MTN-I: BoA begins ML assimilation with 1st structured note filings

Special report from mtn-i.com.

mtn-i has identified the first stirrings of structured note activity from Bank of America following shareholder approval of its merger with Merrill Lynch in early December last year.

Bank of America, which took ownership of Merrill's broker dealer and private client network under the terms of the sale, is in the pre-marketing stage with former Merrill Lynch structured note brands Accelerated Return Notes (ARNs) and Strategic Accelerated Redemption Securities (STARS), according to an SEC filing, ARNs give buyers an opportunity to earn a multiple of the upside (or downside) potential of an underlying asset, up to a specific cap, while bearing one-for-one downside (or upside) exposure.

STARS, meanwhile, are auto-callable structures which allow the investor to benefit from a fixed premium through an automatic call, which may be triggered by the price performance of the underlying asset. If note called prior to maturity, the investor will receive par so long as the underlying is at or above a threshold level, while bearing one-for-one downside exposure if asset has declined below the threshold.

Bank of America has yet to specify the underlying asset and payoff rationale in either case. The dealer was unavailable for further comment.

Exclusive access to its 15k retail brokers gave Merrill a significant competitive advantage in the US structured note market. SEC-registered issuance into this captive network accounted for nearly two-thirds of its league-table topping USD33bn sales total for the period 2006-2008.

During the same period Bank of America reported USD8.3bn of structured note sales across all issuers, or a quarter of Merrill's underwriting activity.Furthermore, Merrill Lynch was one of the most active issuers of US structured notes of recent years, raising USD19bn of capital from its brokerage clients since 2006, according to usmtn-i data. In 2008 alone, Merrill issued USD6.5bn across more than 160 deals into its private client network.Some USD5.4bn of equity index linked product accounted for 39% of its 2008 total, with ARNs accounting for the majority of the reported flow, according to mtn-i data. Merrill also applied the ARN rationale to commodity underlyings.

The new filings, which bear both Bank of America and Merrill Lynch corporate logos, provide the firmest evidence yet that the Merrill Lynch retail brokerage will retain its brand identity. The combination of Merrill's and Bank of America's private wealth management operations will yield a 20,000-strong financial advisor sales force with more than USD2.5trn of assets under management, according to official figures, presenting a significant market share opportunity for Bank of America's forthcoming structured product effort.

Access to this largest of distribution channels that Barclays Capital sought to gain in August with an agreement to both issue and underwrite structured product into the ML & Co brokerage. That initiative has since been sidelined by the merger.

Private clients demand diversification

Nordic agency Eksportfinans is the latest third-party borrower to gain access the Merrill Lynch network. SEC-filed documentation reveals that Eksportfinans will issue STARS linked to any one of the major asset classes as well as basket underlyings via Merrill. According to usmtn-i, Eksportfinans has supplied structured US MTNs through at least 14 underwriters on an all-time basis. Most active arrangers include Goldman Sachs, Wachovia and Morgan Stanley.

Access to the Merrill network has helped Nordic rival Swedish Export Credit become the most active foreign (non-broker) issuer in the US structured note market after the dealer last year accounted for more than half the borrower's USD5.2bn structured funding haul.

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