Bank of America's $103.55 million Mitts on Dow Industrials unusually big for a protected bet

By Emma Trincal

New York, Jan. 19 - Bank of America Corp.'s $103.55 million of 0% Market Index Target-Term Securities due Jan. 29, 2016 linked to the Dow Jones Industrial Average is the biggest principal-protected deal to price this year and one of the largest in recent times, sources said.

"This is gigantic for a principal-protected deal. Those deals are usually much smaller in size," said a New York sellsider.

"You may find big principal-guaranteed deals in rates products, but it's not the case with equity.

"With equity, people tend to look for high coupons or leverage, not so much principal-protection."

Tiny leverage

The notes drew interest from investors as they offered other advantages, such as a slight level of leverage and no cap, sources said.

The payout at maturity will be par of $10.00 plus 107.05% of any index gain, according to a 424B2 filing with the Securities and Exchange Commission.

If the index falls, the payout will be par.

At 1.07 times, the leverage factor applied to the notes was not significant, the sellsider said. Yet, it was unusual, data compiled by Prospect News shows.

Out of the 111 principal-protected deals last year, only one issued by Barclays Bank plc had a leverage factor greater than one at 1.25.

Fewer deals, strong bids

Principal-protected notes have become less available as low interest rates make these deals more expensive to price, sources noted.

Agents last year priced $1.27 billion of principal-protected notes, or less than 2% of the total issuance volume.

"There's so little supply in principal-guaranteed products, people tend to jump on it when they see it," a market participant said.

Another factor that made the notes appealing to investors, sources said, was the uncapped payout.

Only 37% of the principal-protected notes that priced last year were not capped, which represented 41 deals out of 111, according to data compiled by Prospect News.

The five-year term was in line with last year's average tenor of 5.36 years. The 2.5% fee was better than the 2.76% average, according to Prospect News data.

Merrill Lynch's network

"You can be sure that at $100 million, this is a deal for internal distribution. It's for the Merrill Lynch brokers," the sellsider said. "The 2.5% fee didn't hurt. It probably helped generate the size."

"Bank of America doesn't have the best credit," the market participant said. "Their credit default swap spreads are 168 basis points versus 128 basis points for Barclays. Based on that, you can expect to get better terms."

"I think Bank of America has funding levels that are very attractive for investors," the sellsider said.

Dow versus S&P 500

Finally the use of the Dow Jones Industrial Average instead of the S&P 500 as the underlying was seen as an attractive feature as well because fewer deals use this underlying index in general.

In 2010 for instance, only $730 million of notes tied to the Dow Jones Industrial Average priced in 35 transactions. This represented only 1.14% of the total volume for the year.

"There's not a whole lot of Dow Jones deals out there. Maybe people saw the Dow Jones and wanted to be in," the sellsider said.

"I definitely think that the Dow Jones Industrial is going to make a comeback."

Merrill Lynch, Pierce, Fenner & Smith Inc. was the underwriter.

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