Bank of America’s $3.7 million 10.8% autocalls are linked to new name, WisdomTree Investments

By Emma Trincal

New York, July 27 – Bank of America Corp.’s $3.7 million of 10.8% autocallable yield notes due July 28, 2017 linked to the common stock of WisdomTree Investments, Inc. appear to represent the first use of WisdomTree Investments as a single-stock underlier in a U.S. registered structured note, according to data compiled by Prospect News over the past 10 years.

WisdomTree Investments is a New York-based exchange-traded fund sponsor and index provider.

Many WisdomTree ETFs have been and continue to be used as underlying assets in structured notes, such as the WisdomTree Japan Hedged Equity fund and the WisdomTree India Earnings fund. But the stock of the financial company itself has not been used so far, the data showed.

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

Beginning Oct. 23, the notes will be automatically called at par plus the coupon if the stock price closes at or above the initial price on any quarterly call observation date.

The payout at maturity will be par unless the stock finishes below the 70% downside threshold level, in which case investors will be fully exposed to the decline.

Pure fixed interest

“It’s not a phoenix. It’s a reverse convertible with an autocall feature,” a market participant said.

The so-called “phoenix” reverse convertibles pay a contingent coupon. The coupon barrier is usually at a lower strike than the call threshold. With the pure reverse convertible as in this offering, investors get paid a fixed coupon.

“We see fewer and fewer of those reverse convertibles. That’s because there aren’t many single stocks that have enough volatility to generate anything more than a single-digit coupon. Unless you want to link your note to Facebook or Netflix, you’re not going to get a great coupon. We see the Netflix and the Facebook, but it’s a very short list. So it’s interesting to see a new name that’s not one of those momentum stocks,” he said.

Asked whether he thought the deal was “good” or not, he said, “I don’t know enough about the stock. If you think the stock can deliver more than 21.6% in two years or that it can be down 30%, then it’s not a good deal. It depends on your view.”

Forward sale hedge

What intrigued this market participant the most was the choice of this particular reference asset.

“It’s an odd name. It’s an odd stock to link that structure to,” he said.

“I’m going to speculate 100% because I have no idea if it’s the case or not, but I’m going to imagine that for Bank of America it could be a way of hedging an exposure they already have on the name. It happens all the time.

“Sometimes we see some insiders who own a large position in the shares of the company. They may enter into a prepaid variable forward sale with a note issuer, in this case with Bank of America. The two parties agree on a price for a large block of stock. At a certain price, the buyer – in this case, the issuer – agrees to buy the shares.

“Once they buy, they’re long and they need to hedge the exposure. The normal way would be to sell. But they can also issue a note. It’s a way for them to lay off risk for taking the other side of a forward sale from an insider. It’s a way to get liquidity.

“It’s such an unusual name. I’m tempted to think it’s a name the bank has a position on and wants to hedge. That would be a logical reason to do the notes on that.

“It doesn’t mean anything about anybody’s opinion about the stock going up or down 20%. It’s only about hedging and liquidity.”

He noted that the $3.7 million notional of the deal is consistent with his assumption.

“A lot of time, $3 million is the minimum size to execute a trade with an insider,” he said.

Post-election risk

Steven Jon Kaplan, founder of TrueContrarian Investments LLC, said he was more focused on the maturity date.

“The biggest risk is to see big outflows from ETFs. I don’t like equity investments for the next couple of years. We could have a significant downturn. ETF providers like WisdomTree could be particularly hit if we see massive redemptions because their revenues come from management fees,” he said.

“A lot of money could go out over the next two years. The year 2017 will be just after the presidential elections, and statistically, post-election years are not great years. It’s a pattern. Think 2009 or 2001. I’m not crazy about 2017 as a maturity date especially as we will be coming out of a long bull market.

“I think it’s fairly risky.”

The notes (Cusip: 06048WRF9) priced on July 23.

BofA Merrill Lynch was the agent.

The fee was 2.5%.

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