BofA’s closing week means high structured products issuance tally; top agent grabs 68% share

By Emma Trincal

New York, July 5 – Despite market volatility, president Donald Trump’s trade tariffs and the Federal Reserve on a tightening path, it was business as usual for BofA Merrill Lynch, which priced $659 million in 29 structured products deals in the week ended Friday, according to preliminary data compiled by Prospect News.

Overall agents sold $969 million in 198 deals, an 82% increase from the previous week’s revised figure of $521 million.

June

The month through June 29 however showed a significant decline from the same period in May. Sales dropped more than 28% to $2.87 billion from $4 billion during that time. However, those figures are not necessarily final or conclusive. First, June 29, which is the cutoff time for June, does not include the two final days of last month. In May 30 and May 31, more than half a billion dollars was brought to market, which makes the month-to-date even less promising for June.

On the other hand, not all deals which came out last week were filed with the Securities and Exchange Commission website by press time. As a result, June’s numbers will be revised upward in the next few days.

“It’s probably different from an issuer to the next. But for us, June was as good as it can be. We’ve noticed a slowdown in the preceding months, but June’s sales have been picking up. April and May were more challenging,” a sellsider said.

Year’s pace slowing

Still, the solid volume gains observed on the year to date earlier this year are progressively shrinking.

By the end of the first quarter, volume was up more than 21% from the same period the year before.

At the end of the second quarter – and based on preliminary data – volume had dropped 3.5%. The decline began in May, which fits seasonal patterns of slowdowns toward the summer. Again, June figures may not be final as more deals will be included in the database over the next few days.

“In February, when you had such a downward move, hedging conditions changed. There were significant improvements in options pricing and much more attractive entry points,” the sellsider said.

“When volatility pops up you get better optics. Options are worth more.

“Clever people took advantage of that in February and March. In April and May it was old news. That might explain the slowdown.”

Issuance volume jumped 40% in January from a year before, a natural result of the strong bullish momentum at the time. This sellsider’s reasoning seems to coincide with the data. February, despite the pullback, turned out to be a very good month for structured products with volume up 35% from the same month a year before.

It’s only in March that growth began to decelerate.

BofA’s footprint

Underlying asset classes and product types last week reflected the typical deals BofA Merrill Lynch sells to its net worth clients at the end of each month. Equity-index-linked notes accounted for 69% of total volume across all firms.

For the structures, the weight of the top agent put two recent trends on pause.

The bulk of the volume consisted of pure leverage with very short tenors (less than 15-month), high leverage (typically 3x), competitive caps on the upside but no downside protection. These structures were essentially brought to market by BofA Merrill Lynch.

“Same deals they always do,” a market participant said.

“Leverage, autocallable step-ups... It’s interesting. The more things change, the more they remain the same.”

Autocallable step-ups are a signature trade of BofA Merrill Lynch. The structure pays a digital when the underlying finishes above its initial price. If it rises above the digital (or step) level, investors typically get a delta one return.

BofA Merrill Lynch priced seven such deals totaling $138 million, or 21% of its own volume. By far leveraged notes were the top sellers.

To hedge or not to hedge

Last week saw twice as much volume in leveraged notes with full downside exposure than similar products with buffers or barriers. Such a trend is definitely contrary to what the market has shown since the beginning of the year with the proportion of leveraged notes with barrier or buffers nearly double that of unprotected leverage deals.

Does the abundance of unprotected leveraged notes mean investors have remained strongly bullish or even complacent in the face of trade war headlines and looming concerns over the Fed? Probably not, according to the sellsider.

“If you look on the third-party side, no one will buy these short-term, high leverage delta one downside products,” he said.

Just because a lot of those product types were seen last week does not really reflect investors’ appetite when taking into account the registered advisers’ market, he noted.

“These riskier products fit BofA Merrill Lynch]’s pattern of sales. They’re almost programmed to do those full downside risk notes. It’s a central piece of their whole distribution network. It’s just their business model. I’m not saying these are bad deals. After all they sell very well. But whether or not it’s logical in this market, I don’t know.

“I’d say it’s more of a wirehouse distribution trend.”

For this sellsider, increased volatility should favor leverage with buffers or barriers. And it has. The RIA market he caters to is showing growing demand for hedging and protection. Options are facilitating pricing of protection through a buffer or barrier, he said.

