Bank of Montreal sold $101.01 million notes linked to 20 energy picks from Raymond James

By Emma Trincal

New York, Aug. 13 – Bank of Montreal priced last week the 16th largest deal of the 5,498 offerings that have been brought to market in 2014 as of Friday, according to data compiled by Prospect News.

The deal is linked to a basket of stocks in the energy sector. The strong bid was seen as evidence that investors are actively looking for the best stock-picking strategies.

Bank of Montreal priced $101.01 million of 0% “New U.S. Energy Paradigm” notes due Aug. 19, 2015 linked to a basket of energy stocks selected by Raymond James & Associates, Inc. last month.

The issue price was 102.75. The proceeds of the deal were $103.78 million.

“It’s a big deal. It was probably a successful trade given the strong reputation of Raymond James analysts as stock-pickers,” a source said.

Raymond James equity research has been acclaimed in the media for its track record in stock-picking.

In the past 10 years, Raymond James’ annual best picks have generated an average annual return of 19.9% versus 11.4% for the S&P 500 index, or 8.5 percentage points of excess return over the market, according to the brokerage firm’s web site.

The basket companies are Antero Resources Corp., Bonanza Creek Energy, Inc., Continental Resources, Inc., Consol Energy Inc., Cabot Oil & Gas Corp., EOG Resources, Inc., Chart Industries, Inc., Halliburton Co., Hi-Crush Partners LP, Kansas City Southern, LyondellBasell Industries NV, Marathon Oil Corp., Nabors Industries Ltd., Plains GP Holdings, LP, Phillips 66, Pioneer Natural Resources Co., Targa Resources Corp., Union Pacific Corp., USA Compression Partners, LP and Valero Energy Corp. The weight is 5.2% for each stock other than USA Compression Partners, which has a 1.2% weight due to its lower liquidity.

The payout at maturity will be par plus the basket return minus a redemption adjustment amount of $2.50 per $1,000 principal amount of notes, according to a 424B2 filing with the Securities and Exchange Commission.

The breakeven level is 103%, meaning investors will receive less than par if the final basket level is not at least 103% of the initial basket level.

“It’s an opportunistic play on energy given the crisis in the Middle East and in Ukraine. It makes sense in terms of timing,” the source said.

The equity research department of Raymond James selected the 20 companies on the view that “U.S. energy sector companies engaged in exploration and production are currently positioned to increase their cash flows even if the market prices of oil and gas remain near current levels or decline modestly,” according to the prospectus. The Raymond James equity analysts expressed the view that the selected companies “are likely to become more profitable and to increase their capital efficiency.”

Each of the selected stocks has a rating of “buy” or “outperform” from Raymond James.

Access play

“If you look at the components of the basket, you’ll probably find a bunch of volatile stocks that pay high dividends. Put high volatility and high yield together and you can price a pretty interesting structure. The stocks may be correlated, so they’re not getting extra premium from that. But the delta one structure costs very little. Given that you don’t have any optionality, it’s an access play, a bet on energy,” the source said.

A market participant agreed.

“These types of deals tied to a sector-oriented basket are designed to cover one market segment. They are a play on one theme. Instead of buying 20 different energy stocks, they put together this basket, which is more cost-efficient,” this market participant said.

“If no [exchange-traded fund] exists, it’s always a good thing to do a note like that. But if there’s an ETF available, I’d rather use the ETF. I get the liquidity and a lower cost because I receive the dividends.

“The ETF is more or less striking an index. It’s kind of rebalanced, while baskets of stocks tend to be fixed unless they’re actively managed certificates, but those are rare. The ones that are actively managed tend to be privately placed.”

In the case of this product, the stocks constituting the basket were selected for the one-year duration of the product.

One-to-one

Andrew Valentine Pool, main trader at Regatta Research & Money Management, said that investors had to have been buying the notes for the Raymond James research and not for any other reason.

“You have a selection of 20 oil and energy stocks. There’s got to be an ETF or ETN that is close to this portfolio which would give you full liquidity. I suppose you’re buying Raymond James’ expertise at picking stocks,” he said.

“But to not get any leverage, any buffer and be locked up for a year, why not an ETF or ETN? Even if you’re locked up for only one year, you’re not getting any return enhancement or downside protection from the structure itself. It’s a pure delta one product. I guess the Raymond James stock-picking franchise behind this construction would be the only selling point.”

For each basket stock, the initial share price is (a) the average of its average intra-day prices on the three trading days ending Aug. 12, 2014 plus (b) $0.01. For each basket stock, the final share price is (a) the average of the closing prices on the three trading days ending Aug. 14, 2015 minus $0.01 plus (b) 100% of the gross cash distributions made per share from Aug. 11, 2014 through Aug. 14, 2015.

BMO Capital Markets Corp. is the agent with Raymond James as distributor.

The notes (Cusip: 06366RVH5) priced on Aug. 8.

The fee was 2.75% and for Raymond James only.

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