BofA prices two autocallable deals on ETFs with a value tilt

By Emma Trincal

New York, Sept. 22 – BofA Finance LLC’s $13.81 million of trigger autocallable contingent yield notes due Sept. 19, 2024 linked to the SPDR S&P 500 ETF trust and the iShares Russell 2000 Value ETF offer exposure to very different market cap sizes and investment styles.

The notes pay a contingent quarterly coupon at an annual rate of 8.47% if each fund closes at or above its coupon barrier, 72% of its initial level, on the observation date for that quarter, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be automatically called if each fund closes at or above its initial level on any quarterly observation date starting after six months.

The payout at maturity will be par plus the final coupon, if any, unless either fund finishes below the downside threshold level, 72% of its initial level, in which case investors will lose 1% for every 1% loss of the worse performing fund from its initial level.

On the same day, BofA Finance priced a second offering for $24.14 million with nearly identical features, including maturity date, underlying ETFs, and barrier levels.

The second deal however showed a 6.47% contingent coupon, or 2% less in yield. Its fee was 2% versus 0% for the higher-yielding notes.

Fee-based

“Obviously one of the deals – the one with the 8.47% yield – is sold to a fee-based advisor, the other is commission-based. That’s the more interesting conclusion,” a market participant said.

The fact that the difference in coupon rates matched the disparity in fees was coincidental, he said.

“It would be very difficult to explain the difference mathematically.

“You could argue the 2% difference in the coupon adds up with the 2% difference in the fee. But that could be true if it was a fixed coupon. With a contingent coupon, the numbers shouldn’t exactly match because we have the autocall and the contingency of the coupon. The probabilities are different.

“Obviously, the note with the 2% extra coupon is worth more than the other,” he said.

A broker said different cost structures will obviously lead to striking differences in terms.

“The very similar note is offered, one for advisory the other for brokers,” he said.

“With the fee-based deal no one at UBS is getting paid. It’s at the origination level that the issuer gets compensated.”

UBS Financial Services Inc. is the agent on both offerings.

Blend

Wade Slome, president of Sidoxia Capital Management, declined to comment on the structure.

“It’s not a pure value versus growth play. At our firm, when we want to bet on these two themes, we typically use the Russell 1000 Growth versus the Russell 1000 Value,” he said.

Both Russell 1000 indexes are composed of large- and mid-capitalization U.S. equities.

“The S&P 500 index, while heavily tech-weighted, is more of a blend between growth and value,” he said.

“It may be skewed a little bit toward growth given that its top five constituents are big tech stocks. But it’s not 100% growth.”

The top five holdings of the S&P 500 index are Apple Inc., Microsoft Corp., Amazon.com Inc., Facebook Inc. and Alphabet Inc. Together the “big five” represent 22.75% of the index.

“A lot of value managers for instance have Apple in their portfolio while they may avoid Amazon, which has a lot steeper value,” he said.

Mean reversion

It is impossible to predict which of the two underliers would be the worst-of in three years. But Wade emphasized the risk associated with inflated value.

“As far of value versus growth, we know how strong the performance of growth has been in the last 13 years, really since the financial crisis.

“Growth stocks have outperformed in a more extreme way than they even did during the tech bubble. If you believe in reversion to the mean, we’re in the later inning rather than the earlier inning of the game.

“It's hard to say when the bubble will burst, but I definitely believe that value will outperform over the next three to five years,” he said.

The notes for both offerings are guaranteed by Bank of America Corp.

The Cusip number for the $13.81 million deal is 09710E564.

It is 09710E572 for the $24.14 million offering.

Both issues priced on Sept. 15.

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