Bank of America's $30.88 million leveraged notes on Rogers Commodity offer hedge for bears

By Emma Trincal

New York, June 29 - Bank of America Corp.'s $30.88 million of 0% Capped Leveraged Index Return Notes due June 29, 2012 based on the Rogers International Commodity Index - Excess Return may have been bought as a hedge in an uncertain market environment or as a bet on a global economic turnaround, sources said.

The payout at maturity will be par of $10.00 plus double any gain in the index, up to a maximum payout of $13.025 per note, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 5% and will lose 1% for every 1% decline beyond 5%.

Hedging uncertainty

"It doesn't surprise me that you would see a significant amount of interest in this product," said Greg Salvaggio, senior vice president of capital markets at Tempus Consulting. "Commodity indexes give investors access to a diversifier in the portfolio. It's important to have a hedge in this market as we are at a significant crossroad."

The notes are designed for investors who "anticipate a moderate growth of the underlying index" during the two-year period, according to the prospectus.

While the buffer providing downside protection is limited to 5%, the 30.25% cap is seen as attractive.

Welcomed supply

A limited supply of deals while investors' demand remains strong may also explain the size of the offering, sources said.

Commodities-linked notes made for a third of total U.S. issuance during the first six months of last year but represented a mere 9.5% of the volume so far this year, according to data compiled by Prospect News.

In absolute terms, commodity issuance fell to $2.72 billion this year from $5.5 billion during last year's first half, a decrease of more than 50%.

Amid the decline, Bank of America has been successful with a couple of other large deals based on the Rogers International Commodity index, pricing, among others, one for $33.75 million in April and another for $47.7 million in January.

Global growth

Salvaggio said that demand for commodities as a hedge is bound to grow because investors are unsure about the future direction of the economy.

"The market is divided, and you have two divergent schools of thoughts: those who are calling for a double-dip recession and those who are saying maybe not," he said.

He attributed the sharp equity sell-off on Monday and Tuesday to the drop in U.S. confidence and the downwardly revised Chinese growth data, saying that both news helped revive fears of a global recession.

Salvaggio said that using the notes as a hedge in a portfolio against the uncertain direction of the global economy would make sense.

"The main viewpoint is that the global economy is slowing and that perhaps we're approaching a double-dip. So if you're bearish on the global economic outlook, you want to be long government bonds. But you also want to hedge your portfolio, just in case you're wrong. If I bought this note, I would use it as a hedge against a long bond position. If there is a turnaround in global growth, I will gain from a commodity rise as bond prices would fall," he said.

Small exposure

Salvaggio said that the leverage offered by the product allowed investors to make a small allocation to the note while being able to express a contrarian view.

"It could just be a 5% exposure. I would use it to hedge my own bearishness. It's a way to express a bullish and optimistic outlook on the global economy, just in case," he said. "And the benefit of this note is that you're getting a two-for-one return."

Better than Treasuries

Matthew Bradbard, president of MB Wealth, a commodity brokerage firm that trades in commodity futures and options, said that he liked the note as an alternative to Treasuries.

"It sounds better than a two-year government note," he said, in reference to the two-year Treasury's yield falling to an all-time low of 58 basis points on Tuesday as fear of a slowing global recovery triggered a flight to quality.

"If I was trading notes, I would definitely consider it. In an environment where the stock market shows lackluster returns, where currencies are highly volatile and where your money can be tied up in Treasuries doing nothing, if you can trade a commodity index over two years with a 30% cap, you're going to do well. I like that," said Bradbard.

Merrill Lynch, Pierce, Fenner & Smith Inc. and First Republic Securities Co., LLC are the agents.

Fees are 2%.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.