Structured products agents price $979 million in volatile week; BofA leads activity

By Emma Trincal

New York, Oct. 2 – The monthly calendar for structured products issuance closed last week with Bank of America making its usual push, pricing fewer but voluminous deals.

Total sales of structured products amounted to $979 million in 177 deals for the week. BofA priced $455 million, a chunky 46.5% share in only 11 offerings, according to preliminary data compiled by Prospect News.

Those figures are subject to upward revision as not all offerings were filed with the Securities and Exchange Commission by press time.

Bank of America’s high issuance volume in such a small number of “tickets” begs the following question: why aren’t more big banks following its lead?

Keep it simple

“Of course, people should imitate Merrill,” a sellsider said.

“And many are trying.

“If anything, the amount of money they raise is done in simple, plain-vanilla deals and that goes to show that the future of structured products is not gimmicky. Structured products are an asset allocation tool. The biggest rivals of structured products are stocks and ETFs.”

Deals distributed on Bank of America’s platform tend to be always the same, he said.

“Merrill does simple products advisers use for their core allocation. A lot of firms focus on Phoenix autocalls, deals with coupons. Look at what Merrill does. 3x leverage, cap. These are not income-focused deals. No coupons. Just growth. It’s done to express a view and fit in your core portfolio,” he added.

Second deal of year

Last week’s top deal offers an example. It also was the second-largest of the year.

HSBC USA Inc. priced $138.09 million of 14-month leveraged notes linked to the S&P 500 index.

The payout at maturity will be par of $10 plus triple any index gain, up to a maximum return of 11.67%. Investors will be exposed to any index decline.

Before that, another Bank of America trade with a similar structure was Bank of Nova Scotia’s $145.8 million leveraged notes on the S&P 500.

“Whether it’s Scotia or HSBC, I know it’s something they market out every month with success,” said Matt Rosenberg, sales trader at Halo Investing.

“It’s a recurring theme in their marketing. People ladder these products month after month. The wirehouses do like it. It’s not so popular on Halo’s platform because we don’t typically offer notes without downside protection.”

Two big Canadian tweens

Also substantial in size was Canadian Imperial Bank of Commerce’s $51.08 million of 14-month capped leveraged notes on the S&P 500 index, the third largest deal last week.

The upside participation of 200% is capped at 8.99%. There is a 5% downside buffer.

Equally placed, Bank of Nova Scotia priced another $51.08 million deal tied to the S&P 500 index with the same amount of leverage. Set as a two-year, its duration was slightly longer than CIBC’s 14-month, which allowed the issuer to raise the cap to 14.82% and to stretch the buffer to 10%.

“Everybody wants to imitate Merrill. But look at how many years they’ve been in this market? And how disciplined they are. You need the infrastructure. You need an army of advisors who know how to sell these products,” said the sellsider.

While firms such as JPMorgan, UBS and Morgan Stanley do have an important salesforce, their products are different, he said.

“[Bank of America’s] competitors are trying. But they may have a different focus. Some firms want to show more elaborate, more innovative products. Merrill’s choice is: we are boring; we do it like a machine; we print the same stuff every month. It’s easy and it works,” the sellsider said.

Market-linked step-up

One of the “less simple” yet best-selling products from Bank of America, the autocallable market-linked step-up deals, can also generate big sizes.

“These are a little bit more complex but they’re still used for allocation purposes. Instead of being designed for growth, they accommodate a range bound view,” the sellsider said.

An example is last week’s second-largest offering: Barclays Bank plc priced $78.31 million of six-year autocallable market-linked step up notes tied to the S&P 500 index. The notes will be automatically called yearly with a call premium of 6.32% per year. At maturity, the return will be the 30% step payment if the index is flat or up to 30%. Above the step level, investors will get the index return. There is a 15% buffer on the downside.

Scale versus tactical

“Morgan Stanley, UBS are definitely doing a lot of notes. But their push may be more for custom-oriented deals,” said Halo’s Rosenberg.

“When you’re showing calendar deals like Merrill it works better for the desk and it’s more cost-efficient. But you may not get the best entry, the best valuation compared to tactical deals that are designed for the client at a specific time, in reaction to a market move. So, I think customized deals may be better for the advisers. It’s just not the same scale.”

Income sales

Income-oriented notional totaled $233 million in 100 deals, still a fair market share of 23.8% given the weight of Bank of America’s growth products flowing into the market last week.

“Income notes are more tactical. People play income more as a one-off. Leveraged deals are broader and distributed across an adviser’s book of risk. Income-oriented notes are going to be a handful in comparison,” said Rosenberg.

The continued uncertainty and rising volatility seen last week may have provided support for the issuance of income-generating notes.

The S&P 500 lost 1% last week on trade concerns as the White House considered delisting Chinese stocks. A call for impeachment of the president by the Democrats on Tuesday was another bit of news to digest for the market.

Volume down

Volume for the year is down more than 20% to $35 billion from $43.9 billion last year through Sept. 27, according to the data. The number of deals is off 4.3% to 11,765 versus 12,294 a year ago.

“It’s not great so far,” the sellsider said.

“I’m hoping that we can catch up. Our market is down but the equity market is stagnant too. People should look at structured products as an alternative.”

Last week closed the month but also the third quarter. Market participants tend to be cautious at this time of the year. Many remember last year’s sell-off in the fourth quarter, culminating in December.

Dangerous times

“October has historically been a make-or-break month,” said Rosenberg.

“You can have very strong performance just like you can have big drops. 1929, 1987...these crashes happened in the month of October. It’s always a time that carries some big risks. I do anticipate volatility over the course of the month.”

The current political and global environment does not help.

“We have the ongoing trade tensions and now the impeachment. While the impeachment doesn’t matter that much to the market at least so far, it still adds another controversy, which will have a broad market impact,” he said.

“Oil is on edge and the president’s move toward isolationism has an impact on global trade. Risks are rising.”

The top agent last week after Bank of America was UBS with $239 million in 79 offerings, or 24.4% of the total.

The No. 1 issuer was HSBC, which brought to market the top deal and five others for a $164 million notional in total, a 16.7% share.

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