Bank of America Corp. is poised to become the top seller of U.S. structured notes for the second straight year, issuing its highest proportion ever of securities tied to stocks.
The bank leads with $3.28 billion of issuance, of which 93 percent, or $3.04 billion, is linked to equities. Morgan Stanley is second with $2.93 billion of total sales.
Bank of America has been helped by shrinking credit risk and surging stock markets, with the Standard & Poor’s 500 Index climbing 19 percent this year. The lender’s large network of financial advisers also boosts the size of its deals, which averaged $37.7 million in 2013, while competitors use electronic platforms to issue more notes in smaller amounts.
“The comfort level with Bank of America as a credit is as high as it has ever been,” said Liam O’Neil, a managing director and head of the company’s markets group for global wealth and investment management in New York. Five-year credit-default swaps tied to the bank, which reflect the cost to protect against a default by the bank, tightened to 110.7 basis points yesterday from 131.3 at the end of last year, according to CMA.
In June, Bank of America passed Morgan Stanley (MS) as the top issuer of structured notes this year. Lauren Bellmare, a spokeswoman for Morgan Stanley, declined to comment on the bank’s sales.
Bank of America has more than 14,000 advisers who sell structured notes, and more than half of its private wealth clients buy the products, said Suzanne Buchta, a managing director of debt capital markets for structured note issuers in New York.
Its average deal size this year is the largest for any bank selling U.S. structured notes, Bloomberg data show. Eight of Bank of America’s sales during the first seven months totaled more than $100 million, the most for any issuer for the same period since at least 2010, when Bloomberg began collecting comprehensive data on the market.
The lender’s two biggest deals this year were both tied to the Dow Jones Industrial Average (INDU), an index of 30 stocks that are generally the leaders in their industry.
“You’re seeing a repatriation of investor dollars to the United States,” O’Neil said. “The Dow Jones represents the highest of the high quality.”
Bank of America sold $284.5 million of notes tied to the benchmark on June 27. The five-year securities yield 1.22 times the gains of the index with protection against 30 percent of losses, according to a prospectus filed with the U.S. Securities and Exchange Commission.
The lender’s focus on large deals contrasts with the strategy of others such as UBS AG (UBSN), which sells customizable securities using an electronic platform. Such programs, which are becoming more commonplace in the U.S., allow banks to create offerings smaller than $1 million that are profitable.
UBS sold $1.15 billion of structured notes this year through July in 1,231 deals for an average of about $933,000 each, Bloomberg data show. Last year, its issuance was $2.33 billion over the same period.
Megan Stinson, a spokeswoman for UBS in New York, didn’t return an e-mail seeking comment on the program or sales.
Bank of America has sold two notes tied to interest rates through July for $40.6 million, compared with $730.7 million during the year-earlier period, Bloomberg data show. Banks have struggled to offer attractive terms on such securities as the Federal Reserve keeps the benchmark borrowing rate between zero and 0.25 percent for a fifth year.
Banks issued $2.95 billion of structured notes in July, the slowest period since December, Bloomberg data show.
Banks create structured notes by packaging debt with derivatives to offer customized bets to retail investors while earning fees and raising money. Derivatives are contracts whose value is derived from stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.
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