Agents sell $925 million of structured products for week; BofA closes month with 70% of total sales

By Emma Trincal

New York, Oct. 30 – Structured products issuance for the week ended Friday topped $925 million in 140 deals, with BofA contributing to 70% of the total, according to data compiled by Prospect News.

In all, BofA was responsible for $636 million in 28 offerings during the week, according to the preliminary data, which is subject to upward revisions.

The year-to-date volume was down 18.7% to $39.30 billion this year from $48.35 billion last year. With a $9 billion gap, the hopes of matching the 2018 sales record are fading.

“We won’t be able to make it up, and that’s OK,” a structurer said.

“In a way, it’s normal. Last year and 2017 were two great years with double-digit growth. It’s reasonable to have a bad year after two good years. Structured notes issuance can’t just keep on going up forever.”

Natural slowdown

The full year of 2018 with $56.77 billion was the best ever since 2004 when Prospect News began to track issuance of U.S. registered structured notes. In 2017, $52 billion was issued. But 2016 was weaker with $39.69 billion through the end of the year, a notional amount already nearly met so far this year.

“There is of course the issue of interest rates that are still too low and it’s not helpful. But that’s not the root of the problem,” this structurer added.

“There is really no new innovation to be honest. We’re seeing the same deals over and over again. You have the market-linked step up, the autocallables. There are only so many things you can do.”

Plain-vanilla in decline

The industry may be at a turning point, sources said. It’s largely understood that plain-vanilla, easy-to-explain structures are those that sell best. The typical example is the leveraged buffered note. Autocallables, which this year have largely embraced the exotic worst-of payout, are less easy to understand, according to registered investment advisers who balk at buying them on a regular basis. Yet autocallables competed well with leverage, accounting for approximately the same 34% share of this year’s issuance.

Leveraged notes were down 17% in volume to $13.55 billion from $16.35 billion a year ago. One may think that the growth of autocallable products could have offset the decline. But what growth? Autocallable notes have in fact declined even more to $15.04 billion from $21.2 billion, a 29% drop.

Finding customers

These numbers may indicate some kind of saturation.

“Without new structures coming out, you’re getting a sense that you’re not getting new buyers coming in,” the structurer said.

“And without new buyers coming in, the market is going to be stagnant.”

Sellsiders have tried to move away from a business model that’s entirely driven by volume. With fees being compressed, more firms, including wirehouses, are contemplating the design of bespoke deals, which have become more cost-efficient thanks to the emergence of technology platforms.

“There is definitely a need for tailored notes. There’s a trend toward customization,” said a sellsider.

This trend has been fueled by an increase in reverse inquiries, which may not bring the same volume as calendar deals but could make a difference if technology makes distribution more efficient. The goal remains to broaden the investor’s base.

“Custom trades can be time-consuming,” however, this sellsider said. It remains unclear whether the transition to a more labor-intensive business model has been a factor in the overall slowdown this year or not.

“It’s really hard to come up with any reason,” the structurer said.

S&P mania

As the U.S. large-cap stock market flirted with all-time highs (which it hit on Monday and Tuesday of this week) a surprisingly high volume of deals linked to the S&P 500 index came out – 19 totaling $464 million, or more than half of the market, a sign that investors are not yet overly worried about a bear market. The S&P 500 index as a sole underlier represented a third of this year’s notional as a comparison.

Leverage prevailed last week with $355 million, more than three-times the $113 million of autocallable issuance, in contrast with other weeks.

“Merrill, the biggest gorilla in the room, doesn’t do autocalls except its step-up,” said the structurer.

Overall the tone remained bullish, a combination of BofA’s preferred structures and a strong start in the earnings season.

Leverage with full principal at risk ($223 million) exceeded leverage with barriers or buffers ($132 million), another sign of Merrill Lynch’ s input. The deal count for leverage was only 22 as this structure was found among the biggest offerings.

There was an unusually high number of block trades last week even for a final week of the month. Five offerings priced at $50 million or more.

BofA Securities, Inc. distributed the top seven deals except for the second one, coming from Morgan Stanley.

RBC’s $87 million tops

The No. 1 deal last week was Royal Bank of Canada’s $87.22 million of 14-month Accelerated Return Notes linked to the S&P 500 index. The payout at maturity is par plus 3 times any index gain capped at 11.14% with exposure to any index decline.

The second deal was more unusual and reminiscent of last year’s wave of giant convertible deals priced on Voya Financial, Inc., which contributed to make 2018 a record year as one of such deals for instance hit $600 million in size.

Morgan Stanley on Microsoft

Morgan Stanley Finance LLC priced this convertible play in $69 million of 0.25% five-year cash-settled equity-linked notes linked to Microsoft Corp.

The payout at maturity will be $1,000 multiplied by the quotient of the final share price divided by the threshold price, subject to a minimum payout of par. The threshold price is 137% of the initial share price.

Behind the bullish facade, a closer look showed a diversity of structures, including absolute return notes or a large bearish deal, better suited for a pullback.

Two big absolute return

The third deal for instance was BofA Finance LLC’s $54.7 million issue of two-year absolute return notes with buffer linked to the S&P 500 index.

If the index return is positive, the payout at maturity will be par plus the index gain up to 10%.

If the index falls by up to 15.25%, the payout will be par plus the absolute value of the index return.

Investors will be exposed to any index decline beyond 15.25%.

Another absolute return in a bearish format came from UBS AG London Branch, which priced $32.99 million of 14-month bearish autocallable absolute return notes linked to the S&P 500 index. If on any day during the life of the notes the index closes at less than 75% of the initial level, the notes will be automatically called at par. Above initial price, investors will get par at maturity. Gains are made if the index declines by more than 5% but less than 25%. In any scenario, investors will receive at least par.

Step-up, leverage

BofA Securities priced one of its signature products named autocallable market-linked step-up, which combine an autocall, a digital return at maturity in the form of a step return with uncapped exposure above the step-up value.

Bank of Nova Scotia priced $51.82 million of six-year autocallable market-linked step-up notes linked to the S&P 500 index. The call premium is 6.3% a year. At maturity, investors receive the 30% step return if the index is up by less than 30% and the uncapped upside return above 130%.

The downside buffer is at 15%.

Canadian Imperial Bank of Commerce priced its own version, also on the S&P 500 index, with $33.79 million of three-year notes.

The call premium is 8.71% per year if the index closes at or above the initial level on an annual observation date. The step-up value is 121% of the initial price. Investors are fully exposed to the index decline.

Finally, in fifth and sixth place CIBC issued two big leveraged buffered offerings on the S&P 500 index.

The first one priced at $49.96 million. The 14-month issue pays 2x the upside subject to a cap of 8.33% and for the downside, offers a 5% buffer. The other deal at $48.97 million was a two-year maturity note paying 2x the upside subject to a maximum return of 14.68% with a 10% downside buffer.

Top agents

The top agent after Bank of America was Morgan Stanley with $100 million in seven deals, or 10.8% of the total. UBS was the third agent.

For issuers, Canadian Imperial Bank of Commerce led with $210 million in eight offerings, a 22.7% share. It was followed by BofA Finance and Bank of Nova Scotia.

Barclays Bank plc and JPMorgan Chase Financial Co. LLC remained the leading issuers for the year to date with $5.435 billion and $5.393 billion, respectively.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.