Bank of America’s $6.4 million notes on three defense stocks seen as timely in Paris aftermath

By Emma Trincal

New York, Nov. 18 – Bank of America Corp. priced $6.4 million of 0% Accelerated Return Notes due Jan. 27, 2017 linked to a basket of defense industry stocks on Nov. 13, the day seven coordinated terrorist attacks were launched in Paris, producing interest among some investors after the fact.

The equally weighted basket is composed of General Dynamics Corp., Northrop Grumman Corp. and Raytheon Co., according to a 424B2 filing with the Securities and Exchange Commission.

Timing

“These are all military defense stocks,” said Andrew Valentine Pool, main trader at Regatta Research & Money Management.

“And they priced it on Friday? That’s an amazing coincidence!”

Bank of America announced its deal on Thursday via a 424B2 filing with the SEC.

The terrorist attacks began Friday at 9:20 p.m. Paris local time, or about half an hour prior to the close in the United States.

If the basket return is positive, the payout at maturity will be par of $10 plus 300% of the basket return, subject to a maximum return of 14.6%. Investors will lose 1% for every 1% decline in the basket.

“As of after what happened on Friday, we would like this note in the short term. We think that stocks in this sector are going to benefit from increased business; in particular, we anticipate more exports to other countries, including Europe,” he said.

Bulls in arms

In the wake of the Paris attacks on Friday, some analysts predict that defense industry stocks will rally.

With French president François Hollande urging Moscow and Washington to step up efforts to fight against ISIS, the terrorist organization claiming responsibility for the attacks on Nov. 13 and the downing of a Russian plane last month, several analysts have a bullish outlook on the sector.

“Defense stocks have surged since the Paris terrorist attacks on Friday,” said one equity analyst, adding that the trend is picking up in momentum as talks of cooperation between Western allies against ISIS intensify.

Over the past five days, Northrop Grumman’s share price has increased by 3.55%, and Raytheon has seen its stock jump 4.75%.

Another well-known stock in the sector and also a top gainer, although not included in the basket, is Lockheed Martin Corp., whose share price rose 3.77% in the past five days.

Northrop Grumman is a security company providing systems, products and solutions in aerospace, electronics, information systems and technical services, according to the prospectus.

General Dynamics is a diversified defense company that offers, among other products and services, combat vehicles, weapons systems and munitions and information systems.

Raytheon is a technology company specializing in defense, homeland security and other government markets worldwide.

Structure

Pool said he was comfortable with the terms of the notes given his sector outlook.

“You only need to see this basket go up by a little bit more than 4% to reach the cap since your maximum return per year is about 12.5%,” he said.

“I think it can be easily done within 14 months for those types of stocks due to the environment we’re in as of Friday.

“Yes, there is a cap and it can penalize you. There’s also no downside protection.

“But we always make choices based on our risk-reward assumptions.

“And for this sector, given the circumstances, I think it’s a pretty good bet. I think you can easily get to that 12.5% per annum.

“If it was something we had seen, we would have been investing in it.”

Time will tell

The equity analyst noticed the recent rally in defense stocks but remained cautious.

“Given last week and the current geopolitical tensions, people are talking about ramping up military spending. That would be a positive for those stocks,” he said.

“Some names have jumped since Friday.

“The Paris attacks will do something like that. But who knows? It may be short-lived.

“If somebody is putting a deal like that, three defense stocks, it’s probably short-lived. I’m being cynical.

“Fourteen months will cover the election cycle.

“Those stocks may continue to rally because of ISIS, but who knows?

“Everybody wants to ramp up military spending, but nobody wants to spend the money.

“This is not an easy one. It’s not a straightforward bet.”

BofA Merrill Lynch was the agent.

The Cusip number is 06053Y298.

The fee was 2%.

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