Structured Notes Tied to BofA Lead Single-Stock-Linked Increase
Sales of U.S. structured notes tied to Bank of America Corp. have soared this year as issuance of securities linked to a single stock increases, with investors accepting higher volatility for potentially greater gains.
Banks sold $259.2 million of notes tied to the Charlotte, North Carolina-based lender this year through Oct. 4, more than five times the $46.4 million during the same period in 2012, according to data compiled by Bloomberg. Total U.S. issuance of securities tied to single stocks rose 24 percent to $6.3 billion.
By betting on bank share prices, investors are putting their faith in a U.S. recovery that has seen stock benchmarks rise as Federal Reserve stimulus programs keep interest rates between zero and 0.25 percent for an unprecedented fifth year. Terms such as for coupons are often better on notes tied to single stocks rather than indexes, because buyers are compensated for the risk of larger price swings.
“Bank of America is the most U.S.-centric of the biggest institutions” and isn’t as exposed to international markets as other large Wall Street banks, said Andrew Marquardt, managing director and head of bank research at Evercore Partners Inc. (EVR) in New York. Investors also have become less concerned with the bank’s older mortgage liabilities concerning representations and warranties, and its ability to raise capital, he said.
The Fed has pledged for more than a year to press on with $85 billion a month in asset purchases until the labor market achieves sustainable gains.
The greater volatility of single equities has helped banks create more attractive notes at a time when price swings for U.S. stocks, as measured using the price of options on companies in the Standard & Poor’s 500 Index, are about 30 percent below the historical average. The VIX (VIX), as the Chicago Board Options Exchange Volatility Index is known, has averaged 14.4 this year.
“If you get the right ones, there’s a lot of volatility embedded into these notes,” said Donald Selkin, chief market strategist for National Securities Corp. in New York.
The volatility gauge climbed to 19.6 yesterday from 15.5 on Oct. 1 as Congress partially shut down the federal government over a budget impasse. The S&P 500 dipped 1.5 percent this month to 1,656.4 during that time, though still increased 16 percent in 2013.
Apple Inc. (AAPL) is the most popular underlying stock tied to U.S. structured notes this year, with $594.5 million in sales, Bloomberg data show. Last year, it was also No. 1 at $1.12 billion of volume during the same period, as well as being the second-most popular linked asset overall after the S&P 500 Index.
Bank of America sold $148 million of notes tied to Apple on May 16, the largest offering this year linked to one company. The one-year securities, issued May 16, yield three times the gains of the stock with returns capped at 27.65 percent and all capital at risk, according to a prospectus filed with the U.S. Securities and Exchange Commission. The lender valued the securities at 97.1 cents on the dollar at the time of sale.
Apple, the Cupertino, California-based company run by Tim Cook, reached a high of $702.10 a share on Sept. 19 last year and has since lost 31 percent of its value.
Besides Apple and Bank of America, 11 other companies have been linked to more than $100 million of sales this year, up from nine through the year-earlier period, Bloomberg data show. They are Ford Motor Co., JPMorgan Chase & Co., U.S. Steel Corp., Freeport-McMoRan Copper & Gold Inc., MetLife Inc., Cobalt International Energy Inc., Las Vegas Sands Corp., Valero Energy Corp., Amazon.com Inc., Citigroup Inc. and Facebook Inc. (FB)
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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