Various outcomes in BofA’s autocalls on Dow, S&P seen as opportunities, but some say risk

By Emma Trincal

New York, June 6 – BofA Finance LLC’s 0% autocallable enhanced return notes due July 6, 2026 linked to the least performing of the Dow Jones industrial average and the S&P 500 index offer several possible results, introducing more complexity than most notes but also potentially more favorable outcomes for investors, said advisers.

The notes will be called at par plus a 10% call premium if each index closes at or above 95% of its initial level on July 2, 2024, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called and the least-performing index finishes at or above its initial level, the payout at maturity will be par plus three times the index return.

If the least-performing index finishes negative but at or above its 70% barrier level, the payout will be par.

Otherwise, investors will be fully exposed to the decline of the least-performing index from its initial level.

Step-down, catapult

Investors could benefit from two scenarios, said Tom Balcom, founder of 1650 Wealth Management.

“You could get called and pocket a 10% annualized return. Or you get 3 times the uncapped return at maturity. Either way is good, unless a 10% cap is not enough for you,” he said.

The structure “stepped down” with a call threshold set at 95% of initial price rather than the usual 100%, increasing the chances of an autocall.

“That’s interesting. I haven’t seen this before in one of those catapults,” he said.

The term “catapult” is what structured products buyers and brokers have started to call those relatively new products, which are designed to be called after one year and provide unlimited leveraged return at maturity if the one-time call fails to occur.

“I guess it’s because once the call is avoided, the note will propel you to the best bullish scenario at maturity,” he said.

Above and below

The real risk as always was on the downside, he said.

“If the barrier breaches at maturity, you’ll lose almost a third of your principal. But my guess is that the chances for a breach over three years are slim,” he said.

While the exposure is to the worst-performing index, Balcom said that the Dow and S&P 500 were sufficiently correlated to one another to not add excessive downside risk.

“I would think, the chances to breach the barrier over that time are probably less than 15%,” he said.

Another downside scenario if the index finished down but above the barrier would be: “no loss, no gain,” he said.

“In that case, you end up getting no return.”

But investors may have outperformed the index, because while they are not paid any dividend, they benefit from the downside protection.

“The bottom line is that you haven’t lost money. So, this is not the worst-case scenario. The worst case is really if you fall below the barrier,” he said.

Capped out

For some investors, the automatic call may be a disappointment.

“If the index is up 25% and you only get 10%, you’ll have some explaining to do, I agree. I don’t know the future, but I assume that the chances of getting called are higher than the odds of breaching the barrier,” he said.

For this adviser, however, the autocall remained a desirable outcome even at the risk of underperforming the market.

“I don’t really have a problem with that. It’s a cap, but you do get the downside protection at maturity plus the uncapped leverage. That’s the tradeoff.”

One solution to avoid clients’ negative reactions when being “capped out” was to allocate the notes in moderation.

“You’re not going to replace all of your equity with structured products like this one. This note is just a piece of the puzzle.”

He said he would probably not use the notes for more than 5% of his overall portfolio. His large-cap equity allocation in comparison represents 20% of his assets under management.

“I like the fact that you can have different positive outcomes in this note. If you don’t breach the barrier, you could get three times uncapped. If the market is up or even down 5%, you get 10%.

“The risk is not huge over the period. I like it,” he said.

Complexity

Donald McCoy, financial adviser at Planners Financial Services, had a more skeptical view.

“It’s one of those over-complicated ones. You have several legs in this trade. It’s not very easy to estimate your risk-adjusted return in advance,” he said.

“First, it’s the worst of two indices. So, you have to track both indices and hope the worst of the two is not going to trigger a loss at maturity.”

For McCoy, investors are exposed to downside risk as soon as they “pass the first year and continue to ride the notes.”

He viewed the autocall as the least risky route for investors.

“If you get called, you know what’s going to happen. The die has been cast. You will get your 10%. Then you can shop for something else,” he said.

Risk at maturity

But if the notes mature and the worst-performing index closes below the 70% level, investors will lose a significant portion of their investment.

“I can’t tell what’s the likelihood of this happening. But if you do fall below that mark, you’ll lose at least 30% of your principal.

“Most people would argue that the market is not going to be down 30% point to point over a three-year timeframe.

“I still don’t think it would be a great investment for conservative investors.

“At least after one year you could get 10%. But if you don’t, you have some downside risk and a complicated note to monitor with a complex underlying exposure. It would not be suitable to risk-averse clients,” he said.

The notes are guaranteed by Bank of America Corp.

BofA Securities, Inc. is the selling agent.

The notes are expected to price on June 30 and to settle on July 6.

The Cusip number is 09709VZG4.

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