press time.

Bank of America priced all its deals on Thursday.

Plain vanilla

Bank of America priced block trades, which explain its ranking. The top agent sold eight out of the top 10 deals. The 10 largest deals totaled $407 million and within that pie, Bank of America’s slice was $350 million, the data showed.

The No.1 deal was over $150 million in size; the next two were about $68 million and $48 million. All three were distributed by BofA Merrill Lynch.

Another factor behind Bank of America’s large sizes is the simplicity of its structures, said the market participant.

“Their deals are plain-vanilla. People understand them. Their advisers are comfortable with them. They can sell them,” he said.

“When structures are more innovative, you don’t get people’s attention. People do innovative stuff in small numbers,” he said.

$154 million top deal

Barclays Bank plc brought to market the top deal: $153.81 million of 14-month leveraged capped notes linked to the S&P 500 index. The payout at maturity was par plus triple any index gain, subject to a maximum return of 11.85%. Investors were fully exposed to the downside.

“Very simple structure...People like short term so they can reduce credit risk exposure. Of course you get a cap and maybe a lower cap than on a longer note. But if you think the market will be flat in the next year or so, the leverage is your friend,” he said.

Leverage

Leverage can certainly gather large sized deals as illustrated by the second top transaction: Bank of America Corp.’ two-year $67.73 million of leveraged notes tied to the S&P 500 index with a leverage factor of two, a cap of 13.48% and a 10% buffer.

Leverage was the top structure with $600 million in 80 deals or 45% of the market.

Leverage with full downside risk exposure brought bigger deals – 13 totaling $271 million – than leverage with buffers or barriers, which accounted for a $271 million notional and 67 trades.

Step-up fever

But the most popular structure used among the top selling deals were autocallable market-linked step up notes, which in total made for 20% of last week’s volume.

The No. 3 and No. 4 deals distributed by BofA Merrill Lynch used this type of structure.

Barclays Bank priced $47.73 million of three-year 0% autocallable market-linked step-up notes linked to the S&P 500 index. The notes were automatically called at par of $10 plus a call premium of 8.5% per year if the index closed at or above the initial index level on Oct. 20, 2017 or Sept. 21, 2018.

If the notes were not called and the final index level was greater than the step-up value, 125% of the initial index level, the payout at maturity would be par plus the index return.

If the final index level was greater than or equal to the initial level but less than or equal to the step-up value, the payout would be par plus the step-up payment, 25%.

If the final index level was less than the initial level, investors would have one-to-one exposure to the decline.

The fourth deal, issued by Bank of Nova Scotia, which also referenced the S&P 500 index, followed the same structure.

Its size was $36.32 million. The annually observed autocall offered a 6.05% call premium. The step-up value was 135%.

Income

“These deals look good because you can tell the investor that they are not capped at maturity. But in reality it’s very similar to an autocall. Chances are you are going to get called and therefore capped at the call premium. If you haven’t been called, it means your index has been below par each time. What are the odds you’re going to close above the step? If you only talk probabilities, chances are you’ll get the digital coupon, what they call the step. Nothing wrong with that...it’s actually a positive outcome. But there is most likely a cap. Having no cap is a bit of an illusion,” the market participant said.

The market is also dictating the need for investors to use those types of products.

“All these deals are income plays. Usually when people buy an autocall, they want to be auto called. The need for income is so strong that people don’t hesitate to buy something with no downside protection. They’re betting that they’ll be called,” the market participant added.

Volatility, yield thirst

Last week’s equity market was favorable to those autocallable and contingent coupon plays as volatility rose on concerns about the European banking system and Deutsche Bank’s woes

“We definitely have more volatility than in August,” said Paul Weisbruch, vice-president of options sales and trading at Street One Financial.

“We had a sell-off earlier in the month and we’ve rebounded a little bit. But we’re still off.

“The elections jitters or whether or not the Fed will raise rates for the year are making investors a little bit nervous.

“They’re not staying in cash though. They’re investing conservatively, switching to fixed-income.”

He pointed to the iShares iBoxx $ High Yield Corp Bond exchange-traded fund.

“It’s a good benchmark for high-yield, and right now it’s trading at all-time highs...that means yields are the lowest they’ve ever been.

“Meanwhile people still need yield. They’ll go to riskier asset classes like emerging markets to get more and they’re willing to embrace that risk.”

The same holds true with structured notes, said the market participant.

“Whether people use worst-of or contingency... choose to have no buffer or to be called, it’s all designed to satisfy this need for income,” he said.

“We definitely have more volatility than in August.” – Paul Weisbruch, vice-president of options sales and trading at Street One Financial, commenting on the market

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