BofA’s $10 million 13.3% autocalls on SPDR S&P 500 enhance yield, tighten protection

By Emma Trincal

New York, Nov. 6 – BofA Finance LLC’s $10 million of contingent income buffered autocallable securities due Nov. 4, 2024 linked to SPDR S&P 500 ETF Trust provide an above-average yield in addition to a buffer and memory feature, but for some, the size of the protection was just too small.

Investors will receive a coupon of 13.3%, paid quarterly, if the underlying fund closes at or above its 90% coupon barrier on the related quarterly observation date, plus any previously unpaid coupons, according to a 424B2 filing with the Securities and Exchange Commission.

The securities will be called automatically starting Jan. 29 at par if the price of the underlying stock is greater than or equal to its initial price on any quarterly call determination date.

At maturity the payout will be par unless the ETF declines by more than its 10% buffer, in which case investors will be exposed to 111.11% of the decline of the ETF beyond the buffer.

Memory coupon

“It’s a memory coupon. We don’t see a ton of them lately,” said Ken Nuttall, chief financial officer of BlackDiamond Wealth Management.

The term “memory” means that the coupon can be carried over to the next observation date if the coupon barrier conditions are not met on a given observation.

The $10 million offering size was “decent,” he noted.

Morgan Stanley acted as distributor, according to the filing.

“I suppose it was sold through their private wealth group,” he said.

Too tight

The 13.3% yield was attractive, he said.

“We also did a memory two weeks ago with an 11.4% coupon. We got a 30% barrier though, which is why the coupon was lower. Our note is more defensive. It’s a tradeoff. This BofA note gives you an extra 2% yield, but you narrow down the protection to 10%.”

Even though the BofA notes offer a buffer, Nuttall said he preferred having a barrier three times wider.

“The 10% protection level is a little too tight for my taste,” he said.

At the same time, he said the pricing was compelling, pointing to the 13.3% yield, the memory and the single underlier.

“Not bad.”

Geared buffer

Compared to a one-year certificate of deposit, which he said would yield approximately 5.5%, investors received an 8% premium with the note.

“It’s a decent deal. I’m not crazy about geared buffers though just because for some clients it’s psychologically difficult to understand. They have to accept the idea that losses will compound once you breach. Some people really don’t like it,” he said.

1.5% memory

There was a reason for the protection to be limited to 10%, he said, pointing to the cost of including a buffer and a 13.3% coupon. The pricing of the memory feature also played a role.

“The memory feature is always expensive. When we priced our note, we were told that the memory would cost us about 1.5% in yield,” he said.

As a result, if the BofA note had been priced without the memory, its yield could have been stretched to 14.8%, he said.

Those terms were relatively attractive compared to a month ago, he noted.

“We had some volatility in the week prior to last week. The market sold off. I think it made pricing a little bit easier.

“A Phoenix autocall with memory plus buffer with that type of yield...I haven’t seen that in a while.

“We’re just a little bit more conservative. A 10% protection is really too tight for us. But for a more aggressive investor, it’s reasonable,” he said.

Buffer use

An adviser was intrigued by the coupon rate especially for a note tied to a single asset.

This adviser uses back-testing data to assess the probabilities of return outcomes. Based on data collected on the S&P 500 index for over 70 years, he found that the chances of getting a negative performance over a one-year rolling period were 26.4%.

Within that bucket however, the odds of being protected by the buffer – a decline of 10% or less – were 13.9%.

“This gives you a 12.5% probability of losing money,” he said, commenting on the range of negative returns beyond minus 10%.

And yet, even if the index fell below minus 10%, investors would still outperform by virtue of the buffer, he said.

Upside buckets

Repeating the same process, this adviser looked at the upside. The range within which the notes would outperform the underlying was comprised between 0% and 13.3%. The index fit into that range 33.6% of the time.

Adding this probability to that of a negative return (26.4% of the time), the note would outperform the index 60% of the time. In all other situations, the index would close above the 13.3% coupon, causing the notes to underperform.

“You outperform 60% of the time and you underperform 40% of the time. But you still get your 13.3% when the notes trail the index,” he said.

Those frequency figures were more than encouraging for this adviser.

Low cost

“If I can outperform two out of three times, I’ve reached my goal. A 60% chance is very close. It’s really impressive,” he said.

“A lot of it, I’m sure, is because of the fee.”

The fee is 0.1%, according to the prospectus.

“It’s a crazy dirt-cheap fee. Each time you have a very low fee, you’re going to get very good terms.

“Only technology can explain how they can drop their fees so much. You would never have been able to price this 10 years ago,” he said.

Call risk

The only caveat with the note was the automatic call, which could be triggered on the first quarter.

“That’s the only downside. If you get called in three months, you have to start from scratch,” he said.

“You have to take the time to research another structured note, and that’s a pain. You’re getting 3.33% in three months. It’s a great return but it’s only for three months.

“I wish they would have given you a six-month no-call. But on a one-year note, it’s probably not realistic.”

Aside from the call risk, this adviser said he liked the note.

“It’s a very straightforward offering. The numbers look good. You get 13.3% on a single asset. If you miss a quarter, you can make up for it all,” he said.

“You could get called out in three months; that’s the only problem. But you’ve got to give up something for those terms. It’s a small price to pay for a nice, clean note, which gives you a very high chance of beating the market.

“I would recommend it.”

The notes are guaranteed by Bank of America Corp.

BofA Securities, Inc. is the agent.

The notes settled on Nov. 1.

The Cusip number is 09710P2D7.

The fee is 0.1%.

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