BofA’s $18.51 million leveraged notes on Euro Stoxx designed for cautious bulls

By Emma Trincal

New York, May 5 – BofA Finance LLC’s $18.51 million of 0% Leveraged Index Return Notes due April 24, 2026 linked to the Euro Stoxx 50 index give investors uncapped return to a non-U.S. asset class with a strong hard protection. As a result, the terms may appeal to bullish investors who want to get exposure to European stocks with a hedge.

The payout at maturity will be par of $10 plus 1.27 times any index gain, according to a 424B2 filed with the Securities and Exchange Commission.

If the index falls by up to 20%, the payout will be par.

Otherwise, investors will lose 1% for every 1% decline beyond 20%.

Muted growth

Matt Chancey, financial adviser at Dempsey Lord Smith, said he did not like the underlying index.

“Since 2009, the Euro Stoxx hasn’t even doubled. It’s been moving slowly at a 5% compounded growth rate,” he said.

“It hasn’t taken off like a rocket since the financial crisis,” he said.

And while the euro zone benchmark has disappointed for its sluggish performance, its current level remains too high, this adviser said.

“It’s now trading at 4,000. Historically, it has only been trading higher than this twice,” he said.

“I think it has a greater chance of going down than going up.”

Money printing

Chancey said he was concerned about the massive government spending programs that have been implemented during the pandemic and even now, both in the U.S. and in Europe.

“Every developed country has been trying to prop up their economy with stimulative fiscal policies. Debt levels have been rising considerably as a result. At some point there will be a retracement.

“I’m bearish over the short term. Five years feels like the near term.”

Danger looming

Chancey said the markets have not incurred any major bear cycle since the financial crisis.

“From the fourth quarter of ‘07 to the first quarter of ‘09, we had at least six quarters of a downturn. We haven’t seen anything like that since 2009. We had a quarter pullback last year quickly followed by a V-shape recovery.

“Are we due for a six-to-12-month bear market? I think so.

“In this cycle, I don’t want to be in a slow-moving index even if it gives me 1.27 times the upside.

“This note is built around the wrong index.”

Contrarian edge

If inclined to build a note for capital appreciation, Chancey would look for an exposure to a depressed asset class.

“You want sectors or industries that have been beaten down,” he said.

He cited the airlines and cruise lines for value as well as medical technology and green energy as sectors that offer potential for growth.

“You want segments that are depressed. In 2009 people were wondering if banks would have a future. For those who said: yes, this was the perfect value play.”

The SPDR S&P Bank exchange-traded fund has increased more than sixfold since the beginning of the bull market in March 2009.

Structural advantage

From a structural standpoint, the notes were not overly long in duration for a leveraged product that combines uncapped gains and hard protection, a market participant noted.

Most similar trades on the S&P 500 index would require longer tenors, from 10 to six years or the use of a worst-of payout, according to year-to-date data compiled by Prospect News.

But for a Euro Stoxx used as sole underlier, the five-year term is within the norm, the data showed.

One factor helping pricing, he said, is the difference in dividend yields between the two benchmarks, the Euro Stoxx 50 index yielding more at 2.11% compared to 1.4% for the U.S. index.

“It’s not just the difference in dividends but also the difference in interest rates. European rates are negative. It gives you a cheap forward, so that’s more pricing power for the issuer,” he said.

“The forward in a simplified way is rates minus dividends. The more negative the forward is, the cheaper the structure is,” he explained.

The notes are guaranteed by Bank of America Corp.

BofA Securities, Inc. is the agent.

The notes (Cusip: 09710D301) will settle on Thursday.

The fee is 2.5%.

© 2015 Prospect News.
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