Morgan Stanley plans deal linked to PHLX Oil Service; Citigroup sells $99.04 million ELKS tied to Nucor

By LLuvia Mares and Sheri Kasprzak

New York, Oct. 25 - An offering of notes linked to the PHLX Oil Service Sector from Morgan Stanley was called "interesting" on Thursday by a market insider, especially in light of recent jumps in oil prices.

"I think this one is kind of interesting," said a market insider Thursday.

"We are obviously doing more and more principal-protected notes ourselves and I'd like to see more of this, so over all I have very good comments about it.

"I like the fact that it is short term, I think people are asking for that. I am a big fan of the principal-protected notes. I think it's very interesting. Right now with oil it seems like there are very few people sitting on the fence. Either they feel it is going to go way above $100 [per barrel] or back down to $60 [per barrel] so this is a way to really have some exposure."

Investors jumping onto mortgage lenders

In the broader market, one market insider lamented that investors are seeking out very short-term notes linked to mortgage lenders, hoping to hop on the volatility bandwagon and then jump back off when those lenders go out of business.

"People are trying to place very short-term, three-month notes linked to some of these mortgage firms trying to just dip in and out before they go under, capturing that volatility," said one market insider.

"That bothers me more. I think you can do a little bit of that obviously with your playing money but for [a] real investment, I'd rather see you take advantage of some of the other big names, maybe American Express."

Another trend, said a market source, will likely be principal-protected notes.

"I think that principal-protected notes in general are going to continue to grow on the outside but that clearly takes a lot more time," said the insider.

"Overall, I like it. I think the short-term principal-protected and having any exposure to oil right now is good, so I think it's a good way to plan."

Terms of Morgan Stanley's notes

Moving back to the Morgan Stanley Performance Leveraged Upside Securities linked to the PHLX Oil Service Sector, the 14-month notes are set to price in November.

The zero-coupon notes pay par plus triple any positive return on the index at maturity. The payout will be capped at between $12.00 and $12.40 per $10.00 in notes. The exact cap will be determined at pricing.

Investors will share in any losses.

Citigroup's ELKS

Even though a $99.04 million offering of Equity LinKed Securities from Citigroup Funding Inc. linked to Nucor Corp. is a sizable offering, market insiders were less than impressed with the deal Thursday, calling it "pretty standard" and "just another equity-linked note."

"I think this deal is just another equity-linked note," said one insider.

"We continue to see them all over the place. This deal sector right now, I don't think anybody is really too extreme on either side. It has a decent coupon...and decent downside protection, so I am not sure if this one really stands out too much from the 300 notes you see every month."

"It's a big deal and that's about it," said another market source. "Yes, it is a sizable deal but it looks pretty standard."

The 11% notes pay par unless Nucor's stock falls by 27.5% or more during the life of the securities, in which case the payout will be a number of Nucor shares equal to $10.00 divided by the initial share price or, at the holder's option, the equivalent cash value.

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