BofA’s autocallable market-linked notes on S&P show timely pricing, seen as bond proxy

By Emma Trincal

New York, July 21 – BofA Finance LLC’s market-linked securities – autocallable with contingent downside – due July 27, 2026 linked to the S&P 500 index received favorable comments from advisers due to a less overvalued market and an attractive rate of return.

If the index closes at or above its initial level on any annual valuation date, the notes will be called at par plus an annualized call premium of at least 10.25%, according to a 424B2 filing with the Securities and Exchange Commission. The exact call premium amount will be set at pricing.

If the final index level is at or above its initial level, the payout at maturity will be par plus at least 41%.

If the final index level is less than its initial level but greater than or equal to the barrier level, 75% of the initial price, the payout will be par. Otherwise, investors will be fully exposed to the decline of the index.

Beating expectations

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said the timing of the notes was opportune. Part of it was due to the recent pullback, which sent the S&P 500 index in bear market territory last month. While the benchmark has rallied over the past month, it is still trading 17% off its Jan. 4 high.

“I like this note. The coupon is very attractive even though you may get called early,” Medeiros said.

“We have low return expectations on the S&P, at least for the next few years.

“So, if I get called after one year with 10%, I’m fine with that.”

Fair value

On the downside, the 25% contingent protection the barrier offered was “sufficient” for this index over a four-year period, he said.

“The current P/E on the S&P 500 is in line with the 10-year average. With the recent pullback we are pretty much at fair value.

“This note is pricing at a favorable time,” he said.

The deal is expected to price on Friday.

Likely call

Steve Doucette, financial adviser at Proctor Financial, also liked the product. Despite the double-digit call premium though, he saw the notes as a bond substitute rather than an equity-type of instrument.

“It’s likely that at some point you’re going to get called and you’ll make 10% a year. That’s a nice rate of return,” he said.

“The 75% barrier is there to bring you some comfort because you know you’re going to get called, especially if you have four annual call dates. That’s a long time.”

Doucette acknowledged that the call premium is in effect a cap on the upside. But for a bond portfolio, the 10% annualized return was very “competitive.”

“You don’t participate in the upside. So, despite the double-digit potential, it’s not really an equity play. And on a compounded basis, your return is going to be less than 10%,” he said.

“As I look at my asset allocation, I would probably use it as a fixed-income replacement. Where else in fixed-income can you earn 10%?”

Cumulative premium

Doucette suggested that making the right allocation was important because investors ran the risk of underperforming if the notes were to be placed in the equity bucket.

One source of uncertainty was the timing for the automatic call.

“We’ve had a big market drop. Even if we have recovered some, we may still be hitting new market lows. We may go down a little,” he said.

But the memory feature associated with the call premium mitigated some of the risk of losing a payment each time the notes fail the call test.

“If you miss a coupon on a given year, you can get it back later. That’s the good news. I very much like those types of autocalls,” he said.

Yield, not participation

The chances of outperforming the market may not be high over the term, he said.

“Four years is a long time. At the end of it, you may miss some of the upside. The S&P may return more than 40% in four years.

But then we don’t know,” he said.

“The S&P could continue to go down then go back up then down again. If we have that kind of volatility, the market may end up trading range bound during the period. Ten percent could be a decent return.”

Doucette said he often buys autocallable products. This one had the advantage of being linked to a single index and not a worst-of, he said. The length of the observation periods and the cumulative characteristic of the payments were other benefits, he said.

“I do like those autocalls. I never lost money on one. It’s not an equity play. But as a bond substitute, it’s pretty attractive,” he said.

The notes are guaranteed by Bank of America Corp.

Wells Fargo Securities, LLC and BofA Securities, Inc. are the selling agents.

The notes will settle on July 27.

The Cusip number is 09709U4K1.

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