Structured Notes Tied to Valero Sell Most as Crude Supplies Rise

Banks in the U.S. have sold the most structured notes tied to Valero Energy Corp. (VLO) in at least four years this month as the world’s largest independent refiner increases production on larger supplies of domestic crude.

Investors have bought $59.6 million of securities tied to Valero in four offerings so far in February, the biggest monthly sales period since at least January 2010, according to data compiled by Bloomberg. Last year, the San Antonio-based company was one of the most popular among structured note investors, with $132.8 million in sales of securities linked to its stock price, Bloomberg data show.

Valero is profiting off higher supplies of crude oil, which it processes into more valuable gasoline, Sam Margolin, an analyst at Cowen & Co. LLC, said in a telephone interview from New York. “Refining is a better business now than it has been over the past 10 years,” he said. “The refinery level is a bottleneck right now because of all the crude the U.S. is producing.”

Cowen affirmed its 12-month price target of $60 on Feb. 11.

While West Texas Intermediate crude is set for the longest run of weekly gains in a year on falling supplies and cold weather bolstering demand, the oil has traded at a discount to the European benchmark since July 19. WTI futures may fall next week on concern that inventories will rise, according to a Bloomberg survey of 28 analysts.

Memphis Refinery

The price of gasoline rose 1.7 percent to $2.8333 a gallon this year.

Valero reached $53.24 on Jan. 10, the highest in almost six years, when the company announced that its Memphis refinery was operating after a system shutdown four days before. Since then, the company declined 5.7 percent to $50.23 today.

Bank of America Corp. sold $34.8 million of the notes, the largest offering in 13 months. The securities, issued Feb. 13, yield 9.5 percent a year, plus an additional 6.4 percent if the stock rises at least 9.5 percent from its initial value with all capital at risk if the shares decline, according to a prospectus filed with the U.S. Securities and Exchange Commission. The bank distributed the notes for a 1.75 percent fee.

Bloomberg started to collect comprehensive data on U.S. SEC-registered structured notes in January 2010.

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 with values derived from stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.

To contact the reporter on this story: Kevin Dugan in New York at kdugan4@bloomberg.net

To contact the editor responsible for this story: Shannon D. Harrington at sharrington6@bloomberg.net

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