February’s final week ends strong with $1.68 billion; BofA prints more than half of total

By Emma Trincal

New York, March 4 – Agents priced $1.68 billion in the week ended Friday, with Bank of America making for $924 million of the volume, or 55% of the notional sold, according to preliminary data compiled by Prospect News.

The top agent was able to generate this volume with only 25 offerings out of the 257 deals brought to market during this final week. It sold three deals in excess of $100 million, two of which exceeding the $120 million mark. The bank was the agent for the top 10 offerings in excess of $30 million.

Big week

Last month, however, with $3.27 billion ended up weaker than the $3.79 billion sold in January. The difference may be explained by an exceptionally strong week at the end of January, which totaled $3 billion. During that closing week of January, JPMorgan and Goldman Sachs each brought a deal of nearly half a billion dollars while Bank of America sold close to $300 million in a single deal.

The strength of each month’s final week gives the year a 6.2% advance in volume over last year, the data showed.

“There are so many ways to look at our industry, so many different structures, some being borderline and hard to categorize. A week can make a difference, but it’s not so relevant. I’m encouraged because we’re up for the year. We just started 2015, so the trend isn’t firm yet. But I’m cautiously optimistic,” a sellsider said.

Autocallable step-ups

The most popular product, and one of Merrill Lynch’s best-selling structures, was the step-up autocallables note, which feature an autocallable provision with a call premium and in the absence of a call, a potential digital payout if the final index price is below a pre-set step-up level or the index gain with no cap if the final level is above the step level.

Credit Suisse AG, London Branch priced the first one and the week’s top deal with $124.08 million of 0% autocallable market-linked step-up notes due Feb. 23, 2018 linked to the Euro Stoxx 50 index. The call price was at or above the initial level on any of two annual observation dates with an annualized call premium of 11.21%.

The step-up value was 135%, and the step-up payment 35%. Investors participated in the index gains above the step but were fully exposed to any index decline.

Meeting the demand for oil-based structured products as the volatility of the sector permits attractive pricing, Bank of America sold on the behalf of Credit Suisse $120.26 million of two-year autocallable market-linked notes linked to the S&P Oil & Gas Exploration and Production Select Industry index. This time the call premium was 15.1% per annum and the step-up 30%. There was a 5% buffer on the downside.

Credit Suisse

Credit Suisse also issued $52.14 million three-year autocallable market-linked step-up notes tied to the S&P 500 index. Ranked No. 6 in size, it was also distributed by Bank of America.

“These deals show the continued interest in the marketplace for potentially attractive double-digit returns. Those are not income products because the call may or may not happen. But they are increasingly popular under today’s low interest rates environment,” the sellsider said.

Credit Suisse as an issuer was leading. This bank’s balance sheet was used in 30% of the total volume in 28 deals, including the top two. It also issued three deals ranging from $36 million to $52 million.

“There are a variety of reasons why an issuer is going to be used a lot. It may be for the funding rate and pricing, it may be for the credit. Credit Suisse is a major bank. But they’re a small distribution force. It’s not a brokerage. It makes sense for others like Bank of America to use their balance sheet to diversify the paper,” the sellsider said.

Leverage plays

Leverage was the most popular structure last week with 44% of the volume.

It was used in the third largest deal, a short-term highly leveraged structure with a cap and full downside exposure.

HSBC USA Inc. priced $107.46 million of 0% Accelerated Return Notes due April 29, 2016 linked to the S&P 500 index. The leverage factor was 3 and the cap 10%.

Another non-protected leveraged transaction, and the No. 4 deal of the week, was issued by Barclays Bank plc in $89.11 million of 0% leveraged notes due Aug. 30, 2017 linked to a basket of indexes. The basket has been used many times this year in the exact same composition and unequal weights, including the Euro Stoxx 50 index, the FTSE 100 index, the Topix index, the Swiss Market index and the S&P/ASX 200 index. There was no downside protection and no upside cap. The upside participation rate was 156.5%.

Leveraged structures year to date represent 48% of the volume with nearly $4 billion sold, according to the data.

“The market is at all-time highs. Investors believe there might still be some upside, but they see it as limited. It makes sense for them to keep the exposure to the market with leverage to capture most of the gains,” said the sellsider.

Agents sold more leveraged notes with no buffer or barrier (30% of the total) than notes partially protected (18%), the data showed.

The benefits of eliminating the protection vary from shortening the duration to raising the cap or in some cases eliminating it altogether, sources said.

Bullish crowd

“The crowd attracted to these products is bullish, obviously. They believe the market can break out to new highs,” said Paul Weisbruch, vice president of options sales and trading at Street One Financial.

“Volatility has been dropping a lot. It’s probably not a coincidence that you see a lot of those non-protected instruments.

“The VIX was as low as 12 handles recently. Today it’s a bit higher. But it’s very depressed compared to a few months ago. It was at 25 in December. It’s now about half of that.

“I think investors are very optimistic. The Nasdaq hit its 5,000 record a few days ago. It has come back, but it was only a few days ago. The move down is notionally small.

“People who buy those deals are pretty bullish. They’re comfortable with the low volatility. They’re comfortable not having protection. I’m not saying it’s the right call though. We’re several weeks ahead of core earnings. We haven’t had a meaningful correction. You can be cautiously bullish and have some downside hedge with a protection, just in case you’re wrong.”

Svensk Exportkredit

The No. 5 deal, also a leveraged note with no buffer or barrier, was brought to market by a less commonly used issuer.

AB Svensk Exportkredit priced $53.15 million of 0% Accelerated Return Notes due April 29, 2016 tied to the Euro Stoxx 50 index. The upside was levered three times and capped at 15.15%.

Svensk Exportkredit issued only 17 deals last year. For the first two months of 2015, two deals were issued under that name versus one last year.

“We don’t see them a lot probably because it’s not easy to use a non-bank issuer. It’s not like they do their own hedging. You have to find another issuer to swap, which is not the most efficient use of capital. But that’s from the manufacturing perspective. It may be attractive from a distribution standpoint,” the sellsider said.

The second agent last week after Bank of America was UBS, which sold $155 million in 74 deals, or 9.19% of the volume.

“It makes sense for others like Bank of America to use their balance sheet to diversify the paper.” – A sellsider on Credit Suisse

“I think investors are very optimistic.” – Paul Weisbruch, vice president of options sales and trading at Street One Financial

© 2015 Prospect News.
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