Morgan Stanley’s contingent income autocalls on BofA offer very short-term play for yield

By Emma Trincal

New York, March 19 – Morgan Stanley Finance LLC’s contingent income autocallable securities due Sept. 24, 2020 linked to the common stock of Bank of America Corp. offer a reverse convertible-like profile except for the contingency of the coupon. The short tenor and high yield caught investors’ attention, but risks were also considered.

The notes will pay a contingent monthly coupon at an annual rate of 15% if the stock closes at or above its 65% downside threshold on the determination date for that month, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par of $10 plus the contingent coupon if the stock closes at or above its initial share price on any of the first five determination dates.

The payout at maturity will be par unless the stock finishes below its 65% downside threshold, in which case investors will be fully exposed to any losses.

Fast decline

“When a stock drops so much, you have to consider what another 35% is like before the barrier gets hit. In dollars, it’s not much since the price is already depressed. 35% from today is not the same as 35% from a month ago,” said Steve Doucette, financial adviser at Proctor Financial.

The stock closed at $21.20 on Thursday, down nearly 40% from its recent $35.23 high of a month ago.

“You may think you have a deep barrier but you don’t really,” he said.

A 35% decline from today’s price would take the share price down 7.42 points to $13.78. A month ago, the same percentage drop from the high would have pushed the price to $22.90, a 12.33-point decline.

“How soon can it lose another 35% after being down 40%? Well it actually could be sooner than you think,” he said.

“You hope to continue to collect 15% a year and you could if the note was a little bit longer.

“But precisely, this is a very short note. Six months goes fast in this market.”

He pointed to the “tail risk” created by the spread of the coronavirus.

“Your risk-return is asymmetrical. You can get 15% on the upside but that’s your cap. And you can lose 100%.

“I don’t think I’d want to do that in this market,” he said.

Too short

Matt Medeiros, president and chief executive officer of the Institute for Wealth Management, was not impressed by the product.

“This is a very short-term note in a very turbulent time, and I’m not sure I would take the time to review and analyze a note in this environment,” he said.

For a six-month term, investors may find better alternatives to a structured note.

“I would most likely try to use options to achieve something a little bit more efficient if I was focused on a six-month window,” he said.

Single stock risk

A financial adviser said the notes could be used by some investors but with caution.

“This is for a portfolio designed for high yield. It’s probably more suitable for an institution or a hedge fund than for a retail investor,” this adviser said.

“I would argue it’s not that risky given that we’re already down 40%. It’s extremely likely to be called away.

“It’s not worth your time for something likely to be called away.

“But individual investors should not take single security risk in general especially during an extremely volatile period.”

The exposure to a bank stock was also a concern.

“If you’re going to buy this note, you’re not going to put more than 4% in a single security.

“You’re not going to roll the dice on Bank of America,” he added. He pointed to credit risk and financial stress in general as the Federal Reserve Bank just rolled out programs to increase liquidity in the market in the midst of a panic.

“Banks’ balance sheets are not super strong.

“While an institution may have several products like this one in their portfolio, it’s just not suitable for an individual investor,” he said.

The notes are guaranteed by Morgan Stanley.

Morgan Stanley & Co. LLC is the agent with distribution through Morgan Stanley Wealth Management.

The notes will price on March 20.

The Cusip number is 61770G864.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.