Structured products agents price $638 million during week; fourth largest deal of year eyed

By Emma Trincal

New York, July 3 – Agents closed June last week with $638 million in 214 structured products offerings, a higher weekly number than the average as the month and the first half of the year ended, according to preliminary data compiled by Prospect News.

Leveraged notes prevailed, especially those with full downside exposure (49% of the total) as a result of the size of a block trade in this product type category.

“The last couple of weeks have been very busy in our market,” a market participant said.

“We’re seeing a more active June than we’ve seen in years. It’s encouraging as we start the summer months.”

One explanation may be June’s stock market rally prompting investors to reallocate their portfolios prior to the summer.

Prospect News data for last month is not finalized yet, showing a significant decline. It is likely to be revised upward.

Yearly tally

The picture for the year to date is slightly better with a narrower gap than previously observed only a month ago. Volume was $22.21 billion this year through June 28 versus $30.75 billion last year, a 27.8% decline. Not so long ago the gap was about 35%.

“It’s still pretty humbling,” said a structurer.

“Hard to say why we’re down so much. People are blaming it on volatility. I don’t think vol. pays such a role. Right now, volatility is in the mid-teens to high-teens. Not too high, not too low. I’m not sure we can blame it on anything specific really.”

For the trailing 12 months through June 28, volume is down 15.3% to $48.18 billion from $56.9 billion for the previous 12-month trailing period.

“This gives you a better feel of what the market is doing simply because you’re getting more data,” the structurer said.

“It’s not as bad as the year-to-date but it confirms the decline, unfortunately.”

The week was flat on the equity market front as investors were waiting for the G-7 Summit bringing U.S. president Donald Trump and China president Xi Jinping to a new round of negotiations.

June was a very strong month for the stock market. The S&P 500 index rose 6.9% for the month, partly due to a shift in the Federal Reserve suggesting that rate cuts were in the cards.

Fourth-largest deal of year

Barclays Bank plc priced $125.85 million of 14-month 0% Accelerated Return Notes linked to the S&P 500 index.

The notes pay triple any index gain, up to a maximum return of 11.29%. Investors will be exposed to any index decline. BofA Securities, Inc. is the agent. It is the fourth-largest deal of the year.

“These notes are boring, but I’d like to be that boring – $126 million...that’s good boring. You can’t argue with success,” the structurer said.

Despite the lack of buffer or barrier, he found that those deals can provide some form of risk management through the leverage.

“They do it for a reason. You only put a third of your money to work since it’s 3x leverage. It’s not gimmicky. They do that as an asset allocation tool. Rather than putting your money in stocks you put a third of it in this note and you diversify. It’s a more efficient way of balancing a portfolio.

“I admire them for their strategy in training their advisers who explain these products to their clients. It’s what structured products should be. A different way of managing risk.”

The market participant is also familiar with the “Accelerated Return Notes,” which have been Bank of America’s top-selling products for many years.

He explained how the deal may expand the supply of these products.

“Bank of America does a good job at diversifying credits. They don’t want to be pushing too much of their own paper. They see a conflict of interest there,” he said.

But demands from investors is also key.

“Those deals are popular because month after month people are laddering them in their portfolios. So naturally it gets more traction,” he said.

CIBC’s $34 million autocall

Coming second was another BofA-distributed deal: Canadian Imperial Bank of Commerce’s $33.99 million of six-year autocallable market-linked step-up notes tied to the S&P 500 index.

The notes will be called at par of $10 plus an annualized call premium of 6.13% if the index closes at or above the initial level on any annual observation date.

If the notes are not called and the index finishes above the step-up value, 135% of the initial level, the payout at maturity will be par plus the index gain.

If the index finishes at or below the step-up level but at or above the initial level, the payout will be par plus the step-up return of 35%.

There is a 15% buffer on the downside.

“It’s a pretty safe deal because first you might get called and second you get this 15% buffer,” the structurer said.

Scotia’s $30 million note

BofA also priced on the behalf of Bank of Nova Scotia $30.27 million of five-year leveraged notes linked to the Dow Jones industrial average.

The payout at maturity will be par of $10 plus 118.5% of any index gain.

Investors will receive par if the index falls by up to 20% and will lose 1% for every 1% decline beyond 20%.

Some buysiders interviewed by Prospect News argued that including a 20% buffer on a longer-dated note is “a waste” because the underlying is unlikely to drop that much over a long period of time. Rather they would want to see more upside.

“I don’t agree. They’re too confident that the market will go up,” the structurer said.

The market participant shared his view.

“When you buy a structured note, you want to have a certain level of comfort. Part of the reason you’re investing in those products is for the insurance on the downside,” he said.

“Some investors do back testing analysis. They see that over a five- or six-year period, the chances of the Dow dropping 20% are pretty small. And it’s true. But these are past performance results. You can never completely rely on that.”

He explained that investors themselves define their priority. The rest of the structure then falls into place.

“They usually ask: what is the maximum level of protection I can get with as much upside as possible, preferably uncapped? That’s how you can determine how long the notes will be and how much leverage you can get,” he said.

BofA leads

Bank of America was the top agent with $252 million in 88 deals, or nearly 40% of the total.

It was followed by UBS and JPMorgan.

Barclays Bank plc was the lead issuer with $126 million with its single block trade, or 19.74% of the total.

This issuer is also No. 1 for the year to date with $3.22 billion in 873 deals, a 14.57% share.

Naturally Bank of America was the top agent pricing three top deals over $30 million, one of which at $125 million.

“The last couple of weeks have been very busy in our market. We’re seeing a more active June than we’ve seen in years. It’s encouraging as we start the summer months.” – A market participant

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