Bank of America's principal-protected notes tied to CPI part of new inflation hedge trend

By Emma Trincal

New York, Oct. 22 - The pricing by Bank of America of more than $20 million of notes linked to the Consumer Price Index represents a newer trend indicating that investors are growingly concerned about inflation, market sources said Thursday.

Bank of America priced $20.91 million of 1% principal-protected notes due Oct. 21, 2014 linked to the CPI on Monday, according to a 424B2 filing with the Securities and Exchange Commission. Interest is payable monthly and will accrue at 1% per year.

The notes are designed for investors who anticipate that the inflation rate, as measured by the CPI, will increase during the five-year term, according to the pricing supplement.

If the final value of the CPI is greater than the initial value, the payout at maturity will be par plus 133% of the change in the index level. Investors will receive at least par.

Inflation fears

"I would expect to see more of those principal-protected notes linked to inflation popping up," said Irene Alridge, managing partner at Able Alpha Trading, a registered advisory firm that caters to endowments, foundations and high-net-worth individuals. "This is a view product. And the overall view of the economy right now is that inflation is coming in the U.S. and we're talking hyper-inflation. People already anticipate inflation to reach 5% a year from now."

Though the CPI was down 1.3% in the 12 months through September, the index rose 0.2% in September, following a 0.4% rise in August, according to the Bureau of Labor Statistics.

"I haven't seen a lot of CPI-linked notes so far. I guess people obviously are concerned about inflation," said Scott Miller Sr., managing partner and chief investment officer at Blue Bell Private Wealth Management in Blue Bell, Pa. "I think we might see more of those because people are asking the question: what are we going to do about inflation?"

A Citi precedent

The last similar deal with a CPI underlying and the same maturity was an issue of principal-protected notes sold in August by Citigroup Funding Inc., according to data compiled by Prospect News.

At the time, Citigroup sold $4.62 million of a 1.55% principal-protected note due Aug. 28, 2014 paying par at maturity plus 155% of any gain in the CPI.

"Citi had better terms," said Miller, pointing to the 1.55% coupon versus 1% and Citi's higher participation rate at 155%. He attributed the difference to the creditworthiness of the issuer, saying that Bank of America was viewed as a less risky credit.

Credit risk key

Marc Gerstein, research consultant with Portfolio 123 said that "I haven't seen this particular structure, and I find it interesting. But it's who the issuer is that would give me pause."

Noting that "the Citi terms were nicer," he said that he probably would not be interested in the Bank of America's deal. "I like the structure. But I would have been happier if the terms were matching the Citi deal.

"I'm not thrilled with bank of America relative to Citi regardless of what Standard & Poor's and Moody's say. Bank of America is still having a lot of headline risk. They just got rid of their CEO. There is still a lot of instability and a lot of questions that make me uncomfortable taking on that type of risk. So unless I get the same terms of the Citi deal or perhaps a little bit more, I wouldn't be interested in this offering."

Gerstein said that instead of buying the new issue, he would be "waiting it out and see if something better comes out either from an issuer with better credit or with better terms. Alternatively, he said, he would be looking at "how those structures are pricing in the secondary market."

Distribution channels

Bank of America sold its $20 million deal through Merrill Lynch, Pierce, Fenner & Smith Inc., First Republic Securities Co., LLC and Banc of America Securities LLC, all acting as agents.

Citigroup priced its $4.6 million deal through its financial advisers at Citigroup Global Markets and Morgan Stanley Smith Barney LLC.

"The Merrill Lynch salesforce explains why Bank of America had such a large distribution," said Miller.

"The Merrill Lynch brokers are very familiar with structured products. They do a lot of them. Even when compared to the old Smith Barney now part of Morgan Stanley, Merrill has always sold more than anyone else."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.