Morgan Stanley’s uncapped notes on indexes offer choice between more leverage and buffer

By Emma Trincal

New York, Jan. 13 – Morgan Stanley recently priced two issues of uncapped leveraged notes tied to the worst of two U.S. large-cap indexes, giving investors the choice between a buffered downside with little upside leverage versus a more substantial leverage multiple but no downside protection. Both notes are relatively long in duration although the buffered security is one year shorter than the other.

Two offerings

Morgan Stanley Finance LLC priced $750,000 of 0% buffered Performance Leveraged Upside Securities due Jan. 15, 2026 linked to the worst performing of the Dow Jones industrial average and the S&P 500 index, according to a 424B2 filing with the Securities and Exchange Commission.

If the return of the worst performing index is positive, the payout at maturity will be par plus 109% of the return of that index. Investors will receive par if the worst performing index declines by 10% or less and will lose 1% for every 1% that the worst performing index declines beyond 10%.

Separately, this issuer priced $405,000 of 0% Performance Leveraged Upside Securities due Jan. 14, 2027 linked to the worst performing of the same two underliers.

This time, the upside participation is 141.5%, but investors do not benefit from any downside protection against a decline in the worst-performing index.

Both deals priced on Tuesday and will settle on Friday.

Timing is key

“Who knows what’s going to happen in five years? That’s the hard part,” said Steve Doucette, financial adviser at Proctor Financial.

“The four-year is not that much shorter. The 10% buffer chews up all your leverage. You’re pretty bearish if you go for that shorter note. I mean even though they’re both uncapped, that shorter one gives you almost no leverage.

“I’d lean towards the one with the 1.4 times leverage that has no protection. It might help that it’s a five-year versus four. It’s not much but it may give you the extra time to go down and back up although nowadays it’s hard to tell. The market can rebound so fast as we saw it two years ago.”

Doucette said he often tries to change the terms of a deal so the modified note may be a better fit for his portfolio.

In this case, the choice was not easy.

“If you do the five-year, you could try to bring down the leverage a little and add a little buffer although I don’t know if you need a buffer five years out.

“As always with structured notes, we know the outcome. We just don’t know the timing.

“It’s really a tough call.

“I can’t get excited on either one of these notes,” he said.

Buffer first

Matt Medeiros, president and chief executive of the Institute for Wealth Management, commented on the four-year buffered note first.

“It seems like a straightforward allocation tool to capture a large-cap exposure,” he said.

“I think the 1.09x leverage is inconsequential, but I do like the fact that there is no cap on the upside.”

He also liked the four-year maturity.

“Four years with this type of note is important because it seems to lend itself to a long-term hold in an allocation strategy.”

Medeiros said he always favors some level of downside protection in a note.

“The 10% buffer is nice to have. I don’t anticipate it to be meaningful. Four years is a pretty good business cycle, and you may not need it. But even if you don’t, it’s always better to have a buffer,” he said.

Bad tradeoff

This was the reason why Medeiros said he did not like the other deal.

“You have no downside protection. The leverage is higher but it’s probably more expensive than margin. I’m not sure why you would buy this note,” he said.

“Again, the buffer may not be used but it should be offered. Otherwise, why buy a structured note?

“When you buy a structured note, you’re trading flexibility for the benefits of the product.”

Medeiros explained that “flexibility” to him meant liquidity and that the most important benefit he expected from a structured note was the downside protection.

“In this case, you don’t have the flexibility and you don’t have the protection. I don’t see why you would be doing this,” he said.

The notes for both issues are guaranteed by Morgan Stanley.

Morgan Stanley & Co. LLC is the agent.

The fee for the four-year buffered notes (Cusip: 61773HB40) is 0.75%.

The five-year notes (Cusip: 61773HB65) carry a 0.25% fee.

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