BofA’s $6.69 million autocalls on Russell, S&P, Dow show long tenor, likely short duration

By Emma Trincal

New York, Oct. 3 – Despite a long tenor, BofA Finance LLC’s $6.69 million of autocallable notes due Oct. 1, 2029 linked to the least performing of the Dow Jones industrial average, the Russell 2000 index and the S&P 500 index are likely to have a short duration due to a low call threshold and recurring observation dates, advisers said.

The notes will be called at par plus 11% per year if each index closes at or above its 92% call level on any semiannual call valuation date after one year, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus 66% if each index finishes at or above its call level.

If any index finishes below its call level but each finish at or above its threshold level, 75% of its initial level, the payout will be par. Otherwise, investors will be fully exposed to the decline of the least performing index from its initial level.

Six-year tenor

Tom Balcom, founder of 1650 Wealth Management, said he was satisfied with the risk-return of the notes.

“The yield on short-term Treasuries is 5.5%. Here you get double the risk-free rate. You are very well compensated for the risk you take,” he said.

Some factors helped reduce the risk, in particular the long tenor.

“Over six-year rolling periods, the probability of breaching the 75% barrier is probably very low, even with a worst-of,” he said.

Current market valuations helped as well.

“All three indices already had a pullback. It’s not like your entry points are the all-time highs.”

The S&P is down more than 8% from its July high; the Russell is 14% off its February high; and the Dow has dropped nearly 8% from August.

10 chances

The structure of the autocall also offered benefits to investors.

“You are very likely to be called after one year,” he said.

“You have 10 opportunities of being called over the six-year term, and each time, you can get called above 92%, at a lower level than par. I love this feature. It makes it much easier to get out and pocket your premium,” he said.

Because of those two factors – the great number of call dates and the lower call threshold, the long-term tenor was unlikely to be equal to the duration of the notes.

“You’re not going to hold this for six years,” he said.

“Your actual duration is going to be much shorter.”

Some risks

Investors, however, are still subject to market risk.

“It’s not a principal-protected note. You can still breach the barrier. I wouldn’t use it in my fixed-income allocation but as a hedging play in the equity portfolio,” he said.

Balcom said the main risk was on the upside.

“If there’s a rally, you may run into a problem. If the market is up 20%, you’re getting your 11% premium. It’s a cap and you’re giving up almost half of the gains,” he said.

Balcom said he makes a point to explain to his clients the reasons behind a limited upside.

“It’s always a tradeoff. You’re not getting the full return of the index. But you have the downside protection,” he said.

Credit, dividends

On the credit side, the long tenor added some risk.

Any payment and repayment of principal is subject to the credit risk of BofA Finance and such risk increases with the length of the holding period.

Balcom downplayed the possibility of a credit event.

“If Bank of America implodes, we have more things to worry about. So, no, I’m not concerned about BofA’s credit,” he said.

The long tenor increases the compounded amount of unpaid dividends, which represents an opportunity cost to investors.

Among the three underliers, the highest-dividend paying index is the Dow with a 2.2% yield.

“Missing 2.2% or lower is not the end of the world to me. Especially when you’re unlikely to hold the notes for very long,” he said.

Overall, Balcom said he liked the product, pointing to the lower call threshold and the cumulative premium as top features.

The sooner the better

A financial adviser also agreed that the autocall offered many benefits.

The long duration of the notes and the 92% call trigger increased the chances of being called, he said.

“You can get called even if the index is down 8%. It doesn’t have to be up. That makes it much easier,” he said.

The long tenor added more value to the barrier at maturity.

“The chances of being down more than 25% after six years or even to be negative at all are very slim, so you’re likely to get your premium at some point,” he said.

For some investors, the return offered by the call premium may not be sufficient.

“The only downside is to be capped below market returns,” he said.

Although 11% per annum looks attractive over six years with a possible 66% return at maturity, on an annualized compounded basis, it’s only 8.8%, he noted.

“It’s not as appealing. You really want to be called at the beginning, preferably on the first year. That would give you the highest average rate of return,” he said.

Skittish view

He added that the notes were not for everyone.

“You have to be a little bit on the cautious side,” he said.

The better equities perform, the less attractive the notes will be, he said.

“If you think the market is going to be down but not too much down, you can achieve that 11% return pretty easily with the 92% trigger. That 92% trigger is very attractive, especially short-term,” he said.

Investors with such a view benefited from the high probability of an automatic call especially in this current market, he added.

“It’s a very defensive strategy. It allows you to come out ahead if the market is slightly down.

“If you’re nervous about what the market will be in the next 12 months, it’s an attractive way of staying invested,” he said.

The notes are guaranteed by Bank of America Corp.

BofA Securities, Inc. is the selling agent.

The notes settled on Tuesday.

The Cusip number is 09711AN87.

The fee is 0%.

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