Bank of America's $97.11 million autocallable enhanced step-up notes tied to S&P top the year

By Emma Trincal

New York, Jan. 11 - Bank of America Corp.'s $97.11 million issue of 0% autocallable enhanced market-linked step-up notes with buffer due Dec. 30, 2013 linked to the S&P 500 index is the largest offering of the new year so far, according to data compiled by Prospect News.

Sources attributed the popularity of this equity-linked note to the salesmanship of Merrill Lynch brokers but also to the growing appeal of autocallable knock-in notes. The structure, they said, offers simplicity and potentially attractive upside to investors if the underlying is up only moderately.

The notes will be automatically called at par of $10 plus 10% if the index closes at or above the initial index level on Jan. 18, 2013, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called and the final index level is greater than the step-up value, the payout at maturity will be par plus the index return. The step-up value is 132.5% of the initial index level. If the final index level is less than or equal to the step-up value and greater than or equal to 90% of the initial index level, the payout will be par plus 32.5%. Investors will lose 1% for every 1% that the index declines beyond 10%.

Structural appeal

A market insider said that callable step-ups linked to equity indexes are catching investors' attention.

"People are finally getting educated on step-ups linked to equity indexes," he said.

"You'll see that type of structure growing a lot as those deals are getting more and more popular."

The brokers

For Thomas Livingston, director of structured products at Halliday Financial Group, the strong popularity of the deal has a lot to do with who sells the product.

"I haven't seen many other firms doing those step-up deals the way Bank of America structures it," he said.

"But think about 14,000 salespeople. It's so enormous. The Merrill Lynch franchise is one of the best franchises in the world. Not only do they command a lot of assets, but the Merrill Lynch broker is probably the best educated, smartest guy in the retail space.

"They can do $97 million with their eyes closed. That's not a huge volume for them."

Goldman Sachs

The market insider said that Bank of America is no longer the only firm doing these products.

"We've seen something similar, also on the S&P, recently. It was a Goldman Sachs two-and-a-half-year note with a 150% point-to-point uncapped on the upside if not called after year one. If called, you'd get paid 13%. On the downside, you had a 40% knock-in, so it gave you a deep 40% protection if it doesn't knock in," he said.

Upside, downside

Sources said that they like the digital payout structure in the Bank of America deal. Investors will earn the 32.5% payment if the index finishes anywhere between the 90% threshold price and the 132.5% step-up value. The call premium was seen as attractive as well since it only requires the index to stay flat on the call date. Finally, the upside is uncapped above the 32.5% step-up value, another positive for investors.

On the other hand, the 10% buffer on the two-year note was not seen as the strong point.

"They have a buffer, so you're only losing money after the first 10% index decline. But it's a little thin. We're more comfortable with a deep downside like the 40% offered by the Goldman deal even if it's only a barrier. Obviously, if it knocks in, you have other things to worry about with the S&P down 40%," the market insider said.

For Livingston, the quality of the downside protection is relative. It depends on the position of the note in the overall portfolio and also on the investor's objective.

"For us, the key is protection. If I don't get enough protection, I don't care about the return," Livingston said.

"So a 10% protection may not be enough for me on a two-year.

"But I suppose the Merrill Lynch guys look at the portfolio as a whole because protection on an individual security doesn't mean much. You may have in there other products that give you deeper protection. If this note offers a 10% cushion, perhaps the aggregate portfolio gives you an average protection level of 25%. It all depends."

Bank of America Merrill Lynch was the underwriter.

The deal priced on Jan. 4.

The Cusip number is 06051P265.

The fees were 2%.

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