Morgan Stanley’s autocallable notes on bank stocks offer value, deep barrier, advisers say

By Emma Trincal

New York, Dec. 3 – Morgan Stanley Finance LLC’s 0% contingent income autocallable securities due Dec. 14, 2023 linked to the common stocks of Bank of America Corp. and Wells Fargo & Co. offer a defensive play on bank stocks given their depressed prices and the deep barrier level, according to registered investment advisers. The one-year non-call feature is an additional benefit, they said.

Each quarter, the notes will pay a contingent coupon at the rate of 9.5% per year if each stock closes at or above its coupon barrier level, 60% of its initial level, on the observation date that quarter, according to an FWP filing with the Securities and Exchange Commission.

The notes will be automatically called at par if each stock closes at or above its initial level on any quarterly redemption date after one year.

If the lowest-performing stock finishes at or above its barrier level, 60% of its initial level, the payout at maturity will be par plus the final coupon. If the lowest-performing stock finishes below its barrier level, investors will be fully exposed to the decline of the lowest-performing stock from its initial level.

Barrier

For Steve Doucette, financial adviser at Proctor Financial, the main question is how to allocate autocallable contingent coupon notes in general as they offer fixed-income attributes with equity risk.

He was inclined to see the investment as income replacement given the defensive aspect of the product.

“Banking stocks have not done well, which is not surprising with interest rates bottoming out,” he said.

“Those stocks are down... How much further down can they go?

“This 60% makes me pretty comfortable.”

Value stocks

Bank of America is down 18% for the year. Its share price lost nearly half of its value in the first quarter.

Wells Fargo’s performance is even worse as the stock is down more than 45% for the year to date.

“At those levels plus the 60% barrier, you have a decent margin of safety. I can see it as fixed-income replacement. It’s a decent way to collect a coupon with a little bit of downside risk since it’s still a worst-of. But the risk is limited.”

Rallying

If one had to be concerned about risk, it would be more on the upside, he said.

“If you use it in your equity allocation, you might limit your potential return,” he said.

Indeed, Bank of America has gained 17% in the past month alone. Wells Fargo has posted a 40% gain since its 52-week low at the end of October.

Income substitute

“If the vaccines work and the economy picks back up, those stocks may come screaming back. In fact, it’s already happening. Rising interest rates could also boost their performance. Interest rates being this low have to go up at some point.”

“A 9.5% coupon is pretty good. Where else are you going to get that return in fixed income?

“If you lose money, you lose a lot, but it’s not very likely given the valuations and barrier.

“Only people chasing tech returns would complain about a 9% return,” he said.

Bullish on banks

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said he also liked the notes for their defensive structure.

“Those stocks had significant pullbacks which is common in the financial services space especially in a lower interest rates environment,” he said.

“Bank of America did a little bit better because of its more diversified businesses.

“But the deal is pricing at a time when those assets are a bit depressed, which is a positive.”

Medeiros was relatively optimistic about the sector.

“If interest rates go up, the margins for the banks will potentially increase,” he said.

“When we get more stimulus, when more money flows back into the market, banks will participate.”

Defensive play

Medeiros noted that owning the shares may generate a higher return than 9.5% annually.

“But given the unknown in the market and the uncertainty around the political transition, I wouldn’t mind taking a 9.5% with these stocks,” he said.

“Interest rates should rise, but it might take some time.

“For a three-year, the 60% barrier gives me some confidence.

“You get a decent return without taking on the full downside risk.

“I think it’s a good deal.”

The notes are guaranteed by Morgan Stanley.

Morgan Stanley & Co. LLC is the agent.

The notes will price on Dec. 11 and settle on Dec. 16.

The Cusip number is 61771ERL4.

© 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.