Bank of America's $121.13 million 10% STEP Income Securities tied to Ford set record for year

By Emma Trincal

New York, April 4 - Bank of America Corp.'s $121.13 million issue of 10% STEP Income Securities due April 12, 2013 linked to Ford Motor Co. shares is the largest deal of the year so far, according to data compiled by Prospect News.

Sources attributed the size of the product to Bank of America Merrill Lynch's distribution network and a bullish outlook on the underlying stock.

"They do have the Thundering Herd. That's a piece of it," an industry source said.

"If you marry a research call to a product with a potential for broad-base distribution, that might get you to that kind of size."

Interest is payable quarterly, according to a 424B2 filing with the Securities and Exchange Commission.

Bank of America used its popular STEP Income structure, which is offered each month with various names and often reaches high levels of sales, according to Prospect News data.

If the price of Ford shares finishes at or above the step level - 110% of the initial price - the payout at maturity will be par of $10 plus a step payment of 4.51%.

If the final share price is greater than or equal to the initial price but is less than the step level, the payout will be par.

Investors will share in any losses.

Popular name

"Ford has been a success story as a U.S. company. It's been a positive turnaround. People like the management of the company, the direction of the company," a market participant said.

"They've done their research," he added, noting a "buy" rating published in March by Bank of America's equity research with a target price of $19.00.

The stock closed at $12.51 (NYSE: F) on Wednesday. Its price has increased by 16% so far this year.

Sources agreed that the STEP Income products offered by Bank of America tend to sell very well. But in this case, the success of the deal was attributed to factors other than the structure itself.

Focused research

"It's really a reverse convertible with a little extra potential coupon at maturity," the market participant said.

"But to me, this deal is massive because you have the combination of a research capability with a unique distribution channel.

"In the past, issuers used to bring to market 20 different reverse convertibles.

"Here, it's a much more focused offering. They will select one or two names instead of 20. It's much more specific, and it's research driven."

No barrier

The industry source said that Bank of America's STEP Income deals are characterized by the lack of any barrier on the downside. The appeal is on the upside, where investors have the potential to earn an additional step payment if the final price reaches the step level.

"They're sort of unique today. But it was not always the case," he said.

"I remember some reverse convertible brochures that spoke of zero percent barriers, and they were some of the most popular structures. Back six years ago, the no-barrier reverse convertible was a much more common product."

The Cusip number is 06051P810.

Fees are 1.75%.

Bank of America Merrill Lynch was the agent.

Last week saw another record deal brought to market. It was No. 2 in size for the year.

It was Goldman Sachs Group, Inc.'s $100 million of 0% commodity index-linked notes due April 10, 2013 linked to the Dow Jones - UBS Commodity index.

The payout at maturity will be par plus the index return with full exposure to losses.

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