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Sept. 8 (Bloomberg) -- Bank of America Corp. structured note sales dropped to the lowest level last month since at least January 2010 as concern about the creditworthiness of the nation’s largest lender deterred investors from buying the bank- backed securities.
“When headline risk spikes, credit awareness spikes with it,” said Mitchell Eichen, chief executive officer of the MDE Group, an investment advisor that manages about $1.3 billion. “There was substantial headline risk surrounding Bank of America, so people will shy away.”
The bank posted its biggest loss in history in the second quarter, shares have plummeted 44 percent this year through yesterday and the cost to protect its debt surged. Chief Executive Officer Brian T. Moynihan is selling assets to comply with international capital standards and offset mounting obligations linked to soured home loans.
The lender’s structured note sales fell even as overall issuance in the market reached its highest level since March. The Charlotte, North Carolina-based company issued $62.7 million of the securities in August, down 87 percent from its average monthly offerings of $464 million this year, according to data compiled by Bloomberg. Deals in which Bank of America underwrote notes issued itself or for other banks, declined 47 percent to $526 million from a monthly average of $994 million so far this year, Bloomberg data show.
“Given that August is generally quiet, a decision was made in July to extend ticketing to the first two weeks of September,” Selena Morris, a Bank of America spokeswoman said in an e-mail. “In fact, our results for August are comparable to other months,” she said, declining to elaborate.
Credit Swaps Rise
Credit-default swaps tied to Bank of America, which rise as investor confidence deteriorates, jumped to 384 basis points on Aug. 23, the highest level since April 2009, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
That means it would cost $384,000 annually to protect $10 million of Bank of America’s debt for five years. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.
The swaps have declined to 323 basis points after Berkshire Hathaway Inc. Chairman Warren Buffett agreed Aug. 25 to buy $5 billion in preferred equity and four days later the lender announced a deal to sell almost half its stake in China Construction Bank Corp., netting $3.3 billion. The price of the swaps has increased from 127 basis points in April.
“Most people don’t assign a high probability that places like Bank of America will actually fold,” Eichen, who doesn’t own structured notes, said in a telephone interview from Morristown, New Jersey.
Investors may be avoiding Bank of America notes because structured products that have a perceived increased debt risk trade for less than similarly structured securities issued by banks with higher credit quality, he said.
Structured notes issued by Lehman Brothers Holdings Inc. became almost worthless when the company filed for bankruptcy in September 2008. Investors holding the notes, which are tied to specific indexes, had the same recourse as other debt investors when the firm became insolvent, meaning they had to get in line to be paid after more senior investors.
“For structured products, before Lehman, the reality was that everyone focused on the structure itself,” said Brian Jones, chief executive officer of SIP America LLC, which distributes structured notes to registered investment advisors.
“It was a discussion that should have always been there, but wasn’t on anybody’s radar,” he said.
Structured notes are bank bonds with embedded options sold to individual investors for customized bets.
--With assistance from Mary Childs. Editors: Sharon L. Lynch, Pierre Paulden
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