BofA’s $1.67 million income notes on indexes, ETF monetize banking jitters, sources say

By Emma Trincal

New York, March 16 – BofA Finance LLC’s $1.67 million of contingent income issuer callable yield notes due March 18, 2025 linked to the least performing of the Russell 2000 index, the S&P 500 index and the SPDR S&P Regional Banking ETF offer an attractive risk-adjusted return through the use of a sector ETF, which has been under duress over the past week, advisers said.

Investors will receive a coupon of 15.75% per annum, paid quarterly, if each underlier closes at or above its 65% coupon barrier on the related quarterly observation date, according to a 424B2 filing with the Securities and Exchange Commission.

The securities may be called at par on any quarterly call determination date starting Sept. 18.

If the worst performing underlier finishes at or above its 65% threshold value, the payout at maturity will be par plus the contingent coupon.

Otherwise, investors will lose 1% for every 1% that the worst performing underlier declines from the initial level.

Helpful volatility

“It’s amazing how issuers jump on any volatility spike. I guess it helps. 15.75% is a pretty good yield. And they give you a deep barrier too. They can expand the parameters in a big way,” said Steve Doucette, financial adviser at Proctor Financial.

He was referring to the volatility of the SPDR S&P Regional Banking ETF, listed under the ticker “KRE,” which he considered the most likely to be the worst-performer given the fact that the sector is under stress.

“I would do my due diligence on the banking ETF first. See what’s in there, what it looks like on a chart,” he said.

“Any sector should be carefully looked at because sector ETFs are not as diversified as the broad indices.”

The day after

The notes priced on March 13, a chaotic day in the market following the closure of two regional banks over the weekend – Silicon Valley Bank and Signature Bank of New York.

The Federal Reserve guaranteed that all depositors have access to their deposits.

The SPDR S&P Regional Banking ETF, whose components included the two failed institutions, dropped 17% at some point during the day, with volatility soaring within the entire banking sector.

First six months

For some, however, investors may have just overreacted. By Wednesday, the U.S. stock market rallied, and the ETF had recouped from its Monday low.

“I think you should be able to collect your coupon during the first six months before they potentially call you,” he said.

“Theoretically, you could be collecting the coupon all along assuming they don’t call. The 35% barrier is pretty deep. Getting a coupon of almost 16% with that type of barrier is a decent tradeoff.”

The terms were the result of the perceived risk in the banking sector, he said.

“If it was just a worst-of on the S&P and Russell, obviously you wouldn’t get that type of deal,” he said.

More to come

Despite the regulators’ rescue of Silicon Valley Bank and Signature Bank, other concerns are emerging in the banking sector in particular around Credit Suisse, he said.

“It’s hard to say what’s going to happen with the banks. So far, the Fed stepped in, insured all depositors. They can’t do it for every bank,” he said.

But regulators around the world seemed determined to prevent a global banking crisis. On Thursday, the share price of Credit Suisse rose after it received a $54 billion loan from Switzerland’s central bank.

“We may see more shocks in the banking space. But that should be short-term. What are the chances that we’ll be down 35% two years from now? I think it’s unlikely.

“It could happen though if we go through an ugly recession. That’s the scary part,” he said.

Monitoring the events

Ken Nuttall, chief investment officer at BlackDiamond Wealth Management, also liked the terms but said he would not just jump in the deal.

“That’s not a bad note. I’ve looked myself at KRE. I didn’t pull the trigger yet because there may be more casualties coming up, at least that’s what I’m hearing. But the 65% barrier is pretty solid, especially when you’re at a one-year low.”

The timing was also right.

The share price of the ETF closed at $44.45 on the trade date. On the same day, the fund posted a 52-week intraday low at $41.92.

“There’s no doubt that KRE would be the worst-of. There is still a lot of unknown today. I think there’s some more pain out there...Other banks are not doing so well,” he said.

But he noted that the Regional Banks ETF was “pretty well-diversified,” and that the entry price for noteholders was about 33% off the high.

Nuttall was also comfortable with the duration of the notes.

“Two years is long enough for this banking crisis to get resolved. At least it should be enough to bring KRE back up,” he said.

“Meanwhile I think you have a pretty good chance of being called in six months. So, you should get two coupons...almost 8% in just six months...That’s a pretty good deal.”

The notes are guaranteed by Bank of America Corp.

BofA Securities is the agent.

The notes settled on Thursday.

The Cusip number is 09709VM60.

The fee is 1.75%.

© 2015 Prospect News.
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