BofA prices biggest bear deal ever with $71.49 million of autocallable notes tied to S&P

By Emma Trincal

New York, May 20 – Market participants may wonder what happened last week to the iconic bull of Merrill Lynch? BofA Finance LLC on Thursday priced $71.49 million of 0% Bear Strategic Accelerated Redemption Securities due May 28, 2021 linked to the S&P 500 index. It was the largest U.S. bearish deal ever, according to data compiled by Prospect News going back to 2004.

“I’m happy to see it. Notes are for both bulls and bears. Equal opportunity for structured products!” an industry source said.

The notes will be called at a premium of 25.37% per year if the closing level of the index is less than or equal to its starting value on any of three quarterly observation dates after six months, according to a 424B2 filing with the Securities and Exchange Commission.

With the memory feature, the call will pay 12.7% in six months and 19% on the ninth month.

If the notes are not called, investors will lose 1% for each 1% gain in the index.

Hedging

“It’s an interesting note,” a market participant said.

“I like it a lot.

Investors are likely to use the notes for different reasons, he added.

“It can be a natural hedge for your exposure. When you see how expensive it is to buy a put, it can be a reasonable solution, some sort of alternative to options.

“We’re now 35% off the lows. Not so long ago we had this terrible bear market. It’s time to play defense.”

Opinions evolve

Bear notes are not always popular among advisers who traditionally find their clients reluctant to “bet against the market.”

But things are not static, the industry source said.

“Look...People used to say there’s no need for buffered ETFs or buffered UITs because there are plenty of buffered notes, and now billions of dollars go into buffered ETFs and UITs. People used to say nobody buys bear notes and now you see a big bear note deal. The world is changing,” the source said.

Complementary products

Bank of America, a bank whose products are associated with the image of a bull recently, had some of its analysts warn that the current run-up was a bear rally.

Regardless of the bank’s view, adding this trade to its best-selling bullish notes made sense, said the market participant.

“It aligns with their 3x leveraged notes, which don’t have any downside protection.

“This one does not have any protection either if you’re in a bull market.

“One structured note can hedge another.

“That said, if you buy it as a stand-alone deal, you need conviction. If the market is up, the note could lose money just as easily as you could get the coupon.”

Bear history

There have only been 26 bearish offerings totaling $400 million priced in the United States in the past 16 years.

Last week’s deal was by far the biggest.

The second largest deal ever sold was issued by Royal Bank of Canada in March 2013 for the price of $44.56 million and distributed by BofA Merrill Lynch. The 8% coupon bearing notes due March 28, 2014 were linked to Chesapeake Energy Corp. shares. Interest was payable quarterly. The one-year deal provided a 7.1% buffer.

The next three biggest deals came out last year amid a bull market, which sent the S&P 500 index 29% higher.

In March, GS Finance Corp. priced $36.86 million of bearish notes with daily barrier observation on the S&P 500 index. UBS was the selling agent.

This deal was a bear “shark” paying off when the index declines within a range and limiting the gains to a cash-like minimum return otherwise. If on any trading day the index breached the 75% barrier, investors would only get 1% at maturity. This 18-month principal-protected note paid par plus 1% if the index finished up. Gains came under an absolute return payout when the index finished lower but above the barrier.

In October, UBS AG, London Branch issued and distributed $33 million of bearish autocallable absolute return notes also tied to the S&P 500 index. This structure triggered a call below minus 25%, which left investors with 0% return. An adjusted absolute return applied at maturity between minus 5% and minus 25%. Investors scored no gains if the index finished positive.

In June, GS Finance Corp. issued a similar trade for $30.12 million, the fifth largest one on the list. This 18-month bearish autocallable absolute return notes on the S&P 500 index was distributed by JPMorgan.

These last two deals differ from the typical absolute return in that they provide principal protection but no gains if the index is up, hence the term “bear” as opposed to dual directional products giving benefits on both sides of the trade.

Finally, UBS sold last year a pair of S&P 500-based bearish shark notes for $26.55 million each.

Prospect News data comprises deals registered with the Securities and Exchange Commission only at the exclusion of exchange-traded notes.

The notes will be guaranteed by Bank of America Corp.

BofA Securities, Inc. is the agent.

The notes priced will settle on Thursday.

The Cusip is 09710C477.

The fee is 1.25%.

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