May structured products issuance ends strong with BofA selling half of closing week’s sales

By Emma Trincal

New York, June 7 – Issuance volume last week was muted as May ended and June began. Action really took place on the week ended May 26, just ahead of the Memorial Day weekend.

Agents sold $188 million last week against $1.13 billion during the previous week, which is the one BofA Merrill Lynch chose to bring its monthly block deals to market, according to data compiled by Prospect News.

With $565 million sold during that big week, BofA Merrill Lynch nabbed half of the volume in only 13 offerings. It also priced the top five deals.

Market sales figures for May alone showed an 18.5% decline from April, to $3.14 billion from $3.85 billion. This trend may not be final though, and May data may still be subject to upward revisions.

Compared to a year ago, however, current data for last month showed a 9.20% uptick from $2.88 billion in May of last year.

The yearly trend remains remarkably vigorous with $20.70 billion issued through May 31 versus $15.73 billion, a nearly 32% increase.

“It looks like we can almost pop the champagne, but we still have the rest of the year to go,” a sellsider said.

“It’s not like we’re better at doing what we’re doing. I don’t think there’s any breakthrough in the industry so I’m not sure we can really credit ourselves. Last year was really bad. It’s only healthy and logical that we would be doing much better.”

Issuer’s credit

The number of offerings through the end of May was 5,286 versus 3,284 in the year-ago period, a 61% increase.

“Deals are much smaller,” he said, pointing to the gap in growth rates between the notional sold and the number of offerings.

“If anything, you probably see more issuers. Canadian banks have made a big push in the U.S. Issuer’s diversification has something to do with the volume pick up. I’m not saying it’s the only factor but it matters.

“I talk to financial advisers who tell me that some of their clients first want to buy an issue but will give up when it’s the same issuer they already have. When people have more opportunities to diversify across credit, you can cast a broader net and catch more fish.”

Demand

A market participant said that the current market is conducive to structured products, suggesting two different kinds of buyers who may benefit from the industry.

“The first kind of buyer is scared of where the market is,” he said.

“He believes the doomsayers. I want exposure but I also want protection. To me it’s worth giving up some participation in order to buy the protection. This is the richly valued stock market story,” he said.

The “second kind of story,” he continued relates to investors who are not as much concerned about the toppish benchmarks as they are about the concentration of their performance in a handful of stocks, designated under the FAMGA acronym, which stands for Facebook, Apple, Microsoft, Google and Amazon.

“For whatever reasons, individually these stocks are too high. As an investor I don’t want to go near them. But I still want a higher yield than just buying bonds. So here’s your second kind of buyer: the guy who is literally yield-starved,” he said.

Better optics

BofA Merrill Lynch distributed the top five deals. Those consisted of three leveraged offerings and two autocallable market-linked step-ups.

BofA Finance LLC priced the top deal with $174.38 million of 14-month Accelerated Return Notes linked to the S&P 500 index. The notes were guaranteed by Bank of America Corp.

The payout at maturity was par of $10 plus triple any index gain, up to a maximum return of 10%.

Investors would lose 1% for each 1% decline.

The second deal was nearly identical to the first except for the underlying – the Euro Stoxx 50 index – and for the cap of 19.5%.

Comparing the two offerings, which feature the same issuer, maturity date, leverage factor and downside exposure was revealing of the possibilities offered by the Euro Stoxx 50 index versus the S&P 500, the sellsider noted.

“You get almost twice the cap with the Euro Stoxx and that doesn’t surprise me,” he said.

That is because interest rates are lower in Europe than in the United States. In addition, the dividend yield paid by the European benchmark is one percentage point higher than the yield on the S&P 500 index.

“These two factors give you a cheaper forward. Because of that, you get optically better terms on the Euro Stoxx deal,” he said.

Autocall step-ups

The third offering was brought to market by Barclays Bank plc with $51.26 million of six-year autocallable market-linked step-up notes linked to the S&P 500 index.

The autocall premium was 5.75% per year, the step-up value, 135% of the initial price. There was a 15% buffer on the downside.

Investors would receive the 35% step payment if the index finished positive but below the 135% step-level. Above the step, they would receive the index return with no cap.

“You can still lose 85% of your money and you are likely to be capped at 5.75% per year with the call. It seems asymetrical but you can’t look at risk this way only. You have to factor in the probability of losing,” he said.

HSBC USA Inc. priced $47.24 million of two-year leveraged notes linked to the Euro Stoxx 50 index, with two-times leverage, a 26.35% cap and a 10% downside buffer.

Finally Barclays priced $40.2 million of three-year autocallable market-linked step-up notes. There were two annual autocallable observation dates, a 14.5% call premium with a call threshold at par. At maturity the step-up level was 135%.

“You make 35% if you get to maturity, which is less on a per-annum basis than the 14.5% annual call premium. Since there are only two observations, your best scenario is to get called on the second year,” the sellsider noted.

All those deals priced on May 25.

“It looks like we can almost pop the champagne, but we still have the rest of the year to go.” – A sellsider, commenting on the gains year over year in structured products market

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