BofA’s $1.66 million issuer callable notes on indexes, ETF seen as 'fairly standard'

By Emma Trincal

New York, Jan. 10 – BofA Finance LLC’s $1.66 million of contingent income issuer callable yield notes due Jan. 8, 2026 linked to the least performing of the Nasdaq-100 index, the Russell 2000 index and the SPDR S&P Regional Banking ETF are representative of the type of callable notes that are being priced right now, a market participant said, noting that the coupon is raised to double-digit levels by introducing uncertainty and risk such as the issuer call and the use of volatile underliers.

Investors will receive a coupon of 12% per annum, paid monthly, if each underlier closes at or above its 70% coupon barrier on the related monthly observation date, according to a 424B2 filing with the Securities and Exchange Commission.

The securities may be called at par on any quarterly call date starting July 10, 2024.

If the worst performing asset finishes at or above its 60% threshold value, the payout at maturity will be par. Otherwise, investors will lose 1% for every 1% that the worst performing asset declines from initial level.

Banks

“I think it’s the regional banks ETF that allows you to have a higher coupon here,” said the market participant.

“The monthly coupon is a good thing. We’re seeing more requests for monthly coupon payments.

The difference in observation frequency between the payments (monthly) and the calls (quarterly), was not unusual.

“Monthly coupon, quarterly call, that’s very common unless it’s less than one year. Two years is long enough. You can go quarterly on the call,” he said.

The 70% barrier at maturity was correctly priced, he added, despite some risks associated with each underlier.

The lowest correlation is that between the Nasdaq-100 index and the SPDR S&P Regional Banking ETF, which is at 0.46.

Fairly standard

“It’s a fairly standard note. It’s a good structure but you’re taking some risk. The Nasdaq is quite volatile. The Russell has underperformed for a long time. The regional banks ETF of course went through a rough period. But I think a 30% barrier on the coupon is fair,” he said.

Even more attractive was the 60% barrier at maturity.

“Getting 40% in principal protection at maturity, that’s a good feature to have.

“We’re seeing more demand for 70/60, this kind of split level between the coupon barrier and the principal repayment barrier.

“Ultimately, you want your principal to be as protected as possible. 60% is viewed as fairly solid.”

The coupon may be more at risk with the SPDR S&P Regional Banking ETF, he said. But the downside protection at maturity remained “significant.”

Issuer call

More controversial among some advisory firms is the issuer call. But when explained, issuer calls, another term for “discretionary calls.” may ultimately benefit investors, he said.

“Issuer calls are becoming more common. People have accepted them because you can pick up a higher coupon right off the bat.”

By definition, the occurrence of a call is unpredictable. But he pointed to some patterns.

“There’s a lot of moving parts with issuer calls. Unlike automatic calls, you don’t know when or if you’ll get called. But in general, in the initial stages, the indices would need to be up at least 3% or 4% for the issuer to call. It takes a stronger performance in the market for the call to happen at the early phase of the deal. After that, the issuer may not be so proactive. They may let it ride another three months...maybe the put options have become more valuable at this point.”

With time, if the market is flat or slightly higher, investors may expect to hold the note slightly longer, he said.

“As time goes on, your chances of getting called are approximately the same between issuer call and autocall.

“It’s just the initial phase that makes a difference.”

Advisers sometimes are intrigued when the notes do not get called as one would assume they should.

“There are times when the market is down, and the issuer is not calling the note. It’s really hard to predict.”

But the uncertainty gives investors a premium in the form of a higher coupon.

“It’s a tradeoff. The downside is you don’t know if you’ll be called or not because it’s at the discretion of the issuer.

“But if you’re looking for yield, that’s the way to go. That’s why we’re seeing more of those callable features.”

Not so fast

A bond trader did not share that view.

“I don’t like this note because I don’t like those issuer calls,” he said.

“The whole idea of autocalls is to have a predetermined event that’s going to happen under clear conditions. As long as the market doesn’t drop, you will get called.

“In the structured products world, autocall features are unique and attractive. That’s one of the most desirable features of those products.”

This trader added that the risk-adjusted-return of the note was not compelling.

“There’s a lot of contingency on how you get paid. 12% is not that attractive for that kind of risk,” he said.

“I’d much rather do a three-year bond paying SOFR plus 100 basis points with an initial first-year fixed rate of 7% and it’s 100% principal-protected.

“The extra yield you’re picking up with this structured note is not worth the risk.”

The notes are guaranteed by Bank of America Corp.

BofA Securities, Inc. is the agent.

The notes settled on Tuesday.

The Cusip number is 09710PLC8.

The fee is 2.75%.

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