Structured products issuance volume nears $1 billion, led by BofA trades; Canadian paper in favor

By Emma Trincal

New York, Aug. 2 – Structured products issuance jumped in the final days of July as Bank of America brought to market its large, bullish deals as it routinely does when it closes the month during its final week.

Volume reached $974 million in 235 deals, according to preliminary data compiled by Prospect News. Figures are subject to upward revision due to lags between filing dates and press deadlines.

BofA Merrill Lynch distributed $458 million in 18 offerings, or nearly half of the market.

“When they do deals, they do big deals. That’s the nature of their platform,” a sellsider with another firm said of BofA Merrill Lynch.

Bull market

Despite Donald Trump’s agenda being postponed and interrupted by last week’s firing and hiring of White House staffers, investors overall remain bullish, a market participant said.

The so-called dog days of summer have not put the brakes on the rally so far, even if the market ended mixed last week. Last month, the S&P 500 index rose 1.5%. It is up 10% for the year.

Volatility continues to be subdued. The CBOE VIX index hit an all-time intraday low on Wednesday at 8.85.

Finance subsidiaries

BofA Merrill Lynch’s distribution was characterized by the absence of any U.S. issuer besides BofA Finance LLC, which is Bank of America’s issuing arm. All other deals came from non-U.S. banks, essentially Canadian issuers, the data showed.

Two Canadian issuers accounted for 40% of the agent’s distribution. Those were Canadian Imperial Bank of Commerce, with $134 million priced in seven deals, and Bank of Nova Scotia, which brought to market four deals totaling $75 million. Another non-U.S. issuer (AB Svensk Exportkredit) priced a $12 million deal. The remaining $265 million came for BofA Finance.

Bank of America created BofA Finance, its direct wholly owned finance subsidiary last year in an effort to issue structured notes in compliance with a Federal Reserve rule known as TLAC for Total-Loss Absorbing Requirements.

“If they use their issuing arm it’s a direct result of TLAC. All these finance subsidiaries were built for that,” the sellsider said.

The market participant agreed that Bank of America was not an isolated case.

“It’s easier for every bank to use their subsidiary now. They all do that. It has nothing to do with credit diversification for the buyer. All those deals are guaranteed by Bank of America,” the market participant noted.

Foreign issuers

Bank of America is keen on using a large number of non-U.S. banks to issue the deals it distributes. The top deals it has placed this year originated from Credit Suisse AG, London Branch, Barclays Bank plc, HSBC USA, Inc. and Deutsche Bank AG, London Branch, according to the data.

Last week’s systematic use of two Canadian issuers who have seen their volume grow substantially this year did not come as a surprise.

“Investors like Canadian banks because they’re relatively new even though Merrill seems to do more and more of them. They’re new and they have strong credit. It’s more likely that investors have not accumulated that much Canadian paper,” the market participant said.

Leverage back again

Last week’s top deals – all sold by BofA Merrill Lynch – offered the prototype bullish structure under the bank’s brand abbreviated as “ARN” for Accelerated Return Notes. Those products feature short maturities, high leverage, competitive caps and no downside protection.

Given the size of those trades, leverage last week dwarfed income products, making for half of the entire volume versus 30% for contingent coupon deals. The previous week showed the opposite trend with yield-enhancement notes largely prevailing over growth-oriented products.

“It’s hard to say if those preferences reflect a market trend or not. I personally don’t think so,” the market participant said.

“One week you’ll see income, the next leverage. Those big deals are the signature of Bank of America. These are bullish deals because their clients are bullish. You definitely have to be bullish to buy those ARNs because you need the index to be up, not down or flat,” the market participant said.

Big trade, twin deals

BofA Merrill Lynch sold 18 deals all of which were the top deals in size.

BofA Finance LLC issued the largest one with $118 million of 14-month leveraged notes linked to the S&P 500 index. The upside leverage is three times, the cap 10%. Investors will be exposed to any market decline.

“It’s been a while since we’ve seen a big one like this, something more than $100 million,” said the market participant.

The last one was seen in May. It was also issued by BofA Finance for $174.38 million. The structure and underlying were identical.

The second deal last week for $53.13 million was similar to the first one. The only differences were the underlying – the Euro Stoxx 50 index versus the S&P 500 – and the cap of 17.75%.

“You can get a cap almost twice as high with the Euro Stoxx, of course. The cheapness of the forward makes pricing much more attractive,” the market participant said.

Both offerings priced the same day, on Thursday.

Scotia, CIBC

Coming third, Bank of Nova Scotia priced $37.33 million of five-year leveraged notes linked to the Euro Stoxx 50 index.

The payout at maturity will be par of $10 plus 2.68 times any index gain. Investors will lose 1% for every 1% decline in the index.

Canadian Imperial Bank of Commerce’s $34.93 million of 14-month leverage notes linked to a basket of unequally weighted indexes was the No. 4 offering.

The basket consists of the Euro Stoxx 50 index, the FTSE 100 index, the Nikkei Stock Average index, the Swiss Market index, the S&P/ASX 200 index and the Hang Seng index.

The notes offered 300% of any basket gain, subject to a 16.57% cap with full downside exposure.

Positive sentiment

None of those deals offered downside protection, noted the market participant.

“You have to believe that sentiment overall is bullish,” he said.

“Volatility is at all-time lows. Rates are not up. We don’t know how long it’s going to last. It could be the summer. But for now people have no reason not to be bullish.”

But the type of deals being offered also depended on the way products are distributed, he said.

“The structured products machine works that way. Sometimes it’s income, a week later it’s all accelerated.

“That’s the beauty of the system. You have people who want income, others want appreciation.”

The sellsider believed that demand for products played a larger role.

“We see probably more demand for income than leverage and we know why. Rates are low and stock prices are high. People want yield,” he said.

“Market sentiment has a lot to do with what prices. Whether people think it’s a good time to buy or not will have obviously an impact. Look how weak issuance was in the first half of 2016. Once Trump got elected, people got more positive. Distribution picked up a lot from that point.”

Yearly growth

Volume for the year remains strong.

Agents sold $29.33 billion in 7,572 offerings this year through July 28, a 39% increase from the same period last year when 4,725 deals totaled $21.13 billion.

Volume in the 12 months to July 31 is up 26% to $46.86 billion from $37.21 billion in the same period a year earlier.

The top agent last week after BofA Merrill Lynch was JPMorgan with $107 million in 32 deals. It was followed by UBS and Barclays.

CIBC was the second largest issuer after BofA Finance. It was followed by JPMorgan Chase Financial Co. and Barclays Bank plc.

“You have to believe that sentiment overall is bullish.” – A market participant

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