Bank of America's step-up notes linked to Dow Jones Global Titans 50 seen as competitive

By Emma Trincal

New York, Nov. 21 - Bank of America Corp.'s upcoming 0% market-linked step-up notes due November 2013 linked to the Dow Jones Global Titans 50 index offer more appeal than the index itself, said Michael Kalscheur, financial adviser at Castle Wealth Advisors.

"If you knew you would invest in the index anyway, this note is a no-brainer. It's better than indexing, short of Bank of America going bankrupt," he said.

The payout at maturity will be par of $10 plus the index return if the final index level is greater than the step-up value, which will be 126% to 132% of the initial index level, according to an FWP filing with the Securities and Exchange Commission.

The payout will be par plus the step-up payment of 26% to 32% if the final index level is greater than or equal to the initial level but less than the step-up value.

Investors will be fully exposed to the decline if the final index level is less than the initial index level.

"Compare it to the index," said Kalscheur.

"On the downside, you do no worse.

"On the upside, you can't do any worse and you'll probably do a lot better, especially in a low-growth environment.

"It's better than investing in the index directly, unquestionably."

No cap

Kalscheur, who typically likes downside protection, said that in this particular structure, investors are getting at least the benefit of not being capped.

"My biggest beef with buffers is that they always cap the return. Often, the cap doesn't give you enough. The market can rally and you miss on the upside," he said.

"But you don't have a cap here, which is quite good.

"The step-up level is fair. Even if it was capped at that level, I would think it would be a fair number."

Even forgoing dividends was not seen by Kalscheur as a negative given the step-up payment.

"For somebody only moderately bullish, losing the dividend is not an issue with the way this product is built," he said.

Credit risk was perhaps the only real feature that gave him pause.

"Bank of America makes me a little bit nervous because it's a single-A," he said.

"But this is only a two-year.

"Citigroup is worse. Bank of America at least bought Merrill Lynch for a song, and they can sell it and raise a lot of money."

Index or better

Carl Kunhardt, wealth advisor at Quest Capital Management, said that the notes are designed for moderately bullish investors.

"If the market goes up 40% you still get 40%," he said.

"The benefit of the contract is really when the index closes between zero and 30%. In that case, you get bumped up to that 30% step-up, even if the index return is only 1%," he said based on a hypothetical 30% step-up payment.

"I don't see the downside to the investor. You're giving up a little bit of dividend for the potential of making 15% a year.

"I don't see anything that would make an argument against using it," Kunhardt said.

Simplicity

Another advantage, according to Kalscheur, is the simplicity of the structure.

"The product passes the smell test," he said.

"My clients know all the companies in the index."

The index is composed of 50 stocks selected from the Dow Jones Global index to reflect the performance of the world's leading multinational companies, according to the prospectus.

"This is not one of those esoteric structures with many different possible scenarios based on trigger levels and knock-outs. This is very straightforward," he said.

Pricing will tell

Kalscheur said that two factors would be key in his decision to invest in the notes: the fees and the level at which the index closes at pricing.

"For those types of products, a 1% fee annually and 2% for two years would seem about right," he said.

"As we get close to execution, the initial price will be important. If the market is down, the timing would be right. I have no contention.

"But if the market creeps up, I would put a premium on the downside protection."

The exact step-up value and step-up payment will be set at pricing.

The notes are expected to price and settle in November.

Bank of America Merrill Lynch is the agent.

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