Morgan Stanley’s trigger return notes linked to Euro Stoxx Mid offer euro bulls new playground

By Emma Trincal

New York, Sept. 22 – Morgan Stanley plans to price 0% trigger return optimization securities due Sept. 28, 2018 linked to the Euro Stoxx Mid index, according to an FWP filing with the Securities and Exchange Commission.

If the index return is positive, the payout at maturity will be par of $10 plus two times the index return, subject to a maximum return that is expected to be 52% to 57% and will be set at pricing. If the index return is zero or negative and the final index level is greater than or equal to the trigger level, 75% of the initial index level, the payout will be par. If the final index level is less than the trigger level, investors will have full exposure to the index’s decline.

The Euro Stoxx Mid index, which is derived from the Stoxx Europe 600 index, is comprised of mid-capitalization companies from across the euro zone. It is a price-return index denominated in euros that is calculated, maintained and published by STOXX Ltd.

Knowing the index

Tom Balcom, founder of 1650 Wealth Management, said that the structure is attractive but that the underlying is not one he would use in a note.

“I’m not familiar with the stocks in this index. Half of the names of the top holdings I’ve never heard of before. At first, it looks like this may be more suitable for non-U.S. investors, even if they’re based in the U.S. You really have to know what’s inside the index,” he said.

“You also have to have a view on the euro. This is a foreign equity index traded in euros.”

Some of the top holdings include Deutsche Annington Immobilien, Atlantia, Prosieben, Veolia Environement VE SA, Ferrovial SA, Bank of Ireland, Accor SA, UCB SA, Wolters Kluwer NV and Dassault Systemes SA, according to BlackRock Advisors (U.K.) Ltd., which offers in Europe a product equivalent to an exchange-traded fund based on this index.

Diversification tool

Balcom said the notes may offer an alternative to the very popular Euro Stoxx 50 index.

“For folks who want exposure to the euro zone and already own the Euro Stoxx 50 that’s a good way to diversify,” he said.

“You’re buying down from large-cap to mid-cap. That’s a new approach on the same regional theme.

“Morgan Stanley probably designed this product for investors and advisers who have a strong appetite for Europe.

“If you want that kind of exposure, if you’re familiar with those mid-cap companies and want to invest in this part of the world, it’s a decent deal.

“The terms are quite good. They offer a nice barrier with 25% protection on three years.

“I like the cap. You compound 15% to 16% return per year. It’s a nice juicy return.”

Solid barrier

Scott Cramer, president of Cramer & Rauchegger, Inc., said the barrier is relatively generous.

“This should be a pretty good play if this market is an area you want to invest in,” Cramer said.

“By picking this mid-market capitalization level, you’re going to be in a more volatile space than the large-cap area.

“The real risk would be an external event, a terrorist attack, a macro event, anything with a significant impact.

“It’s in such circumstances that your barrier would be broken. Under normal circumstances, this barrier will serve as an effective protection. And you’re not giving up that much upside.

“The terms are such that what you’re really exposed to is some sort of catastrophic risk, if everything goes bad.”

Liquidity

But investors will still be exposed to risks common to all structured notes, he added.

He pointed to liquidity risk, something the prospectus in its risk section describes as the possibility that “there may be little or no secondary market” for the notes.

“People need to remember that it’s a structured note. As with any structured note, your risk is the lack of liquidity. If this goes bad, you don’t have the ability to get out,” he said.

“You’re giving up liquidity as a trade-off for some mitigation of your risk. That’s just the nature of structured notes.

“If you want to preserve your liquidity, you’d have to take 100% exposure to the market. You wouldn’t have liquidity risk anymore, but you would have full market risk exposure.”

Morgan Stanley & Co. LLC is the agent with UBS Financial Services Inc. as dealer.

The notes will price Monday and settle Sept. 30.

The Cusip number is 61765R503.

© 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.