BofA prices a week ahead of Labor Day weekend, generates two-thirds of total issuance volume

By Emma Trincal

New York, Aug. 30 – Total structured products issuance volume was higher than average, reaching $880 million in the week ended Friday, according to data compiled by Prospect News.

BofA Merrill Lynch priced $553 million of it in large block trades, which suggests that the agent did most of its pricing last week rather than this week. It closed its month ahead of the final week of August prior to Labor Day weekend, which enabled the firm to settle most of its deals this month instead of risking an overlap with September.

These figures are subject to revisions as some BofA deals may be filed later this week on the Securities and Exchange Commission website.

A total of 201 offerings priced last week. BofA sold 28 offerings, a small number contrasting with its massive notional. Its top two deals priced at $80 million and $60 million, respectively.

“This is just the week of closing deals for Bank of America,” said an industry source.

“They did a lot. That shows how much they’re driving the market even though they only do that one time a month.”

A brokers’ trade

Investors are sold products and the top agent knows how to sell them, he added.

“There was a lot of news and political events last week. But this is not what drives volume. Retail keeps pounding in, puting money in, they just roll and spread the investment through the year.

“It’s a distribution business.

“An institutional investor would look at taking some hedging protection or take advantage of the market environment. They can go for a long time without trading.

“But retail doesn’t seem to take vacations and brokers are just doing their jobs.”

A market participant disagreed saying that investors remain influenced by the market if only in their moods as they form their opinion. For now, investors remain cautiously optimistic, he noted.

Timeliness of protection

“The market remains uncertain. You have North Korea and the mess in Washington and yet investors continue to be upbeat. The market shrugged all fears. It seems like they don’t care,” this market participant said.

“However you had a sell-off prior to last week. The S&P 500 remains richly valued. It makes the use of structured products more compelling because they give you some form of protection either in the form of a buffer or a barrier and even through leverage.

“It’s more market sentiment than pricing that drives volume right now.”

Equity tops

Equity as an asset class made for 93% of the total, a higher share than the annual average, which is 88%, the data showed.

The equity category includes indexes, baskets of stocks, single-stocks and equity funds.

Within that group, equity indexes overwhelmed the rest with 83% of the total, which is higher than the 73% average for the year.

BofA’s large block trades shaped the week in terms of asset classes and favored structures. Equity index notes for instance accounted for 83% of this distributor’s volume.

One notable exception was a Bank of America Corp.’s $10 million rate deal. The fixed-to-floating rate notes offered a 4.1% initial rate for the first two years followed by a variable interest rate at the 10-year U.S. dollar ICE swap rate payable quarterly.

Leverage

BofA also dictated the flavor last week for structure types. It essentially priced leveraged notes with or without downside protection, a contrast compared to other weeks, where worst-of and autocallables have prevailed.

Worst-of structures last week saw a volume of $119 million in 37 deals, which is slightly more than $3 million per deal.

Last week was choppy even though the S&P 500 index rose 0.7%, ending a two-week sell-off.

Federal Reserve chairman Janet Yellen and her European counterpart Mario Draghi met on Friday during the Jackson Hole Symposium offering no surprise, which gave the market an opportunity to rally on that day.

The U.S. markets struggled in the two previous weeks amid the geopolitical tensions between the United States and North Korea.

The CBOE Volatility index hit 16 on Aug. 10 and remained elevated a week later at above 15.

“Volatility came back down last week at around 11 and it’s still low now, observed the market participant.

“I don’t think pricing conditions have improved pricing a bit.

“People are simply more interested in hedging their portfolios.

“It’s not the pricing as much as the story that justifies the use of structured notes.”

Year up 41%

Figures for the year continue to be positive.

Agents sold $33 billion this year through Aug. 25, a 41% increase from $23.43 billion issued during the same time last year, according to the data.

The number of deals has significantly increased to 8,608 this year from 5,306 last year.

On a yearly rolling period, volume in the 12 months to Aug. 25, 2017 is up 27% to $48.30 billion from $38 billion in the same period a year earlier, the data showed.

S&P versus Euro Stoxx

BofA Merrill Lynch last week distributed six out of the seven deals in excess of $30 million, including the top two.

The No. 1 deal in size was Barclays Bank plc’s $80.07 million of 14-month leveraged notes linked to the S&P 500 index. The leverage on the upside was three times with a 10% cap and no protection on the downside.

Interestingly BofA in its second top trade used a nearly similar structure: only the issuer, underlier and therefore, cap, differed while the leverage, maturity and one-to-one downside exposure were the same. It was BofA Finance LLC’s $59.08 million with terms similar to the previous one but tied to the Euro Stoxx 50 index with an 18.25% cap.

The difference in caps did not surprise the market participant.

“This is simply a pricing issue,” he said.

“The forward on the Euro Stoxx is much cheaper, and what drives the terms if you compare the two almost identical deals is the delta.

“You buy the delta, and with the Euro Stoxx forward much cheaper you buy a lot more of the Euro Stoxx.”

He calculated approximately the annual forwards on each deal. The forward is the interest rate minus the dividend.

For the S&P 500, he assumed a 1.5% interest rate for 14-month and a 2% dividend yield for the equity index.

For the Euro Stoxx 50, interest rates are negative and their level for that term is approximately minus 0.25%. The yield on the Euro Stoxx 50 index is about 3.5%.

As a result, the S&P 500 index based on this “rough estimate” is about minus 0.5% while it is minus 3.75% for the Euro Stoxx 50 index, he said.

“Optically it’s cheaper to use the Euro Stoxx than the S&P. It doesn’t mean the deal is better. It just looks optically better,” he said. “The terms are the same. The only difference is the cap. Since you can get the Euro Stoxx a lot cheaper you’re going to have a higher cap.”

Other top deals

Canadian Imperial Bank of Commerce brought to market the third largest deal with $43.5 million of leveraged notes slightly longer than two year linked to the S&P 500 index. The leverage on the upside is 1.4 times with a 24.36% cap and a 12.5% geared buffer. CIBC World Markets Corp. is the agent.

Finally BofA Finance LLC priced $38.17 million of two-year leveraged notes also linked to the S&P 500 index with a 200% upside participation rate, an 11.24% cap and a 10% buffer.

“The S&P 500 is still the underlying of choice,” noted the market participant.

“It’s the market and people want to capture the market.

“It’s a much broader index than the Dow Jones and it offers tons of liquidity, making it an easy hedge. Almost nobody uses the Dow Jones.”

League table

The top agent last week after BofA Merrill Lynch was JPMorgan with 26 deals totaling $70 million, or 7.95% of the total. It was followed by UBS and CIBC World Markets Corp.

Barclays was last week’s top issuer with $237 million in 14 deals, or 27% of the market. About 80% of this issuer’s volume was distributed by BofA Merrill Lynch, according to current available data.

Barclays is also the No. 1 issuer for the year with $4.96 billion, or 15% of the total issued in 944 offerings.

“The market remains uncertain. You have North Korea and the mess in Washington and yet investors continue to be upbeat.” – A market participant

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