BofA prices block trades, pushes market’s weekly structured notes issuance tally to $558 million

By Emma Trincal

New York, Nov. 30 – It was a short holiday week as the stock market closed early the day after Thanksgiving, but structured notes issuance was strong. Agents priced $558 million in 37 deals, according to preliminary data compiled by Prospect News. Not all deals were accounted for by press time given the delays between pricing and filings with the Securities and Exchange Commission, especially during the Thanksgiving break.

Volume in the stock market was thin.

“Just because the rest of the market is on holiday mode with very little volume doesn’t mean structured notes issuance is going to be light,” said a structurer.

“Our market is not big enough to be really impacted by the overall trading volume in the equity market.”

BofA tops

Bank of America stole the spotlight, pricing its monthly calendar ahead of the holidays with $518 million in 32 deals.

“Not a surprise. Merrill is the biggest broker in the world,” said the structurer.

By Tuesday, most of BofA’s deals had already priced, early enough to settle in November.

“It’s always hard to tell when BofA is going to close. They usually price sooner when you have a holiday falling at the end of the month. In theory, they could have done some this past Monday to settle by the end of the month. But they usually come out in one big chunk,” the structurer said.

The stock market, initially choppy, rallied last week following Wednesday’s release of the Federal Reserve minutes raising expectations that the pace of interest rate hikes may be soon slowing. The S&P 500 index gained 1.5% on the week.

HSBC’s ARNs

BofA Securities priced three big leveraged trades on the behalf of HSBC. The “Accelerated Return Notes” or “ARNs, which are a best-selling product for this agent, feature short-term capped notes with two to three times leverage and limited or non-existent downside protection.

HSBC USA Inc. priced $78.92 million of such ARNs with a 14-month duration on the S&P 500 index offering three-times the upside up to a maximum gain of 20.8% with full downside risk exposure.

The same issuer also brought to market $64.27 million of two-year ARNs on the S&P 500 index paying 200% of the index capped at 26.72%. A 10% buffer was included.

Another large ARN also issued by HSBC priced for $36.29. It was a 14-month note tied to the S&P with double the gain capped at 18.32% for the upside and a 5% buffer on the downside.

BofA last week favored HSBC as its top issuer. Other weeks, Canadian banks including Canadian Imperial Bank of Commerce, Bank of Nova Scotia and Toronto-Dominion Bank, capture the overwhelming majority of this agent’s trades both in numbers of deals and sizes. At the end of October for instance, Canadian issuers made for two-thirds of the issuance volume associated with BofA’s month-end pricing.

Rotating the paper

“What [BofA] is trying to do is to make sure their clients are not too concentrated in one single issuer. I suppose their brokers have limitations on how much structured notes they can hold and how much from the same credit. They have to strike a balance, which is why you’ll see them using some names one month and other names the next month,” the structurer said.

“The other factor is the funding rate, which they’re looking at when they price. The Canadian paper is known to be safe. Maybe not so much now. But they’re probably trying to find a balance between creditworthiness and better pricing.

“The primary factor though is diversification of credit for their customers.”

Index growth

Reflecting a consistent trend observed at all times but especially throughout the year: index-linked notes overwhelmingly dominated the flow last week. The input of BofA was the main factor as this agent focuses almost exclusively on index products rather than single stocks.

Index notes issuance is up 11% this year to $56.2 billion from $50.6 billion. Simultaneously stocks have dropped 46% through Nov. 25 compared to a year ago.

Eggs in baskets

No deal linked to single stocks was spotted last week. Instead, a few offerings came out with baskets of stocks.

One of them issued by BofA Finance LLC for $6.24 million was a three-year autocallable market-linked step-up tied to an equally weighted basket consisting of Goldman Sachs Group, Inc., JPMorgan Chase & Co. and Morgan Stanley. The call premium was 20% annually and the payout at maturity was unlimited above the 145% step-up strike.

