BofA’s $1 million autocalls on three indexes show eye-popping 13% fixed income

By Emma Trincal

New York, May 30 – BofA Finance LLC’s $1 million of 13% fixed income autocallable yield notes due May 23, 2024 linked to the worst performing of the three U.S. equity indexes intrigued market participants for the high fixed rate over a short tenor.

The three underlying indexes are the Russell 2000 index, the Nasdaq-100 index and the S&P 500 index, according to a 424B2 filing with the Securities and Exchange Commission.

Interest is payable monthly.

The notes will be called at par if each index closes above its initial level on any monthly determination date after six months.

If the notes have not been called, the payout at maturity will be par unless any index closes below its 70% downside threshold during the life of the notes and any index finishes below its initial level, in which case investors will lose 1% for every 1% that the worst performer declines from initial level.

Equity bucket

“It’s pretty good,” a market participant said.

“A lot of advisers right now are parking their money in Treasuries and are reluctant to take on market risk or credit risk. But a 13% coupon gives you a big spread over the risk-free rate, and since the coupon is guaranteed, that’s enough of an incentive.”

While there is no risk on the coupon payment, investors are still at risk of losing principal or even their entire principal at maturity, he said.

“I would put it in the equity allocation, within my income-producing portfolio. It doesn’t belong to the fixed-income bucket since it’s not principal-protected,” he said.

Autocall

Even while taking into account the barrier risk, the credit risk and the worst-of exposure, this market participant said he was intrigued by the amount of income available to investors.

“I haven’t seen a coupon like this in a long time especially for a one-year maturity,” he said.

“More than 1% a month in income...It’s really an opportunity.”

The autocall versus an issuer call was also an advantage for investors.

“Normally with coupons of that size, you typically see issuer calls, especially on a short-term note. But here, you’re getting the autocall, which is so much more popular among investors. With the autocall, investors know where they stand and how to plan for that period, especially in the uncertain environment that we’re in,” he said.

On the other hand, the call protection was not surprising.

“Six-month no-call is typical, even on a one-year,” he said.

Correlation, rates

One way to price the high coupon was through the worst-of exposure, he noted.

“But you would get more premium with uncorrelated assets. The three indices they’re using in this note are all domestic and are highly correlated. In the past you would have seen two U.S. indices with the Euro Stoxx or some other combination of U.S. and non-U.S. equity.

“So again, I’m sort of surprised about the amount of premium that they got,” he said.

One factor that may have helped pricing could be the fee amount, which is only 0.1%. But still, pricing remained unusually favorable to investors, he said.

“I don’t know how they did that on a one-year. I guess it’s the rate environment. Pricing conditions have really improved with rates much higher. Think about it. The one-year Treasury yields 5.25% right now. Early last year, it was at 0.25%. Yields are particularly high on the shorter-end of the curve. That explains a lot of it,” he said.

Risk on

James White, founder and chief executive of Skye Capital Markets, was skeptical.

“Right now, you can pick 5% off the sidewalk,” he said referring to short-term Treasury yields.

“If you can make 13% there is some risk involved, a lot of risk actually,” he said.

He described his own volatility trading strategy as conservative and generating narrower spreads over the risk-free rate.

“I pick my 5%, I add 300 to 400 basis points on top of that and that’s it. If you make more than that, investors are at peril. You might get lucky. But given the current economic environment, all sorts of things can go wrong,” he said.

“All I’m saying is that there is no free lunch.”

The notes are guaranteed by Bank of America Corp.

BofA Securities, Inc. is the selling agent.

The notes settled on May 23.

The Cusip number is 09709VXX9.

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