BofA’s $4 million 7.05% trigger callable yield notes on indexes to fit into bond allocation

By Emma Trincal

New York, April 14 – BofA Finance LLC priced $4 million of 7.05% trigger callable yield notes due Oct. 14, 2025 linked to the performance of the Euro Stoxx 50 index, the Russell 2000 index and the S&P 500 index, according to a 424B2 filing with the Securities and Exchange Commission.

Interest is payable quarterly.

The notes are callable at par on any quarterly coupon payment date.

The payout at maturity will be par of $10 unless any index finishes below its 50% downside threshold level, in which case investors will lose 1% for each 1% decline of the worst performer from its initial level.

Not contingent

Steve Doucette, financial adviser at Proctor Financial, liked the coupon.

“We see so many contingent yield autocalls. It’s nice to have a note with a guaranteed coupon,” he said.

“It might be a decent fixed-income substitute with a 7% return. Even if you get called in three months, you still collect 1.75% during that short period of time. That’s still 7% annualized. You always face the reinvestment risk anyway.”

While the notes could never be a pure fixed-income equivalent, the guaranteed coupon and the defensive nature of the protection made them suitable as potential bond substitutes.

“You have so much protection on the downside. I’m pretty comfortable with that. If you look for a 7% coupon in a fixed-income investment, it’s pretty good,” he said.

More problematic was the discretionary nature of the call, also known as “issuer call.”

The issuer may exercise its option to call the notes as early as in July, according to the prospectus.

“The flip side is we really don’t like a no-call that’s so short because every income note we get, we have to allocate it somewhere in the client’s portfolio. If we could get a comparable return with a longer no-call we might be more comfortable,” he said.

The note does not even provide for a call protection, with the first call starting immediately on the first quarterly coupon payment date.

To call or not

Investors always assume the issuer will call the notes too soon. But in some cases, the opposite happens, he noted.

“When the call is at the discretion of the issuer, it can be weird. For some reason, they may not call you even if the market is up. We’ve gone through that a couple of times. With an autocall it would never happen. The market is up, you get called. That’s in the book,” he said.

“I never really figured out what makes an issuer decide to call or not to call the notes. But when they don’t call, we like it. It’s easier for us. We allocate those notes. It’s a bit of work. We prefer to hold them for some time.”

Deep barrier

The exposure to the worst of three indexes, including two in the U.S. and one in Europe was not a problem in this case.

“The worst-of only matters on the downside since it’s a fixed coupon. And since they’re giving me a 50% level, I’m not too worried about the downside unless we have World War III,” he said.

If he had to modify the structure, Doucette would focus on the call.

“A better alternative maybe would be a non-callable note. Keep the fixed interest rate but eliminate the call. Like those reverse convertibles,” he said.

High yield

Matt Medeiros, president and chief executive of the Institute for Wealth Management, appreciated the elimination of the risk on the coupon. He also liked the return.

“In this environment, people are looking for income opportunities. One caveat with this product is to know when they’ll call it assuming they will,” he said.

“But this is a really attractive yield. You may not know when and why it will get called if it gets called, but it’s still 7% a year. If they call it on the first call, that’s great. You almost get 2% in three months.”

The 10-year Treasury yields 1.875%, which is close to the 1.76% payout an investor would receive upon a first call.

“This is definitely an income note. You don’t get to participate in the index. But what you get is a very nice income,” he said.

Interest rate risk

One possible development if interest rates keep on rising would be that the current coupon may not compete with the prevailing yield environment within the next three-and-a-half years.

Medeiros downplayed this scenario.

“There is always a risk in a rising interest rate environment, but you can find that risk in your bond portfolio as well with your prices fluctuating opposite to rates,” he said.

“We are in an inflationary period. I believe it will continue for some time. But I don’t anticipate rates rising to the degree they did in the early 80s.

“The economic factors are different from the late 70’s. We’re more in a global market. Companies are profitable; they generate healthy earnings.

“Higher rates are definitely going to put more pressure on equities and bonds. But I still think the 7% coupon is a pretty good yield for that holding period.

“Yes, you are flipping the coin about why and when they might call the notes. But if I’m looking for income, this one is a pretty good note.

“I like it.”

The notes are guaranteed by Bank of America Corp.

BofA Securities, Inc. and UBS Financial Services Inc. are the agents.

The fee is 0%.

The Cusip number is 09710G825.

© 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.