BofA’s $1.2 million contingent income autocalls on renewable energy offer buffered sector bet

By Emma Trincal

New York, Oct. 28 – BofA Finance LLC’s $1.2 million of contingent income buffered autocallable yield notes due Oct. 31, 2024 linked to the lesser performing of the Invesco Solar exchange-traded fund and the iShares Global Clean Energy ETF provide exposure to the “hot” renewable energy space for investors seeking yield and enhanced protection as the structure offers a buffer, a rare item in an autocallable structure, advisers said.

Each month, the notes will pay a contingent coupon at the rate of 8.35% per year if each underlier closes at or above its coupon barrier level, 80% of its initial level, on the determination date for that month, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be automatically called at par if each underlier closes at or above its initial level on any quarterly determination date after one year.

The payout at maturity will be par unless either underlier finishes below its buffer level, 85% of its initial level, in which case investors will lose 1% for every 1% that the lesser-performing underlier declines beyond 15%.

Buffered autocall

“I haven’t seen a real buffer on an autocall. It’s always a barrier. That’s kind of neat,” said Steve Doucette, financial adviser at Proctor Financial.

He also liked the high correlation between the two underliers.

“They chart pretty closely,” he said.

Popular theme

Doucette said he follows the sector closely.

“The government is going to put more money in renewable energy. The emphasis is to get away from fossil fuel. So that’s a plus when you invest in the sector,” he noted.

President Joe Biden during a speech on Thursday related to infrastructure proposed to spend $555 billion on climate-related provisions, with the goal of cutting by half greenhouse gas emissions by the end of the decade.

Fixed-income bucket

“The funds have gone down but they’re on their way back,” he said.

“If you like the terms of the notes, for a fixed-income replacement, an 8% coupon is decent.

“You may collect a coupon for at least one or two quarters. You’re likely to outperform most fixed income.”

The downside risk was taken care of, he said.

“One of these things could fall through the floor in three years. But I don’t see it that way, not on a three-year. It gives you enough time and you have this 15% buffer. So, I’m not too worried about the downside.”

Broader energy

Doucette’s only concern was the narrow focus on renewable energy.

“Oil is up a lot. Both oil and renewable energy stocks could be up at the same time. But we know how volatile energy is in general,” he said.

“I would probably be more comfortable with a broader energy fund. Instead of buying a note on renewable and another on oil, I’d rather have exposure to the entire space through one underlying fund or index.”

Growing pain

An adviser expressed a more negative opinion about the notes, reflecting his view on the underlying investment theme.

“Overall, I do think this clean energy is going to struggle a little bit,” said Scott Cramer, president of Cramer & Rauchegger, Inc.

“First it’s going to take some time before we transition into those new types of energy. For now, oil and gas powers the world,” he said.

“In an effort to push for green energy, we’ve tried to constrain supply of fossil fuel. We’ve made it more difficult to produce oil. Meanwhile, demand for fossil fuels has not gone away. The result has been this rising inflation.”

There is a push to develop new energies as a response to concerns over climate change, he noted. Many large pension funds, like in New York City, have vowed to divest of all fossil fuel, he said.

Cold in Texas

But Cramer was skeptical about the new technologies themselves.

“We’ve seen how unreliable some of these clean energies can be. We’ve not transitioned as much as we would like into this new space. We’re not there yet,” he said.

Texas offered an example of a severe disruption during one of the state’s coldest winters in decades, he said.

“Wind turbines don’t work in the frost. The sun was not shining for solar panels,” he said.

“These renewable energies can do well but only with massive government support.

“It’s a tail risk because government subsidies could go away.”

Uptrend

On a more bullish note, a large consensus of consumers and investors has been pushing for greener energy, which has helped the prices of the two ETFs move higher, especially after the Presidential Elections in November, opening the door for a strong rally amid the start of a pro-green agenda. Both ETFs saw their share prices jump between the Elections and January when they each hit their 52-week highs.

The iShares Global Clean Energy ETF rose 77% during that time and the Invesco Solar fund nearly doubled. Since then, they dropped 22% and 26%. Yet both ETFs are back in a bullish mode this month.

Company risk

Regarding the terms of the notes, Cramer said he did not care for worst-of payouts.

“The 15% buffer is good. 20% would be more generous,” he said.

“We could see a 15% drop in three years. It could happen.

“If one or two of the companies in these ETFs blows up, you have a problem.

“It can happen. These renewable energy companies are not exactly the most profitable.”

He concluded that the notes would not be a sound investment for his firm.

“I don’t know if the 8% return is worth this risk over three years.”

The notes are guaranteed by Bank of America Corp.

BofA Securities, Inc. is the selling agent.

The notes will settle on Friday.

The Cusip number is 09709UTR9.

The fee is 3%.

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