Bank of America's $37.62 million Stars linked to S&P 500 drew interest for yield, short term

By Emma Trincal

New York, June 13 - Bank of America Corp.'s $37.62 million issue of 0% Strategic Accelerated Redemption Securities due June 21, 2013 linked to the S&P 500 index was the most successful product last week as investors looked for short-term bets that give them income and a chance to outperform the market, a market participant said.

The notes will be called at a premium if the index closes at or above the initial level on any of three call dates. The call premium will be 5% if the notes are called on Dec. 7, 7.5% if called on March 15, 2013 and 10% if called on June 14, 2013, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called, the payout at maturity will be par unless the index falls by more than 10%, in which case investors will lose 1% for every 1% decline beyond 10%.

First call

An industry source said that the note is not very likely to last more than six months.

"The buffer is simple; it doesn't get knocked out, it's not leveraged," this source said.

"You only get 10%, and your cap is also 10% if you get called at maturity.

"Chances are though that you're not going to reach 10% at maturity. You're more likely to get called on the first call date after six months and get 5% instead of 10%. Even if it's still 10% annualized, you're going to pocket half of what you would get if the notes were to last one year."

An autocall is the most likely to occur on the first call date for these types of products, he explained. That's because if the notes are not called on the first observation date, the index has fallen into negative territory or below the required threshold, making the call condition harder to be met next time.

"I would say you have a 75% chance of getting called after six months, with a lower probability in nine months and an even lower probability in 12," he said.

A market participant said that part of the current appeal of autocallables such as this one is that they offer investors an exit strategy in a very choppy market.

"We have a volatile market. We had a low last fall followed by a rally, hitting a high in April. Since then, the market has been trading downward. Europe has caused some havoc. People don't know if we're going up or down, but we're still at pretty high levels. And with the depressed global environment, the low GDP in the U.S. and high unemployment, people are wondering: are we too high?

"As investors are trying to figure it out, they're either sitting on the sidelines or going very short term," he said.

Income for bulls

Another driver of the deal's success may be the Merrill Lynch platform, this market participant said.

"They sell an idea across the board to a variety of agents. If the idea has some merits, it sells well," he said.

"This is a tactical play. Americans are bullish on the S&P, on the Dow and on the U.S.

"The S&P 500 has gone through a correction a couple of weeks ago. People who bought this know that the duration is uncertain. But they hope to be called before the market corrects again."

Investors who bought the notes were also on the lookout for income, he added.

"You can earn 5% in six months, or 10% annually. What do clients have in their arsenal? A 10-year Treasury at 1.6%?" he said.

"You're taking the credit risk of Bank of America, but it's only one year, which lessens the chance of a credit event."

The notes also offer the advantage of being an alternative to a direct investment in the benchmark.

"This note which makes you lose only 1% after the index is down by 10% is going to outperform the benchmark on the downside," he said.

Exit strategy

One drawback of callable securities is reinvestment risk, and this note is no exception, he said.

"Sure, you can say 'I receive 5%, and now where can I earn a product that would give me a 5% yield?'" he said.

"But given what interest rates are, people are happy to get their coupon and get out early. These deals are an opportunity to earn something and step [away from] the table.

"Autocallables are an exit strategy without having to make a judgment call. It eliminates the situation where you have to unwind your position and sell out early. You don't have to know where to pull the trigger. It pulls the trigger for you."

The notes (Cusip: 06051R386) priced June 7.

The fee was 1.25%.

Bank of America Merrill Lynch was the underwriter.

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