Agents price $1.32 billion structured products for week; Merrill prices year’s third-largest trade

By Emma Trincal

New York, Nov. 1 – The month ended on a decent note last week with $1.32 billion priced in 222 deals for the week as BofA Merrill Lynch closed its monthly calendar with large block trades, including the third-largest deal of the year, according to data compiled by Prospect News.

BofA in action

As it is the case each month, BofA Merrill Lynch captured a larger chunk of the market, taking the first slot with $761 million sold in 26 offerings, or approximately 58% of the total volume.

Merrill also priced the third deal of the year in a $128.53 million trade.

BofA Finance LLC was the top issuer with $377 million in 11 deals, or about 29% of the total issued for the week. This issuing volume amount represented half of the distribution of the firm last week.

The 15 offerings coming from other issuers, which were not affiliated with Bank of America, were all non-U.S. banks, mainly from Canada. Those were Canadian Imperial Bank of Commerce, Bank of Nova Scotia, Royal Bank of Canada and Swedish issuer AB Svensk Exportkredit.

Slow October

While BofA Merrill’s contribution was strong, volume for that time of the calendar month was nothing out of the ordinary: the final weeks of each month this year have shown higher notional except for August with $1.23 billion sold during the week of Aug. 27.

It may be premature to conclude that October will be a weak month as figures are only preliminary.

As all deals get filed with the Securities and Exchange Commission, last week’s figures will likely be revised upward. But so far October does not look outstanding.

For the month volume is up 3.30% through Oct. 27 with $2.82 billion in 700 deals versus $2.73 billion in September sold in 904 offerings.

From a year ago, October’s issuance volume is 13% lower from $3.25 billion.

Rally is on

It was another solid week for equities with the S&P 500 index and the Nasdaq hitting new highs last week. Strong earnings from giant technology companies Alphabet, Microsoft and Intel helped the rally as well as the release of GDP figures showing that the U.S. economy rose at an annual rate of 3% in the third quarter.

While most pundits see the U.S. market in overbought territory, investors continue to be bullish, which helps fuel structured notes sales for those seeking exposure with downside protection or higher rates as those remain historically low, sellsiders said.

Year up 31%

Volume for the year is up 31% to $41.21 billion through Oct. 27 from $31.53 billion last year, the data showed.

On a 12-month trailing basis through Oct. 27, volume is up 23.75% to $48.4 billion from $39.11 billion.

“We’re getting closer to the real picture as the end of the year gets closer, and it looks good,” a market participant said.

The trailing numbers are the most important early on in the year, he said.

“Now we only have two months to add and it really looks like we’re having a solid lead from last year,” the market participant said.

“People are buying more notes. Agents that did well last year probably continue to do very well this year.”

Training

Some firms have invested in training their salesforce to sell the products, and it has paid off.

“We had an extraordinary year,” a sellsider said.

“There are, at least for us, other reasons for our performance this year than just the market in general.

“We’ve invested in an internal marketing plan, trained our [financial advisers] so they can pass along that knowledge to the end-client.

“You don’t just sell products off-the-shelf. There’s a lot of education and training that goes into the process. And when you make that investment, you get new adopters. There’s a multiplying factor and structured products now become part of your clients’ portfolio. The product kind of sells itself.”

Calls and rolls

But the market has helped a lot too, especially when it comes to the sale of autocallable notes, he said.

Autocallable reverse convertibles, now the best-selling product in U.S. markets, account for 37% of the volume this year versus 24% last year. Volume for these notes has nearly doubled to $15.10 billion from $7.7 billion last year, according to the data.

The ascent of this particular type of product this year has been a determining factor of growth, according to this sellsider.

“As the market keeps on trading higher, these keep getting called. They have to be rolled into new positions. That certainly contributed to more volume this year,” he said.

More deals

Another important driver behind the increased notional this year has been the explosion in the number of deals compared to last year: 10,894 versus 7,488, which is a 45.5% increase.

“More firms are getting better from a cost perspective at printing smaller deals,” he added.

“While last year they wouldn’t have done less than $3 million, they may do $1 million now.

“That goes along to explain why you have more deals with a lower average size. But you’re also reaching more potential clients.”

Top deals of 2017

BofA Finance LLC’s $128.53 million of 15-month leveraged notes linked to the S&P 500 index was the top deal of the week and the third-biggest one so far this year.

In May, BofA Finance priced a similar structure with the identical underlier for $174.38 million. It was the second-largest deal of 2017. The first one came in January from Bank of Montreal with $310.24 million of basket-linked notes tied to Raymond James Analysts’ Best Picks for 2017.

Last week’s $128.53 million trade offered 300% of any index gain, capped at 10% with full exposure to any index decline.

“This product has become so common, investors are so comfortable in these types of leveraged deals, it’s not even a structure anymore. It’s now a portfolio building tool,” the market participant said.

“The terms are very easy to understand. It’s pretty much always the same. It’s just a matter of what the cap is, which depends on the index and pricing.”

Even with no downside protection, investors can make a more conservative use of the structure, he added.

“If the investor is cautious he can just put a third of his money and get the same upside as a long position with less risk. The market only has to be up 3.3%. If you don’t think there’s much left on the upside, you can outperform. These notes are very easy to sell, especially now.”

Market-linked step-up

BofA Finance priced last week’s second deal for $68.81 million based on the Euro Stoxx 50 index. It was a three-year autocallable market-linked step-up with a step-up level of 130%. The notes were automatically called on a yearly basis at par plus a 13.2% premium a year if the index was flat or above its initial level. Investors were exposed to any losses.

Third deal

The third deal, also from BofA Finance was identical to the first one but linked to the Euro Stoxx 50 index and capped at a higher level of 17.7%.

“The Euro Stoxx has a higher dividend than the S&P and rates are higher in the U.S. than in Europe. Both factors give you this pricing advantage with the much higher cap on the second deal,” the market participant said.

CIBC, Scotia

Coming as No. 4, Bank of Nova Scotia priced $44.48 million of two-year leveraged notes linked to a basket of international equity indexes.

Finally Canadian Imperial Bank of Commerce sold $42.84 million of two-year leveraged buffered notes linked to the Euro Stoxx 50 index with double any index gain capped at 26.17% on the upside and a 10% buffer on the downside.

After BofA Merrill Lynch, the top agent last week was UBS with 47 deals totaling $138 million, or 10.52% of the volume. It was followed by JPMorgan and Goldman Sachs.

“People are buying more notes. Agents that did well last year probably continue to do very well this year.” – A market participant

“More firms are getting better from a cost perspective at printing smaller deals.” – A sellsider

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