BofA’s $59.92 million callable notes on Russell, S&P, Nasdaq offer yield-boosting call, barrier

By Emma Trincal

New York., Aug. 31 – BofA Finance LLC’s $59.92 million of trigger callable contingent yield notes with daily coupon observation due Feb. 26, 2026 linked to the worst performing of the Nasdaq-100 index, the Russell 2000 index and the S&P 500 index offer an above-average contingent coupon based on riskier features applied to the barrier and the call.

The notes will pay a contingent quarterly coupon at an annual rate of 12.45% if each index closes at or above its coupon barrier level, 65% of its initial level, on each trading day during the relevant observation period, according to a 424B2 filing with the Securities and Exchange Commission.

Unlike a point-to-point observation, such daily observation strikes, named “American barriers,” may be more easily breached.

The notes will be callable at par of $10 plus any coupon due on any quarterly observation date.

If the notes are not called and each index finishes at or above its downside threshold level, 55% of its initial level, the payout at maturity will be par. Otherwise, investors will lose 1% for every 1% decline of the least-performing index from its initial level.

Big picture

“This is a staple. That’s your typical worst-of callable note,” a market participant said.

“We tend to do that on much shorter durations, between 12 and 18 months. Three-and-a-half years is a bit long for me.”

The risk at maturity in relation with the coupon rate was attractive, he added.

“A 55% European principal repayment barrier. That’s good.”

The term “European” designates a barrier observed point to point.

“12.45% a year. That’s over 3% a quarter...that’s nice as well. It covers more than inflation,” he said.

No no-call

While there is no call protection, the probability of an immediate call on the part of the issuer was “very low,” he said.

“It would mean that all the indices have to rise, volatility has to drop, interest rates must go down. These are the conditions that would encourage the issuer to call, and preferably, all those three conditions should happen. That’s a lot of things that are rarely happening simultaneously,” he said.

In any event, a call after three months may not be a bad outcome for investors, he said.

“You get called right away...Fine. You get 3%.”

But offering a call protection or a “no-call” period always makes the notes more marketable.

“I have a flexible rule. I try to put a no-call half-way through the duration of the notes. If it’s a 12-month, I put a six-month no-call. If it’s an 18-month, I try a 9-month.”

The idea is to let investors accumulate as much coupon as possible.

“You want to get your payment for a while. You also want to reduce your cost because the fee embedded in the product is paid upfront,” he said.

Therefore, the longer investors hold the notes, the more time they have to amortize the cost.

Issuer call

Investors often object to issuer calls as they do not know when, if and why the notes may get called.

For advisers, autocalls are much easier to explain, he said.

“With the issuer call, it’s very difficult to explain why a note has been called. With an autocall, it’s mathematical. Either three are above or not,” he said.

“But autocalls don’t pay as much.”

If the BofA callable note had been structured as an autocall, investors may have lost about 1% per annum, he said as “a guess,” without directly pricing the change.

“I don’t have much against this structure. It’s pure yield enhancement. The American barrier adds another level of risk, but you’re compensated for that,” he said.

Dangerous knock-in

But the American coupon barrier was the biggest drawback, a financial adviser said.

“It definitely gives you more yield. And both barriers are deep. If the index falls less than 35%, you get paid. If it falls less than 45%, you get your money back at maturity. These are great barriers,” this financial adviser said.

But the daily observation for the coupon payment was a real concern.

“A knock in observed every single day adds too much risk. We never use them – ever,” he said.

He said he would rather have quarterly observation dates even if it meant a lower coupon.

“If it had a memory, I could tolerate the risk of the knock-in. If you trip, if one day you breach, at least you can make it up. Your coupon is less at risk.”

A memory feature provides payment for previously unpaid coupons.

The human touch

On a positive note, the issuer call was not a problem for this adviser, quite the opposite.

“We actually like issuer calls. We like them better than autocalls. You get more yield. They pay you more for the option to call,” he said.

In addition, the notion that issuers would systematically call when the market goes up was ill-founded, he said.

“They have reasons not to call that have nothing to do with the market. Many times, it has to do with their liquidity, or the positions they have in their books. Also, if they call you, there’s always a risk that you may shop around and take your business to another bank. So, they may think twice before doing it,” he said.

Reinvestment risk

On the other hand, autocalls offer little control when stock prices go up, he noted.

“We may strike a note and like it. The market rallies and the autocall will kick us out while we may not want to.”

“It’s especially problematic when the prevailing rate is lower than when we bought the product. We then risk rolling out to a lower coupon,” he explained.

Would this still hold true now that rates are trending up?

“It depends on your outlook,” he said.

“The Fed controls the very short end of the curve but on the longer end, I expect rates to be lower.

“There are different phases of inflation. For now, I’m still more comfortable with issuer calls.”

Without the American barrier on the coupon, this adviser said the note would have been one he may have considered for his portfolio. Replacing the coupon barrier by a European barrier or adding a memory feature would have greatly improved the optics of the deal, he said.

The notes are guaranteed by Bank of America Corp.

UBS Financial Services Inc. and BofA Securities, Inc. are the agents.

The notes settled on Friday.

The Cusip number is 09710G239.

The fee is 1%.

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