American banking behemoth Bank of America (BAC) has had a roller-coaster year to date, with equity shares opening in January under $6, reaching a high of almost $10 in late March, and then falling to today's mid-$7 range. In the news recently for mortgage disputes and the "Lie"-bor scandal, the bank has seen its fair share of problems in 2012.
One particular lot of existing fixed-income issues from the firm, however, is extremely interesting for potential investors. The bonds currently on auction and described herein mature on September 15, 2037, are non-callable, trade on the New York Bond Exchange, and are taxable. The non-callable aspect of these bonds was important in my screen, as many of the BAC corporate debt securities listed on the market ostensibly yield higher than 6%, but many are callable and have a yield to worst in the sub-1% range. Let's take a closer look at one of the non-callable lots with the highest yield to maturity:
Bank of America Corporation CUSIP 060505DL5, rated Baa3/BBB+ and currently being offered for 109.008 cents on the dollar at best currently fit these criteria and yield 5.813% to maturity, which is also the yield to worst on these bonds. Coupon is 6.5%, and there are 72 bonds in this lot with this offer price (minimum quantity 10). Purchasing all 72 bonds here, with accrued interest payment of $1,859 and principal payment of $78,485.76 would come to a total cost of $80,344.76 for the individual investor. Other current offerings of the same CUSIP with respective yields include 418 bonds at 109.524 cents on the dollar with 5.776% YTM; 15 bonds at 109.608 cents on the dollar with 5.77% YTM; and 30 bonds at 110.128 cents on the dollar with 5.733% YTM.
Examining Moody's analyst reports for these bonds, it appears that Bank of America has a long-term rating of "investment grade" from these analysts. They do rate the specific bonds Baa3, stating that "obligations rated Baa are subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics." Potential investors should keep in mind that the outlook on Bank of America's credit rating is negative, indicating possible future downgrades by the ratings agency. One compelling excerpt from the analysis:
BAC also remains exposed to potentially significant risks related to both the residential mortgage and home equity loans on its balance sheet, as well as to mortgages previously sold to investors. Moody's believes the bank has ample resources to absorb the additional losses it is likely to experience on these exposures. However, if the economic environment were to deteriorate and the bank were to receive adverse legal rulings on the claims pending against it related to its mortgage business, it could have a significant impact on BAC's capital position. Moody's also believes the variability around potential negative outcomes is substantial, and their resolution is not entirely within the direct control of management. The resulting uncertainty is a constraining factor on BAC's standalone credit assessment.
Investors should check out all the factors involved and see if this investment and its risk characteristics are appropriate for their investment strategy and objectives before entering into a purchase of these bonds. Still, I believe that for the risk-tolerant investor, these securities offer higher-than average market yield for a large corporation that (regardless of normative judgment) has the benefit of moral hazard on its side.
There exist other nominally non-callable Bank of America corporate fixed-income securities, but many of these have special redemptions and are therefore effectively callable, potentially resulting in a lower yield to worst than described. Be careful when examining these securities to see if the bonds in question have special redemption provisions (BAC bonds with CUSIP 06050XA94 are one example).
Fixed-income investors should conduct their own due diligence on all potential investments before making final investment decisions. Investors should remember that these notes are not bank deposits and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency, and that the integrity of the notes is based upon Bank of America's credit solvency and ability to service its debts to bondholders and creditors into the future.
Disclosure: I am long BAC.