Bank of America prices $104.2 million notes linked to S&P; generous upside, but no protection

By Emma Trincal

New York, Nov.2 - Bank of America Corp. priced $104.2 million step up notes linked to the S&P 500 index, in a deal financial advisers said offered an attractive upside opportunity for investors who have a positive outlook on the market. However, they also stressed the risks involved with a structure that offers no downside protection.

"If somebody has a positive view on the market and believes that the S&P index will be up in two years, then I think it's a pretty decent deal," said Kirk Chisholm, principal and wealth manager at NUA Advisors, an independent registered advisory firm in Lexington, Mass.

Bank of America priced $104.2 million of 0% market-linked step up notes due Oct. 28, 2011 linked to the S&P 500 index, according to a 424B2 filing with the Securities and Exchange Commission

If the index finishes at or above initial level, the payout at maturity will be par plus the greater of the index return and 22.6%. However, if the index value decreases during the term, investors will lose some of their principal in proportion to the index loss.

Great for bulls

Chisholm noted that the notes are a good tool way for investors to enhance returns as long as the market goes up. No matter how much the market gain may be at maturity, investors would be getting a minimum of 22.6% return for the term, making this deal "attractive" for anyone even slightly bullish on the market, he said.

"It doesn't matter what the index does, as long as it's positive," Chisholm said. "Your minimum annual return would be 11.3% even if the index increases only by a small amount. If somebody thinks that in two years the market will be greater than now, then it's an excellent type of product," he said.

Others agreed that as long as one is bullish, even moderately so, the product gives investors an attractive upside return.

"This is a view-based product," said Irene Aldridge, managing partner at Able Alpha Trading Ltd., a New York registered advisory firm that caters to endowments, foundations and high-net-worth individuals. "It's a very smart package for people believing the market is going to rise."

Distribution factor

Commenting on the size of the transaction, Aldridge said that "Bank of America has a great distribution network. They're one of the best shops."

"The Merrill Lynch/Bank of America merger has brought together a very large distribution network and when the product makes sense, they can distribute large issues quickly. But regardless of the size of your salesforce, you still have to show a product that makes sense for the investor in order to bring those large deals to market," said Chisholm.

Chisholm noted that the success of the deal evidenced by its size may be easily explained by the appeal of the product.

"It captures most of what people are looking for. It has a decent return. It gives you a lot on the upside. And even if the index is down as long as it goes back up, investors will make up for it," Chisholm said.

No principal guarantee

Advisers also pointed to the risk associated with this investment. Investors in the notes will be fully exposed to any index decline, according to the term sheet.

While she believes the investment is appealing to some, Aldridge said that she would not be offering it to her clients. .

"First, we do intraday trading, so we would not be looking at a two-year maturity. But I also think it's pretty risky. You're exposed to the downside and most of our investors, institutional investors or high-net worth individuals, seek some kind of protection. This deal looks pretty on paper but you still have unlimited downside risk," she said.

After the rally

"Whether it's a great deal depends on who you talk to," said Chisholm. "Due to the significant rise in the market in the last six months, there is a lower probability that it will continue at this pace. In fact there is more of a potential for downside than upside at this point," said Chisholm.

Chisholm added that "Personally I would not be attracted to this investment because I have the suspicion that over the next two years, the economy will not be quite as positive as the market is showing right now. But it's not to say this deal does not have its place."

The notes will settle on Nov. 4.

The underwriters were Merrill Lynch, Pierce, Fenner & Smith Inc. and First Republic Securities Co., LLC.

Fees are 2%.

© 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.