BofA’s $24.95 million leveraged notes tied to bank stocks to beat long play in mild uptrend

By Emma Trincal

New York, Nov. 28 – BofA Finance LLC’s 0% Accelerated Return Notes due January 2019 linked to a basket of three equally weighted common stocks could be a fair substitute to a direct investment in the stocks given the leverage and competitive cap as long as the market is not overly bullish, buysiders said.

The notes are guaranteed by Bank of America Corp, according to a 424B2 filing with the Securities and Exchange Commission.

The underlying companies are Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley.

The payout at maturity will be par plus triple any basket gain, up to a capped return of 21.3%.

Investors will be exposed to any losses.

Structure

“It seems like a good, rational way to invest in these stocks if you’re bullish on financial stocks,” said

Kirk Chisholm, wealth manager and principal at Innovative Advisory Group.

“It’s a pretty decent cap...Three-to-one on the upside and one-to-one on the downside...That’s very straightforward... The structure is very reasonable, even the stocks are reasonable.

“If people want to have exposure to these names in their portfolio, this note is a better way to do it than buying the stocks outright.”

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But one would have to be bullish on financials or at least slightly bullish. Chisholm said he was skeptical about the sector.

“I’m not too keen on bank stocks. The yield curve continues to flatten and there’s a risk that it may get inverted at some point, which is bad for banks and for lending. It’s certainly not a good sign for the economy, especially for banks,” he said.

“If you already have the exposure, the notes are a good substitute for your existing holdings in financial stocks.

“I just don’t see the opportunity in this sector.”

Mildly bullish

Jonathan Tiemann, president of Tiemann Investment Advisors, LLC, said he liked the structure.

“It seems like a pretty clean deal, and I don’t always like those deals,” he said.

“It’s a 14-month so your lack of liquidity isn’t much of an issue.

“If you view a mild drift upward for this basket, the note is definitely likely to outperform.”

Pricing

Investors still have to forego the dividends paid by the three banks.

The average dividend yield for the basket is about 2%.

“You’re giving up a little bit, but that’s sort of normal considering what you’re getting, especially in terms of leverage,” he said.

“The option is a little trickier to value because you have three different dividend yields.

“But I’m sure that if you price it out, the cost you’re incurring isn’t so bad, especially with that kind of cap.”

Investors would still lag the basket by the dividend amount on the downside. But the difference remains modest, especially over such a short period of time, he noted.

Perhaps a greater risk would be a very strong bullish trend making investors miss some of the upside, above the cap. But such scenario is less likely given the cap level.

“It strikes me as not a bad play at all.”

BofA Merrill Lynch is the agent.

The notes will settle on Wednesday.

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