BofA Finance’s market-linked step-up notes linked to Euro Stoxx 50 index aimed at mild bulls

By Emma Trincal

New York, Feb. 27 – BofA Finance LLC’s 0% market-linked step-up notes due February 2019 linked to the Euro Stoxx 50 index offer return enhancement in a moderately bullish market without penalizing investors in a more bullish market, making the notes attractive for some advisers.

The notes will be guaranteed by Bank of America Corp., according to a 424B2 filing with the Securities and Exchange Commission.

If the final index level is greater than the step-up value, 122% to 128% of the initial value, the payout at maturity will be par of $10 plus the index return.

If the final index level is greater than or equal to the initial level but less than or equal to the step-up value, the payout will be par plus the 22% to 28% step-up payment.

If the final index level is less than the initial level, investors will lose 1% for every 1% that the index declines below its initial level.

Mandatory allocation

“That would be an OK note for me,” said Carl Kunhardt, wealth adviser at Quest Capital Management.

As a registered investment adviser, Kunhardt said he has to allocate to international stocks.

“Non-U.S. markets is part of my core portfolio, and 70% of that market is Europe. The Euro Stoxx is the European Dow, and I’m going to be exposed to those stocks anyway,” he said.

The most important assessment he would need to make before buying a product is to determine whether the notes offer a better alternative than a direct investment in the index.

“That question is not always easy to answer, but in this case it is,” he said.

“On the downside, I’m not losing any more than what I would lose with the index.

“On the upside, I’m not capped. If the index is up more than 12%, I’m not losing.”

He made the assumption of a step-up payment of 24%.

“If the market is flat, I get a 12% a year. Twelve percent is pretty solid.

“And if I don’t like the notes, I’m not locked in for very long. It’s just a two-year holding period.”

Low expectations

The notes would fit his view on Europe, a market he believes will not show much growth over the next couple of years.

“It’s not even a bullish play. You maximize your return if the index is not up more than 12% a year. Do I believe the Euro Stoxx is going to achieve 12% a year? No,” he said.

“There’s just too much headwind to the European market. They have yet to implement basic economic reforms and face a number of crises. Much of their problems are self-inflicted wounds. They still haven’t addressed the debt issues of Italy, Spain, Greece, and Portugal, so I’m not overly bullish on the Euro Stoxx.”

Credit, term

Steven Foldes, vice-chairman at Evensky & Katz/Foldes Financial Wealth Management, is often interested in uncapped digital products.

“I like the notes,” he said.

He said he is comfortable with Bank of America’s credit, which has improved “greatly” since the end of the financial crisis.

The two-year tenor is exactly the type of maturity this adviser is seeking in a note.

But the structure itself is the most appealing aspect of the deal.

“We like those uncapped digital [notes] a lot,” he said.

“If the index takes off, you get the result of the index minus the dividend.

“If the index is up quite modestly, as long as it’s up, you get the coupon, which is really nice.”

Dividend, fee

The Euro Stoxx 50 index, he noted, happens to offer a high dividend yield of 3.3%.

“That’s the part we don’t like. ... You don’t get the 6.6% yield. That hurts because it’s a pretty significant distribution,” he said.

“That’s an expense you want to factor into your thinking.”

On the positive side, Foldes said that he could negotiate the deal with the issuer on the basis of the 2% underwriting discount listed in the prospectus.

“We’re a fee-only adviser, and this commission would not be applicable to us. We don’t need it. I assume that we could give it up as long as we can improve the terms.”

In general, Foldes said he likes notes that offer a step payment and unlimited exposure above the step strike.

“This product fits the bill,” he said.

“We also like a lot those when the coupon happens on a negative level. The coupon is lower, but you can really outperform the underlying index,” he said.

“Not getting capped for us is crucial because we want to get the full benefit of the asset class minus the dividend.”

The exact step-up value and step-up payment will be set at pricing.

BofA Merrill Lynch is the agent.

The notes were expected to price in February and settle in March.

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