Baskets of stocks can also be used as worst-of. The previous week revealed a good example in a somewhat unusual five-year autocallable variable coupon note tied the worst of three tech stocks. It was issued by GS Finance Corp. for $10.72 million with an exposure to the worst of Amazon.com, Inc., Apple Inc. and Tesla, Inc.

The notes will pay a monthly coupon at an annual rate of 10% if each stock closes above its coupon barrier price, 70% of its initial price. The unusual twist was the payment of a guaranteed monthly coupon of 0.25% per annum if the coupon condition was not met on the observation date. The automatic call kicked off after one year. Even more unusual for an income product: the principal was fully protected.

A weaker hedge

Commodities issuance is on the decline again. Only one small deal priced last week. Issued by BofA Finance, the $5.07 million issue of four-year notes was linked to the Bloomberg Commodity index. The terms featured uncapped leveraged upside at a rate of 1.45x and a 15% buffer.

“Commodities issuance has disappeared,” the structurer said.

There was some hope earlier in the year, he noted. But the pace has plummeted.

“In the first four months of 2022, there was a lot of concern about inflation. So, you saw a number of commodities notes used to hedge against inflation risk.

“But now, with the Fed signaling its commitment to break the back of inflation and with inflation apparently cooling off a bit, commodities are facing a real challenge,” the structurer said.

Issuance of commodities notes from January to May accounted to $412 million but dropped to $240 million from June to October, according to Prospect News data.

Market-linked step-ups

The normal distribution of structure types was skewed last week by the specificities of BofA’s product line.

This agent aside from ARNs typically sells a high volume of autocallable market-linked step-up notes, which fall into a hybrid category as they combine cumulative annualized call premium and unlimited one-to-one participation at maturity above the step-up, guaranteeing a minimum return equal to the step payment if the underlying is up.

Almost all of those deals (BofA’s $6.24 million on the basket of bank stocks is the exception) are linked to a single index.

BofA Finance priced $27 million of autocallable market-linked step-up notes on the S&P 500 index.

Investors get the index gain if the underlying finishes above the 30% step-up level; the payout is 30% if the positive return is below the step-up level; the notes offer a 10% buffer on the downside. There is an autocall after one year with a 12.8% annualized premium.

Prospect News does not include such products in its callable/autocallable category given the upside participation. Incidentally, the volume of traditional Phoenix autocalls plummeted last week making for 3% of the tally.

On the other hand, autocallable market-linked step-up notes accounted for $108 million in eight offerings, or 19% of the total. BofA was the agent for all those products.

Innovative gearing

Much less visible last week were digital and absolute return notes.

One exception was an absolute return note issued by Citigroup showing an innovative feature: leverage was applied to the absolute return within the buffer range. Sources noted that it’s highly unusual to see participation on an absolute return distinct from one-to-one, and if it is, the delta is usually negative, not positive.

Citigroup Global Markets Holdings Inc.’s $12 million of 0% two-year dual directional buffer securities linked to the S&P 500 index offered 1.25x the index gain capped at 22% and 1.25 times the absolute value of the index return up to the 80% buffer. There was no gearing for any decline beyond the buffer.

By far, leveraged notes prevailed last week under the impetus of BofA. Leverage accounted for 63% of total sales, or $353 million issued in only 19 deals. The breakdown as a percentage of the total between protection and no protection was bullish. Leveraged notes with buffers or barriers accounted for 25% of total issuance volume while their unprotected counterparts made for 38% of it.

“Some distribution networks, like BofA like notes with no protection. It just depends on where you put the notes in the portfolio as well as your market outlook,” said a sellsider.

BofA Securities distributed the quasi totality of leveraged products with the pricing of $338 million in 17 deals.

Last week’s top agent after BofA was HSBC Securities. It was followed by Citigroup.

The top issuer was HSBC USA Inc. with $421 million in 24 deals, or 75.5% of the total.

Issuance for the year through Nov. 25 was $72.62 billion, a 12.7% drop from $90.05 billion a year ago.

The number of deals declined by a third to 18,345 from 27,149.

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