Bank of America's $142.4 million sale of notes tied to Ford appeals to bulls, income seekers

By Emma Trincal

New York, March 1 - Bank of America Corp.'s $142.4 million sale of notes linked to the share price of Ford Motor Co. represented a successful deal that may be attributed to both the structure and the reference asset of the notes, sources said.

"I would expect Ford to do extremely well," said Carl Kunhardt, director of investment management and research at Quest Capital Management, adding that, "The coupon in itself makes this deal attractive."

Bank of America priced $142.4 million of 10% STEP Income Securities due March 7, 2011 linked to the common stock of Ford, according to a 424B2 filing with the Securities and Exchange Commission.

Interest is payable quarterly.

If the final share price of Ford stock is greater than or equal to the step level, the payout at maturity will be par of $10 plus 1.2%. The step level is 110% of the initial share price.

If the final share price is greater than or equal to the threshold level but less than the step level, the payout will be par. The threshold level is 90% of the initial share price.

Investors will be exposed to any decline beyond 10%.

Interesting 10%

"The structure in itself with the barrier and the limited upside is not necessarily innovative. What makes it really interesting is this 10% coupon that you get in any circumstances," said Kunhardt.

"Even if you hit the 10% buffer, the coupon takes you back to par. It's almost [as] if you had a downside protection of 20%," he added.

Beating GM

In addition, Kunhardt said that Ford's share price is expected to rise.

"This is the only U.S. car company that didn't take any money from the government. Their products have become very good. Their quality problems are beyond them and it's selling very well. They're hitting their numbers despite a poor market. Of course, they'll be at the mercy of consumer demand. But I think they'll take the lion share of the domestic market, especially with Toyota [Motor Corp.] struggling right now," he said.

"I don't see what's not to like about that note," Kunhardt said.

However, he noted that "the only downside I would see in this note" is that the payment of principal depends on the creditworthiness of the issuer. "And [Bank of America] doesn't have the highest credit quality," he said.

But overall, the 10% annual coupon payable quarterly for a one-year note combined with a 10% barrier and a step-up coupon payable if the stock appreciates by more than 10% represent a "very attractive" investment, said Kunhardt.

"I can certainly understand why the deal would be popular," he said.

Toyota factor

For Richard Sparks, senior equities analyst at Schaeffer's Investment Research, the choice of Ford's stock as the underlying accounts for one of the most attractive features of the deal, especially given Toyota's recent woes.

"We're bullish on Ford. We think it has the potential to jump by another 25%, from $12 to $15. Now there's always risk. But Ford did a lot better than [General Motors Corp.] during that crisis. They didn't have to borrow from the government whereas GM had the disadvantage of having to borrow," he said.

Ford's shares climbed by 5.71% on Monday to close at $12.41 (NYSE: F) after the company announced that it earned its fifth straight Energy Star Award for Sustained Excellence from the U.S. Environmental Protection Agency.

Options interest

But even before that, Ford has been a fast-moving stock over the past five weeks, gaining more than 10% since Toyota's recall announcement on Jan. 21.

So far this year, Ford's share price is up more than 23%.

"Ford has been able to take advantage of Toyota's problems. We're seeing a heavy call activity on this name with more calls than puts over the past few weeks, and it's probably due to Toyota," said Sparks.

"Another plus for Ford is that they've been winning a series of quality surveys and ratings. This is a company that has become very competitive. It was always the Japanese cars thought to be the very best. Now Ford has stepped up," he said.

Commenting on the structure of the notes, which require that the share price move up by 10% in order to trigger the additional 1.2% step payment, Sparks said, "It is very possible that the stock will go up by 10% within a year, in which case, you get a very good return."

Merrill Lynch, Pierce, Fenner & Smith Inc. and First Republic Securities Co., LLC are the underwriters.

Fees are 1.75%.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.