BofA’s $19.75 million 8.13% fixed income callable notes on indexes seen as too short

By Emma Trincal

New York, Dec. 9 – BofA Finance LLC’s $19.75 million of 8.13% fixed income callable yield notes due Dec. 8, 2022 linked to the worst performing of the Russell 2000 index, the Nasdaq-100 index and the S&P 500 index have the advantage of paying a guaranteed coupon. But advisers focused on the risk involved with a short duration note as the upcoming year may be filled with increased uncertainty and volatility.

Interest is payable monthly, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be callable at par on any monthly determination date after six months.

If the notes have not been called, the payout at maturity will be par unless any index closes below its 70% threshold value during the life of the notes and any index finishes below its initial level, in which case investors will lose 1% for every 1% that the worst performer finishes below its initial level.

Six months and out

“If the market is down, you won’t be called and you subject yourself to the worst-performer of the three,” said Steve Doucette, financial adviser at Proctor Financial.

“What you get is a 4% buffer really for an 8% yield with unlimited downside.

“You have to really be confident that we won’t have a market meltdown next year.”

For this adviser, the best outcome would be a call as early as in six months, when the call protection period ends.

“You get called then and you get your 4%.

“It’s probably the best-case scenario because you probably want to be called rather than being subject to the downside risk a year from now.

“If it was a 20% return it would be different.

“But really, getting 8% a year with a high probability of being out in six months, that’s not such a high return for the risk you’re taking,” he said.

Fixed versus contingent

The guaranteed interest rate however was surprisingly higher than other deals with a contingent payment, he noted.

The difference may lie in the duration of the notes, the barrier size and the type of call feature.

As an example, Barclays Bank plc recently priced $5.74 million of two-year autocallable notes linked to the least performing of the same three indexes. The downside threshold at maturity is also 70%. But the coupon, set at 7.15% per year is contingent based on a 70% coupon barrier.

“You get 8% fixed rate. But it’s a short duration with more downside risk. The other one is a two-year,” said Doucette.

The discretionary call versus the automatic call also helped explain the relative advantage of the fixed coupon.

Risk-reward

“Regardless, I’m amazed that with the volatility spike we just had, all you get right now are 5%, 6%, 7% and even 8% coupons. To me, it doesn’t seem enough to compensate you for the risk,” he said.

“I would need a higher yield or a much lower barrier even on indexes. It’s still a worst-of.”

Another issue for this adviser was the call risk.

“It’s nice to have no call for six months. But you don’t know if and when the notes are going to be called. It’s at the issuer’s discretion. In general, we like to have a minimum stay in the note,” he said.

Upcoming challenges

Matt Medeiros, president and chief executive of the Institute for Wealth Management, also expressed hesitations about the one-year tenor.

“It’s interesting as a short-term play because it’s in line with our return expectations. So, assuming it gets called in six months, a 4% return can be very appealing,” he said.

But he stressed some important risk factors.

“After six months though, our view gets a little cloudy. Inflation is the risk I’m focused on and of course a lot will depend on the Fed.

“Can they react efficiently enough relative to the pace of inflation? I’m concerned over the potential for the equity markets to tumble over this very short period of time in reaction to the shock of a higher-than-expected inflation,” he said.

One year is probably too short of a timeframe at a time when the market is going to be forced to adjust to potential economic challenges, he added.

“A longer note would have the advantage of giving us more time for a return to normal,” he said.

The notes are guaranteed by Bank of America Corp.

BofA Securities, Inc. is the selling agent.

The notes (Cusip: 09709UWJ3) settled on Wednesday.

The fee is 0.25%.

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