Morgan Stanley’s phoenix autocalls on Travelers show rare underlying stock, used only once

By Emma Trincal

New York, May 13 – Morgan Stanley Finance LLC’s contingent income autocallable securities due May 18, 2023 linked to the common stock of Travelers Cos., Inc. offer a tactical play on a blue-chip stock, which has not been used in a note for more than a decade.

The notes are guaranteed by Morgan Stanley.

The notes will pay a contingent quarterly coupon at an annual rate of 10.75% to 12.75% if the stock closes at or above its 55% downside threshold on the determination date for that quarter.

The notes will be called at par plus the contingent coupon if the stock closes at or above its initial share price on any determination date after six months.

The payout at maturity will be par unless the stock finishes below its 55% downside threshold, in which case investors will be fully exposed to any losses.

Only one so far

There has been only one U.S. registered structured note tied to Travelers that has priced so far, according to data compiled by Prospect News. The data goes back to 2004.

The deal, UBS AG’s $4.49 million of six-month 10.1% reverse convertible notes, priced 11 years ago.

“It’s not a common underlier even though it’s a Dow component,” said a market participant.

“It’s one of those names with a volatility that’s been too low for a long time to make it worthwhile.

“But with the recent spike in volatility, you’re able to price that type of blue-chip name.”

The implied volatility of the stock is at 36%.

“36% is not that high. But if you look back to February, the vol. must have been more around the mid-teens,” he said.

Conservative play

The stock closed at $89.86 a share on Wednesday. From its $77.00 low in March, it has only regained 16%.

“But it’s way off its recent highs. You have to go back to September 2014 to be at these levels,” he said.

The stock is now trading 42% lower than its 52-week high of July.

“It’s definitely a conservative note based on the type of stock and the historically low volatility,” he said.

“In addition to that, you’re getting a 45% cushion on the coupon and the downside while still achieving double-digit.”

Slow race

Brady Beals, director, sales and product origination at Luma Financial Technologies, said the deal offered a tactical play.

“It seems like a bet on one of those stocks that has not really been part of the recovery story of April,” he said.

“If you compare Travelers with stocks that have regained a large part or even the full part of what they lost in February, the stock is far behind. The likes of Amazon, Google, Microsoft, have been up a lot until the last couple of days.”

Amazon Inc. and Microsoft Corp. are about 30% higher than their levels in March at the bottom of the bear market. Alphabet Inc., Google’s parent company, has recouped 27% from its low at the same time.

In comparison, the share price of Travelers has dropped more than 34% for the year and has only rallied by 10% since its March bottom.

Futures curve

“The pricing is obviously attractive,” Beals added.

“You get 55% and 55% with a double-digit yield. The dividend is close to 4%, which certainly helps.”

He mentioned another factor behind the competitive pricing.

“If you look at the futures curve of Travelers, it’s actually negative. That 100% impacts pricing.”

The futures curve reflects investors’ expectations on the stock.

A negatively slopping curve will contribute to cheapen the cost of the call options embedded in the structure, he explained.

The slope of the futures curve as well as low interest rates and the high dividend yield of the underlying are all positive factors, which have contributed to the compelling terms of the product, he said.

Stock picking

“It’s a tactical play. They took a conservative profile. No doubt they targeted the underlying first and put a structure on it,” he said.

The choice of the underlying gave clues as to who the client may be.

“Some issuers price autocalls on stocks that everyone knows, stocks that have performed well, knowing that retail clients will like it.

“The difference here is that they picked a much more conservative name, a blue-chip that hasn’t been going up as much as the big movers.

“It’s probably a reverse inquiry,” he said.

Morgan Stanley & Co. LLC is the agent.

The notes will price on Friday.

The Cusip number is 61771BEL4.

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