BofA’s $20 million snowball on S&P provide some safety, tax benefits with long tenor

By Emma Trincal

New York, April 10 – BofA Finance LLC’s $20 million of jump securities with autocallable feature due April 6, 2034 linked to S&P 500 index are a slightly different type of autocall showing a 10-year tenor and the absence of any downside protection at maturity.

The securities will be called automatically starting April 15, 2025 at a price to give a return of 9.15% per year on any annual call determination date, according to a 424B2 filing with the Securities and Exchange Commission.

At maturity the payout will be par plus 91.5% if the index finishes above its initial level.

Otherwise, investors will be fully exposed to the decline of the index.

Good idea

“You don’t see long-term snowballs like this very often,” said Brady Beals, director, investment solutions at Luma Financial Technologies.

“But I think it’s a really good concept.”

Snowballs are autocallable notes paying investors a cumulative premium only upon the occurrence of a call.

“If you do some back-testing, the probabilities for the S&P to be down in 10 years are zero,” he said.

“Extending the term to a long duration like 10 years can be used as a form of downside protection.

“That 9.15% premium is not amazing. But it’s just on the S&P. It’s not a worst-of.”

Beals said he has talked to clients about this concept.

Resistance

“We get different responses depending on what people want to accomplish. But in general, most clients want some kind of downside protection. They’re reluctant to use an extended maturity as a substitute for the protection.”

Snowballs with annualized calls such as this one have become popular among investors in part due to their favorable tax treatment, he noted.

Unlike most Phoenix autocalls, which have monthly and quarterly observations for both the coupon and the autocall, the annual observation of a longer-dated snowball provides a superior tax treatment.

“If you make it one year plus one day, you pay long-term capital gains, which is a much lower tax rate than the ordinary income tax you would pay on your Phoenix coupons,” he said.

But tax benefits are not enough to convince investors they can give up barriers and buffers over long periods of time, said Beals.

“Somehow it gets lost in translation. It’s lost on people that a structured note with no principal protection is just similar to being long the underlying.

“And again, over 10 years, the odds of losing money are close to zero,” he said.

Likely call

A market participant had the same experience with clients and reached similar conclusions.

“I’ve always been surprised that we don’t see more of these,” he said.

“I think this type of structure makes sense.

“There’s an extremely high chance that you’re going to get called. When you do get called, you get a premium that’s higher than the historical level of the S&P.”

The autocall is more likely to be triggered with a greater number of observations and a longer tenor, he added.

“You have 10 opportunities to get called. At some point, you’ll get paid,” he said.

“Since it’s a one-year or more, you don’t get hit with income taxes. You’re taxed on long-term capital gains.”

The notes priced on April 3 and the first observation date is April 10, 2025, which is a year and a week later.

Cost

The market participant said that clients’ reluctance to seek long-term notes with no protection was easy to understand.

“Most people want some level of safety. That’s the main factor,” he said.

“A big part of getting new clients to buy structured notes for the first time is to offer them some kind of protection.”

The 0.25% fee disclosed in the prospectus was low, he said.

“It’s a fee-only type of deal. The advisers get paid on a percentage of the assets under management.

“I think it’s a pretty good deal,” he said.

The notes are guaranteed by Bank of America Corp.

BofA Securities, Inc. is the agent. Morgan Stanley will act as distributor.

The notes settled on Monday.

The Cusip number is 09711BLF1

© 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.