“The vol. conditions have been seemingly better. When volatility pops up you get better terms, better optics,” this sellsider said.

“You can take advantage of the increased volatility skew that we’ve seen. Your leveraged call spread allows you to buy more options since you’re getting a higher premium on the short side. That’s an easier sale. Volatility has really helped the pricing of buffered notes and barrier notes. Who knows why some don’t take advantage of that?

What gets sold so easily in the wirehouse market may not be of interest to RIAs, he concluded.

Participation is back

A second trend, which is also contrarian to past recent months, also confirms the impact of BofA’s distribution patterns last week. It was the overwhelming volume of growth notes (47% of sales) versus income (20%).

Participation products have proportionally increased as a percentage of the market in recent months but not to the point of dwarfing the bid on autocallables and income products as was the case last week.

For the year, income products make for 35.5% of total volume versus 34% for leverage, a neat balance between the two types of products.

The overwhelming amount of BofA deals last week explains in large part the temporary vanishing of income notes as this agent did not price any such product and does not most of the time.

Structuring autocallables has been easier this year with volatility on the rise, explained the sellsider.

“Autocallables most of the time have a downside barrier. Higher volatility helps with options and entry points. You can generate higher coupons and the optics of protection are attractive,” he said.

Go Canada!

As expected last week saw the pricing of large deals, which BofA Merrill Lynch distributed, including the top eight ones.

One was over $100 million in size, another over $50 million and three others above $30 million, according to the data.

The top three were issued by Canadian banks.

Canadian issues, which traded on the BofA Merrill platform last week, accounted for more than $440 million in 15 deals. This represents two-thirds of the agent’s sales and more than half of its deal count for the week.

Overall Canadian banks issued $455 million in 28 deals. Hence 97% of those Canadian bank-issued notes were distributed on Merrill’s platform.

“BofA has grabbed Canadian issuers because they would never do business with what they perceive is a major competitor,” the sellsider said.

“And who are the competitors? It’s the American banks.

“What are the alternatives? Probably not the nebulous European credit under pressure.

“So here you have it. Canadian banks are solid credit-wise, at least that’s how they are perceived since there is no credit default swap market for them. If Canadian banks were seen as risky you would imagine that enough people would want to insure them, which apparently is not the case.

“But the main reason for doing business with them is because Merrill doesn’t feel threatened. They would never have that type of relationship with a Goldman or a Morgan Stanley.”

Top deals with big one

Not surprisingly the top three issuers last week were Canadian banks, which together priced close to a quarter of the market’s size in volume.

Canadian Imperial Bank of Commerce was No. 1 with $117.25 million of 14-month Accelerated Return Notes linked to the S&P 500 index. Leverage will be three times on the upside up to a cap of 11.94%. Investors will be fully exposed to the downside.

Bank of Nova Scotia came out with the second top deal, also a 14-month. It priced at $51.23 million and was based on the S&P Regional Banks Select Industry index. Leverage will be three times up to a capped return of 17.15%. Investors will be exposed to any index decline.

The third deal was another Bank of Nova Scotia issue. Linked to the Euro Stoxx 50 index, the notes priced for $42.65 million. The leveraged structure had a more conservative profile with a longer maturity of three years, a 25% buffer and a lower leverage factor of 1.62.

BofA Finance LLC issued the No. 4 offering in $38.8 million of five-year leveraged buffered notes linked to the Dow Jones industrial average. It will offer 1.166 times leverage, no cap and a 20% buffer.

Finally Bank of Nova Scotia again came out with the fifth largest deal in $32.1 million of 14-month leveraged notes tied to the Russell 2000 index.

The payout at maturity will be triple any index gain, subject to a capped return of 13.17%.

Investors will be exposed to any index decline.

After BofA Merrill Lynch, the top agent last week was UBS, followed by Morgan Stanley.

Bank of Nova Scotia was the No. 1 issuer with seven offerings totaling $204 million, or more than 21% of the volume.

For the year, JPMorgan Chase Financial Co. LLC is the top issuer. It priced $4.6 billion in 1,059 trades.

“The vol. conditions have been seemingly better. When volatility pops up you get better terms, better optics.” – A sellsider

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