Bank of Montreal reverse convertible offers near-record 42.16% coupon

By Emma Trincal

New York, May 5 - Bank of Montreal's $2 million of 42.16% annualized reverse exchangeable notes due Aug. 8, 2011 linked to the common stock of Eastman Kodak Co. offer a coupon that is among the highest on record for reverse convertibles, data compiled by Prospect News shows.

A previous record was broken in July 2007 when JPMorgan Chase & Co. priced $1 million of 67% reverse exchangeable notes due Oct. 18, 2007 linked to the stock price of InterOil Corp.

The payout at maturity for the Bank of Montreal deal will be par unless Kodak shares close below the trigger price - 75% of the initial share price - during the life of the notes and the final share price is less than the initial share price, in which case the payout will be a number of Kodak shares equal to $1,000 divided by the initial share price or, at the issuer's option, the cash value of those shares.

Interest is payable monthly, according to a 424B2 filing with the Securities and Exchange Commission.

Timing is everything

"It's fascinating," said Mark Kaufman, an analyst at Rafferty Capital Markets who covers the stock. "What fascinates me is the timing of it."

Kaufman explained that Kodak brought a patent infringement action against Apple Inc. and Research In Motion Ltd. and that the matter will be reviewed during a hearing by the International Trade Commission on May 23.

"What's the chance of a 25% drop in the price? That's this specific event," he said. "The quid pro quo has to be a really high return."

But Kaufman said that the short term of the notes is a plus for investors.

"This deal may not be as irrational as it seems because the stock price might not collapse by 25% in three months," said the analyst, who has a buy rating on the stock.

"The May 23rd decision by the ITC may not bring this dispute to a head," he added.

In addition, Kodak also filed Federal Court actions pertaining to the same issue, which are now pending, he said.

"Bottom line, this litigation is not going to be resolved in three months."

The stock on Thursday afternoon was trading at $2.84, up 1%. The deal priced on Tuesday at $2.88.

"Twenty five percent decline is 25% decline, whether the stock is trading at a low price or not," said Kaufman. He added that a lot of the discount due to the trade dispute has already been priced into the stock. His target for the buy rating is $9.50 a year from now.

BMO Capital Markets Corp. is the agent.

Fees were 2.25%.

© 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.