Bank of America's leveraged notes linked to silver appeal to inflation hawks, moderate bulls

By Emma Trincal

New York, March 3 - In a repeat of a similar deal that priced well last week, Bank of America Corp. plans to price 16-month 0% Accelerated Return Notes linked to the price of silver in response to investors' strong appetite for this precious metal, which is seen as capable of outpacing gold prices as well as providing a good inflation hedge, sources said.

The payout at maturity will be par of $10 plus triple any increase in the silver spot price, subject to a maximum return of 28% to 32% that will be set at pricing, according to an FWP filing with the Securities and Exchange Commission.

Investors will be exposed to any decline in the silver spot price.

Second in a week

The deal, which is expected to price this month or next, comes on the heels of a $64.3 million sale of similar leveraged notes that priced on Feb. 25.

Bank of America on that day sold 0% Accelerated Return Notes due May 3, 2011 with a payout at maturity of par plus triple any gain in the price of silver. The cap is 34.26%.

Small bulls

Using a 32% cap as an example, a New York sellsider said that a direct investor in silver using a three-times leverage factor would outperform the return potential of the notes only if silver prices rise by more than approximately 11% during the 16-month term.

"This product is great for someone modestly bullish on the underlying," the sellsider said.

Silver versus gold

"Some people view silver as a much less speculative asset than gold. But they also see it as a good defense against inflation pressures due to monetary and fiscal policies in the U.S. or in the world," this sellsider noted.

"It's a more conservative way to play the inflation story. Inflation sells and therefore, I'm not surprised at all that they sold that much of it last week," he added.

Dollar wildcard

One reason to be cautiously bullish rather than very bullish on gold and silver is the uncertainty around the dollar, commodity experts said.

The sovereign debt crisis in Greece and other European countries has caused the dollar to rally since December, dampening the precious metals rally and depressing gold and silver prices.

Inversely, as the Greek debt crisis shows signs of improvement, the dollar tends to decline and spot prices for silver as well as gold tend to rise to new highs, experts said.

On Wednesday for instance, new austerity measures announced by the Greek government pushed up spot silver prices to a new peak for this year as the euro gained against the dollar.

No true bulls

But the truly bullish investors in silver said that the potential for price appreciation of the precious metal is too high to warrant any interest in the notes.

"I see silver spot prices going up by 33% in the next 16 months, and that's without leverage. And I use leverage," said Matthew Bradbard, commodity broker and president of MB Wealth in Fort Lauderdale, Fla.

"I wouldn't touch it," he added, saying that he would not want to be capped and that he does not like the lack of downside protection, which often comes with leveraged notes.

Bradbard, who trades commodities through futures and options, said that he is more bullish on silver than on gold, a sentiment that may explain the appeal of silver on the part of investors.

"I'm more bullish on silver than anything else, more bullish on silver than gold or any other metals. The gold/silver ratio is way out of whack. Last year, gold was up 25% and silver rose by about 47%," he said. Bradbard said that silver will strongly rally regardless of the situation in Europe.

"I'm not worried about a dollar rally caused by the sovereign debt crisis in Greece or in Europe. The dollar has appreciated by 9% since the first week of December. But now I look at the dollar to trade down or sideway. The dollar index is now at 80 from its 81.4 high last year. I don't see it going above 82 regardless of Spain, Greece, Italy or Canada," Bradbard said.

The U.S. Dollar index measures the performance of the dollar against a basket of six currencies that includes the euro, Japanese yen, British pound sterling, Canadian dollar, Swiss franc and Swedish krona.

Fear of tomorrow

For some, the appeal of the notes is not just a commodity play on a precious metal. Rather, it's a way to protect a portfolio from volatility and inflation.

"Clients look for good inflation hedges," said a New York structurer. "When nobody knows which way the market is going, there is always going to be robust demand for precious metals. I think that those short-term notes with leverage and no downside protection clearly fit that need."

Powerful network

This structurer said that the $64.3 million size of last week's deal could easily be repeated or even surpassed.

"The size doesn't surprise me. Bank of America Merrill Lynch is the biggest network of brokers in the U.S. So if you have a product that's simple to understand, supported by some good research and if you pay your brokers the right commission, you're going to attract a good deal of capital," the structurer said.

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

The fees charged for the deal last week were 2%.

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