BMO’s $1.44 million 13.7% autocalls on Blackstone Group offer fixed rate with single-name risk

By Emma Trincal

New York, Jan. 23 – Bank of Montreal’s $1.44 million of 13.7% autocallable barrier notes due Feb. 23, 2024 linked to the common stock of Blackstone Group Inc. provide a guaranteed double-digit monthly income if the notes are not called. But the risk associated with a single stock was seen as too high for the return despite an apparently large barrier, according to a financial adviser.

Interest will be payable monthly.

The notes will be called automatically at par if the stock closes at or above its initial price on any monthly valuation date after six months, according to a 424B2 filing with the Securities and Exchange Commission.

If the stock finishes at or above its 60% trigger price, the payout at maturity will be par.

Otherwise, investors will receive a number of shares equal to $1,000 divided by the stock’s initial price or, at the issuer’s option, the cash value of those shares.

Credit, fee

Steven Foldes, wealth manager and founder at Evensky & Katz / Foldes Financial Wealth Management, explained that regardless of the structure, he typically avoids single stock underliers preferring index-linked notes given the additional risk investors may incur from exposure to stocks.

“I can’t really comment on the credit quality of the issuer since I’m not familiar with the bank. But it’s always the most important thing. You want to make sure they’re creditworthy,” he said.

The 13-month term however reduced the credit risk in this case.

One obstacle was the 2.15% fee disclosed in the prospectus.

“It’s a little bit on the high side,” he said.

But the main stumbling block for this adviser was the underlying.

“We don’t do notes linked to individual stocks for the same reason that we don’t invest in individual stocks in our portfolio. Stocks are just too volatile. You’re exposed to the risk associated with a given company. Anything can happen,” he said.

Stock down

While he would not buy the notes, Foldes said that Blackstone was “a very fine company.”

The stock closed at $87.83 on Monday. This level was 37% off the stocks’ one-year high of February at $139.

“It’s down significantly over the last year,” he said.

“We just don’t know where it’s going to be in 13 months. The idea that a 40% barrier is a substantial protection may be true in the case of a broadly diversified index but not for an individual stock. We know that stocks can have very substantial swings.”

From last year’s high to the recent low of $71.72 on Dec. 28, the share price dropped 48.4%.

“That’s the reason why we avoid individual stocks when we buy notes for our clients. In this particular case, the kind of return you get – 13.7% – is not nearly enough from my perspective to take that kind of risk on an individual stock,” he said.

Call risk

Despite the six-month call protection, Foldes said a call event would not be beneficial to investors.

“It would be disappointing to be called early on such a short-term note. If you get called in six months, you will receive less than 7%. It’s not that much bang for your buck considering the risk you’re taking. The level of protection you get with a 40% barrier is not sufficient and the risk is too high.

“Many growth stocks last year lost two-thirds of their value or even more. Even some of the indices dropped dramatically. Consider the Nasdaq down almost 35% last year. You have to keep in mind that a single name is going to be even riskier and more volatile than an index.

“This is not a note we would be doing,” he said.

Complex behemoth

Investors in the notes should be familiar with the underlying stock. But a company as large and diversified as Blackstone may not be easy to understand, a bank analyst said.

Dick Bove, senior research analyst at Odeon Capital Group, said that any exposure to a large asset manager like Blackstone would require some significant due diligence on the part of investors.

“I’m not sure retail investors have the time or the skills to do the necessary research. Blackstone is a giant in the alternative investment space. But its stock was down a lot last year as most of the stock market,” he said.

“With investors expecting a recession – I’m not sure it’s going to happen – but with that negative expectation last year, we had a market that went substantially down.”

Blackstone has about $951 billion of assets under management. Its major lines of business are in real estate and private equity.

“The real estate sector has been hit hard because of the increase in interest rates,” said Bove.

Rising rates have a negative impact on the sector as higher mortgages slow demand for housing.

Meanwhile, higher interest rates also hurt the sector as they increase construction costs, he added.

“I don’t cover Blackstone directly. But if the bulk of their portfolio is in commercial real estate, their funds will be especially vulnerable to changes in work habits as people are increasingly working from home,” he said.

“The hospitality industry is also at risk. The only segment that’s more attractive is industrial real estate, which includes factories and warehouses. In that particular area, you’re in great shape.”

Private equity, which represents about 25% of Blackstone’s business, according to Morningstar, is a segment known for its lack of transparency, noted Bove.

“There’s an awful lot you have to know if you want to analyze private equities companies. Same thing for real estate,” he said.

Blackstone also raises funds for its hedge fund operations and credit alternatives.

“This is a complex company. You have to do your due diligence. This may be a tall order for an individual investor,” he said.

BMO Capital Markets Corp. is the agent.

The notes settled on Monday.

The Cusip number is 06369NEZ0.

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