BofA’s $4.01 million buffered autocalls on Russell, S&P may offer multiple uses in portfolio

By Emma Trincal

New York, Feb. 6 – BofA Finance LLC’s $4.01 million of 0% buffered autocallable notes due Jan. 28, 2027 linked to the least performing of the Russell 2000 index and the S&P 500 index may be used in various buckets of a portfolio, an adviser said.

The notes will be called at par plus a 12% annualized call premium if each index closes at or above its initial level on any semiannual call date after one year, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus 36% if each index finishes at or above its initial level.

If the laggard index falls by up to 20%, the payout will be par. Otherwise, investors will lose 1.25% for each 1% decline of the worst performer beyond 20%.

Fixed income

Tom Balcom, founder of 1650 Wealth Management, emphasized the multiple uses of the notes.

“We do a lot of those snowballs. They fit in several parts of the portfolio, which is very useful,” he said.

Snowballs are notes with an autocall strike equal to the initial price. The premium payment is made upon early redemption, not as a coupon, which means that investors only get paid upon the call.

Balcom said he mostly uses snowballs for the fixed-income portion of his portfolio.

“This one could be a good high-yield substitute with its 12% premium. The 20% buffer is very nice too. Even with the gearing, that’s a good downside protection,” he said.

Because the notes can be called early, suppressing the expected cash flow, they do not properly meet the definition of traditional fixed income, he noted. In addition, the principal is not fully protected as with a bond.

“We view it as income replacement but with some limits. That’s why we’re only using a small portion of it in our fixed-income bucket,” he said.

Long-only replacement

But snowballs offer some flexibility, allowing asset allocators to use them as equity substitutes as well.

“You get a 12% annualized, which really is an equity-type of return.

For equity, the position would represent a bet on a mildly bullish market.

The S&P 500 index as well as other U.S. equity benchmarks, have been posting a series of all-time highs lately, he noted.

The benchmark posted its latest record high on Tuesday at 4,957.77.

“The market is up a lot. It may only move up moderately from those levels. You could outperform in a range-bound market. It’s possible to get 12% a year if the indices are just slightly up or even flat,” he said.

“By the same token, if we have a correction, you have the downside protection.

“I can see it as a growth note. Getting a 12% potential return is not too shabby,” he said.

The fixed payout could even beat the return of a leveraged note in a market rising only moderately, he added.

“We had situations where the leverage did nothing for us,” he added.

For instance, in a market rising only 4% a year, a note offering 1.5x leverage would only yield half of the premium return, or 6%.

Protection, hedge

As a third possible use, Balcom cited hedging.

“You give up the upside above 12% but you’re getting a pretty good buffer. It’s a tradeoff. If you think one of the indices can advance rapidly, you shouldn’t use this note. But a buffered note can complement a long-only position and be used for hedging,” he said.

“The terms are pretty generous. It’s a fairly attractive note.”

Likely call

A financial adviser said he liked the risk-adjusted return of the security. But the reinvestment risk was a concern.

“You could easily get called in six months,” he said.

“It can be an issue for an adviser. You could be out of the market for some time while trying to find something else.”

For this adviser, the odds of being called early were significant.

“The S&P has done a lot better than the Russell. But the two indices are not inversely correlated. They could easily both be higher in six months,” he said.

Such scenario would precipitate an automatic call.

“You have to be proactive in tracking these things.”

Investors would get a much better result if the notes were held until maturity.

“You have a 20% buffer. That’s a strong buffer for sure,” he said.

The 1.25 leverage factor is calculated to expose 100% of investors’ principal at risk.

“While this may be scary for clients, it would take a drastic event to really wipe out your principal,” he said.

In the case of a bear market, a 40% drop in the index would generate a 25% loss of principal.

“You would still outperform the market,” he added.

The tenor of the notes may work to the benefit of investors in terms of risk.

“If you hold it for three years the chances of being down 20% are pretty low,” he said.

“Even if it was down, you would need a big shock to really be hurt by the downside leverage.”

Overall, this adviser said the product was compelling.

“I like the downside protection the most,” he said.

“The premium is what I would expect. I’m good with it.

“Other than the call risk, it’s a fine note.”

The notes will be guaranteed by Bank of America Corp.

BofA Securities, Inc. is the selling agent.

The notes settled on Jan. 30.

The Cusip number is 09710PPC4.

The fee is 0.25%.

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