BofA’s $116.92 million Accelerated Return Notes on S&P 500 suggest leverage still in demand

By Emma Trincal

New York, Aug. 5 – BofA Finance LLC’s $116.92 million of 0% Accelerated Return Notes due Sept. 24, 2021 linked to the S&P 500 index was the six largest deal to price this year, illustrating the popularity of a structure characterized by its simplicity, short duration and high upside leverage but full downside exposure to the market.

The payout at maturity will be par of $10 plus triple any index gain, up to a maximum return of 15.01%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will lose 1% for every 1% decline.

BofA Securities, Inc. was the agent for this issue, which priced last week.

This distributor also priced the fourth and the fifth top deals of the year, all based on the same structure – short tenor, 3x leverage up to a cap with full downside risk exposure.

BofA’s ARNs

This structure type popularized by Bank of America under the brand name “Accelerated Return Notes” or ARNs makes for some of the largest deals to price on any given year, according to data compiled by Prospect News.

Four of this year’s six deals in excess of $100 million are ARNs, the data showed.

In June, BofA Securities, Inc. priced the fourth largest offering of the year on the behalf of Barclays Bank plc in $133.79 million of 0% ARNs due Aug. 27, 2021 linked to the S&P 500 index.

The upside leverage factor was 3, the cap, 17.25%.

In late March, BofA distributed the fifth largest deal with Wells Fargo Finance LLC’s $132.31 million of 0% Leveraged Index Return Notes due March 28, 2025 linked to the Dow Jones industrial average.

The term was longer and the return uncapped, but the downside remained the same with full exposure to losses.

The payout at maturity will be par plus 205% of any index gain.

Other block trades

Deals that do not fit into the ARN category in this size range include Barclays Bank plc’s $250 million cash-settled equity linked notes tied to Visa Inc. issued in February. Often referred to as synthetic convertible, these products are not representative of a typical structured product but tend to surpass any other one in size.

Also distinct for ARNs, Credit Suisse AG, London Branch priced $104.8 million of 0% market-linked notes due March 31, 2025 on the S&P 500 index. It was a rare instance of a large-sized offering of fully principal-protected notes with 1.0577 of any appreciation of the index. UBS Financial Services Inc. was the agent.

Another highly popular structure marketed by Bank of America is the autocallable market-linked step-up.

The second largest deal this year fell into this category, coming from BofA Finance with $164.34 million of six-year notes linked to the S&P 500 index.

Seeking buffers

“From time to time we see those 13- or 14-month 3x leveraged notes with no downside protection. You can make money on it, and many people like them. But it’s not for us. We think they’re too risky for our clients. We buy structured notes for the buffer or the barrier,” said a buysider.

A market participant questioned the notion that having no downside protection on these high-leverage products is necessarily riskier than having a buffer.

Asymmetrical exposure

“First, if you compare it to a direct equity investment in the market, you’re better off with a 3x leveraged note than a 3x leveraged ETF. With the note, your downside exposure is only one to one as opposed to 3x with the ETF,” he said.

“OK those ARNs come without a buffer. I would say: who cares?

“When you get 3x the upside, you can budget your risk, invest intelligently and do your own buffer.

Do-it-yourself

“If you have $100 to invest, put 90 into the note and 10 into cash or Treasuries, anything safe. That 10% is your buffer. Now you can invest 90 in the note. 3% of 90 will give you 2.7 times leverage. That gearing is close enough to 3 and your do-it-yourself buffer gives you the protection that you need.

“But when you get 3x leverage, you can create your own protection.

“This is something you couldn’t do on a one-to-one upside exposure. The advantage of high leverage is that you can determine your participation level and your risk.

“You just don’t buy 100.

“Invest one third of the money in the market if you want and put the other two-thirds in cash.

“This is the perfect time for those products. The market went up a lot. But is the rally over? No one knows really. Sure, there will be a correction. But when? And look how fast we recovered from the last one. You don’t want to be left behind.

“If the market takes off, you follow the market up to the cap. If it’s down, you have created your own buffer.

“You have your cake and you can eat it too.”

BofA Securities, Inc. is the underwriter.

Bank of America Corp. is the guarantor.

The notes will settle on Thursday.

The Cusip number is 09710C600.

The fee is 1.75%.

© 2015 Prospect News.
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