Bank of America's leveraged notes on MSCI India lack protection, diversification, sources say

By Emma Trincal

New York, April 7 - A leveraged note linked to the performance of the Indian stock market could be risky due to the country-specific bet and also because of the absence of a buffer in the structure, financial advisers said.

Bank of America Corp. plans to price 0% notes due April 2014 linked to the MSCI India index, according to an FWP filing with the Securities and Exchange Commission.

The payout at maturity will be par of $10.00 plus 1.75 times any gain in the index, up to a maximum payment of $16.80 to $17.20 per note. The exact cap will be set at pricing.

Investors will be exposed to any losses.

The notes may be suitable for investors who anticipate moderate growth in the MSCI India index, the prospectus stated.

Because the gains are capped and the returns leveraged on a 1.75 times basis, the underlying index would have to grow in the low two-digits annually in order for investors to maximize their return, based on the prospectus.

Despite the potential enhanced return, sources said that they had a negative view on the lack of protection and diversification.

Country-specific call

"It's a pure play on India with the idea of leveraging up returns," said Steve Doucette, financial adviser at Proctor Financial. "For somebody bullish on India, that might be worthwhile."

But for Doucette, diversification is key.

"We do have emerging market exposure. But we've got to have broad exposure. We're not going to make country-specific calls. There's too much political risk involved," he said.

Doucette said that he gets emerging market exposure either through the use of active managers via mutual funds or through structured notes linked to broadly diversified indexes such as the MSCI Emerging Markets index.

Doucette also noted that the equity performance of India as measured by Barclays Bank plc's iPath MSCI India exchange-traded notes has been disappointing.

Over the past three years, the ETN has only gained 13%, which is less than 4.5% per year. The ETN has lost nearly 5% so far this year.

Not overly bullish

For Matt Medeiros, president and chief executive of the Institute for Wealth Management, India, as well as other large emerging market countries, could see its equity markets underperform due to rising inflation.

"Frankly, we're not overly bullish on India specifically. The average return over the past three years is around 4%. Most emerging market countries have nice growth projections. But it certainly comes at a premium because inflation is considerably high," he said.

Medeiros said that he would not necessarily look for a broad index as the underlying of a structured note.

"If I wanted exposure to India, I wouldn't just get exposure to the Indian index. I would buy notes linked to the BRICs," he said.

BRIC is an acronym coined by Goldman Sachs that refers to Brazil, Russia, India and China, seen at the time as the largest and most promising emerging markets.

Next 11

Medeiros said that other emerging market underlyings may do a better job.

"There are also plenty of opportunities beyond the BRICs," he said. "I would look into the Next Eleven for better growth."

The Next Eleven are countries - Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, South Korea, Turkey and Vietnam - also picked by Goldman Sachs for their potential for growth in this century.

Downside risk

Medeiros said that his concerns with the notes were not limited to the underlying.

"I'm not sure from a structural perspective of the advantage of this particular offering," he said.

"If I do a note with leverage, I prefer a downside buffer.

"There are a lot of macroeconomic events that may precipitate swift volatility moves.

"I know that some investors are ready to forego the buffer in order to get a higher cap and more upside potential. But that's not what I would want to do."

Merrill Lynch, Pierce, Fenner & Smith Inc. is the agent.

The notes will price and settle in April.

© 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.