Bank of Montreal’s upside booster notes linked to Euro Stoxx 50 are seen as ‘new concept’

By Emma Trincal

New York, March 5 – Bank of Montreal’s 0% upside booster notes with barrier due March 29, 2018 linked to the Euro Stoxx 50 index offer investors an unusual way to outperform in either direction of the market without capping the upside and without sacrificing downside protection, sources said.

If the index return is greater than 24%, the payout at maturity will be par plus the index return, according to a 424B2 filing with the Securities and Exchange Commission.

If the index return is between negative 10% and positive 24%, inclusive, the payout will be par plus 24%.

If the index return is less than negative 10%, investors will have one-to-one exposure to the index's decline from its initial level.

Not seen before

“I really like that note. I really haven’t seen that specific type of note. It’s a new concept,” said Steve Doucette, financial adviser at Proctor Financial.

Bank of America consistently sells a similar structure named “market-linked step-ups,” but with some differences, according to data compiled by Prospect News. The step-up notes have in common with Bank of Montreal’s “booster” product a digital payout when the index finishes below a pre-defined upside threshold (called the step-up level instead of booster). Another common feature is the uncapped exposure to the index above that level.

However, one distinct feature is that step-ups tend to lack downside protection. Another important difference is that the digital payment only kicks in at or above the initial level while the Bank of Montreal notes allow investors to pocket the 24% reward even if the index is negative up to the barrier threshold.

Tenor, barrier

“The only time you outperform is if you’re in that range between minus 10% and plus 24%. It’s a pretty broad range. The 24% is a nice number, and you’re long the index above that. I have no problem with the upside,” Doucette said.

“On the downside, you can significantly outperform between 90% and 100% of the initial price.

“But it’s too hard to predict the market three years out. That’s a little bit my problem. It’s the uncertainty of having a bear market that would make me hesitate.

“If you really think we’re going to trade range bound, it’s a great note. If you’re an indexer, there’s no reason not to pick this instrument. As an equity investor, you almost have nothing to lose.”

Not bear proof

Doucette said that the notes met one of his criteria, which is to enable investors to outperform in either direction of the market.

“The potential to outperform on the downside here is huge. The problem is the level of protection,” he said.

“In a bull market, if it was a leveraged note, I might give up some of the leverage for more protection.

“With this one, you get the 24% boost if you’re down 10%, which is great. But after six years of bull market, we might not be down 10%. We might be down 30%. You never know.”

Doucette said the notes were interesting enough to entice him to rearrange the terms.

“I might look at shortening it and play with some of the range. Maybe get a bit of protection ... make the booster a little bit lower and add a buffer.

“It may put the whole note out of whack. But I would still play with it. I always try to get outperformance including in a really bad market, and that’s what I would be looking for.”

Euro Stoxx 50

Matt Medeiros, president and chief executive of the Institute for Wealth Management, also liked the notes, especially the combination of the terms and the benchmark.

“I think the structure for this particular underlier is very interesting. I like the Euro Stoxx 50 index. It has already outperformed the S&P this year. It shows some interesting opportunities for the next three years,” Medeiros said.

“Most likely the index will bounce around a bit. But the fact that it’s a point-to-point makes it more attractive.

“I like the idea that if it’s a modest return over the three-year period, you get some return enhancement. That part is attractive. I like that.

“I don’t recall having seen that type of structure before. To be able to make 24% if the index is down 10% is definitely interesting.

“I think that it’s important not to be too enamored with a structure when you look at a product though. You have to take into consideration how the structure applies to a particular underlying.”

In this case, the structure and the embedded investment theme worked well together, he said.

“I’m optimistic about the index right now. Since it’s point-to-point on a three-year timeframe I am confident about the terms relative to this particular benchmark.”

Another attractive feature, in his view, was the uncapped return when the index final level is above the booster.

“I don’t like caps per se,” he said.

“The fact that you get the full benefit of the underlying if you’re right is a good thing. And if you’re moderately right, you get the return enhancement. That’s also a good thing.

“If I look at these things relative to the fluctuations of the underlier, this particular note is pretty straightforward.”

BMO Capital Markets Corp. is the agent.

The notes are expected to price March 26 and settle March 31.

The Cusip number is 06366RE27.

© 2015 Prospect News.
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