Morgan Stanley’s $4.57 million autocallables on Ford show high coupon for single stock bet

By Emma Trincal

New York, Jan. 6 – Morgan Stanley Finance LLC’s $4.37 million of contingent income autocallable securities due Jan. 6, 2025 linked to Ford Motor Co.’s common stock offer a high double-digit return, but an adviser said the payoff was not attractive given the risk associated with single stocks.

Investors will receive an annualized coupon of 17%, paid quarterly, if the underlying stock closes at or above its 70% downside threshold on the related quarterly observation date, according to a 424B2 filing with the Securities and Exchange Commission.

The securities will be called automatically at par if the stock closes at or above its initial price on any quarterly call determination date.

At maturity the payout will be par unless the stock closes below its 70% downside threshold, in which case investors will be fully exposed to the decline of the stock.

Company risk

“I’m not a big fan of single stocks,” said Steve Doucette, financial adviser with Proctor Financial.

“Maybe the bet here is Tesla is out of control, Ford will catch up, so you get that note and pocket that 17% coupon. But if you’re bullish, why buy a 17% coupon when you can buy the stock?”

Doucette acknowledged that the answer to this question was the downside protection.

“I get that. But it’s a 30% contingent. If you get caught in that downdraft, you’re long the stock. It’s a loss of 30% or more. Theoretically, you could lose 100%,” he said.

Doucette said he looks for equity indexes rather than stocks when searching for notes that fit his clients’ needs.

So many stocks

“We do like autocalls. But we like them on broad indices,” he said.

“I talk to those brokers. They constantly pitch autocalls on stocks. Why are people doing this? I can’t get excited about it. Of course, you get a much higher coupon. But the company risk of a single stock is much more punitive than your risk in the overall market.

“I’d rather get a high single-digit on indices than 17% on Tesla.”

About a third of the notional amount of all autocallable notes issued last year was structured on single stocks, according to data compiled by Prospect News.

Another defensive approach

“The only way it would make sense to buy these notes is if you use them as a hedge,” he said.

“If you’re long Tesla, you made 30% last year. If you bought Microsoft, you’re up 45%. You can’t sell them because of the huge capital gains. But you’d like to hedge the position and you probably should. So, in that case, you would buy an autocall on the stock. That could make sense. Maybe that’s what’s driving this market.”

But the hedge was far from perfect, he noted.

“Tesla is down 40%, you’re long Tesla. You bought the notes trying to collect 17% and you’re down 40%. Not exactly a good risk-return profile,” he said.

On Wednesday, Ford reported that its sales surged in the fourth quarter despite Covid-induced supply chain issues which have disrupted the car industry on a global scale.

The share price closed at $24.95 on Wednesday, scoring a 52-week high. At that level and in only three days, the stock was already more than 20% higher than the $20.77 level at which it closed on the trade date.

Likely call

Matt Medeiros, president and chief executive of the Institute for Wealth Management, was relatively bullish on the stock. But he said the strategy was very short term.

“There’s been so much pent-up demand because of supply chain issues that new car sales are going to pick up quite a bit in the next couple of years especially when interest rates are still low,” he said.

“I think it’s a good sector to be in.

“Most likely, the notes will be called in the next couple of quarters.”

The short duration would not “disappoint” him, he said.

“You still get a nice return.”

Medeiros was not overly concerned about the barrier level.

“I just don’t see this note going to term.

“I think it’s a good note. I like it,” he said.

The notes (Cusip: 61773HVL0) are guaranteed by Morgan Stanley.

Morgan Stanley & Co. LLC is the agent.

The notes priced on Friday.

The fee is 2%.

More deals

Morgan Stanley earlier last month priced $4.57 million of another three-year autocallable notes on the same stock (Cusip: 61773HVS5). The terms were similar except for the 13.46% contingent coupon and the 60% barrier level applying to the coupon and principal at maturity.

Interest for Ford as the underlying for an autocallable product was not limited to those two deals.

Coming up Monday, JPMorgan Chase Financial Co. LLC will price another issue (Cusip: 48133CNM0) with a very different profile.

The tenor is much shorter as a 13-month. The contingent coupon, which will be at least 10% per annum, will be paid monthly rather than quarterly. The barrier for the coupon and the repayment at maturity is 65%. The notes are autocallable monthly, but the issuer offers a six-month call protection.

Rates matter

For Doucette, the risk-adjusted return issue had not improved compared to Morgan Stanley’s $4.37 million deal.

“You take the risk of a single stock for an even lower coupon. Your maximum return is 10%. Your maximum loss is 100%,” he said.

“They give you a little bit more in protection. It doesn’t seem like a lot, 65% versus 70%, but if you look at the average losses of bear markets, perhaps it’s a bit better.

“However, averages don’t always mean much, especially on a 13-month.”

The average drawdown of a bear market since June 1, 1932 is 35.2%, according to S&P Dow Jones Indices.

“I’d go for 8% on indices. It’s a lower return but you are less likely to get slaughtered,” he said.

Medeiros stressed his preference for the Morgan Stanley notes with a 17% contingent coupon.

“It seems more appealing to me,” he said.

“The economics on the one with the 10% coupon are not as good. In this case, I think you’re better off buying the stock.”

© 2015 Prospect News.
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