Morgan Stanley’s $24.29 million trigger jump notes on Euro Stoxx offer ‘exciting’ upside, risk

By Emma Trincal

New York, March 6 – Morgan Stanley Finance LLC’s $24.29 million of 0% trigger jump securities due March 5, 2019 linked to the Euro Stoxx 50 index can offer an attractive alternative to a direct investment in the euro zone equity benchmark, financial advisers said.

If the index return is positive, the payout at maturity will be par of $10 plus the greater of the index return and 25.55%. Investors will receive par if the index falls by up to 10% and will lose 1% for each 1% decline from the initial level if the index declines by more than 10%, according to a 424B2 filing with the Securities and Exchange Commission.

Modest outlook

“This makes a lot of sense for somebody who’s kind of lukewarm on the Euro Stoxx,” said Michael Kalscheur, financial adviser at Castle Wealth Advisors.

“We wouldn’t buy it because it doesn’t match our risk management criteria.

“That’s not to say the note isn’t attractive. There’s definitely value. It just wouldn’t be our style.”

Downside

Kalscheur says he buys structured notes for the downside protection in order to decrease the probabilities of losing money.

On a statistical basis, the notes have lost money about a quarter of the time, he said based on historical data he collected on the underlying index.

The Euro Stoxx 50 has lost 10% or more 24.5% of the time over a two-year rolling period since the beginning of the period observed, 30 years ago.

“These are significant chances of losing money, making this product not suitable to our clients,” he said.

Both the size and the contingency of the protection fail to match the risk-mitigation approach of his firm.

“I can’t really get excited by a 10% cliff,” he said.

But for investors who are “slightly bullish” on the Euro Stoxx 50, the “very straightforward” product provides an opportunity to outperform the index, even without the payment of dividends, he said.

Dividends

The Euro Stoxx 50 yields 3.25%, which, over two years, represents 6.5%. Unlike equity investors, holders of the notes will not receive the 6.5% dividend payments.

But if the index finishes flat or is up by less than 19%, investors in the notes will obtain a better return than the total return of the index thanks to the 25.55% upside payment.

“If the market is up 1%, you get 25.55%. That’s not too shabby,” he said.

Better than capped deals

“This is the flip side of this note: a pretty exciting upside ... Compared to a lot of leveraged deals, this is a fairly good return.”

Most leveraged deals may offer some “good” downside protection, but investors will have a low cap, he explained.

“If I’m going to get 6% or 7% on a note, I’d buy a bond instead any day of the week.

“This has a digital coupon with a double-digit return. If you’re looking at a market that’s up but up only a little bit, this is the perfect way to do that.

“While I would not use it due to the risk, I can see why some people would find it really attractive and why they got $24 million of it.”

Bull play

Jerrod Dawson, director of investment research at Quest Capital Management, had a similar view.

The barrier is probably not enough to make conservative investors comfortable. But the upside potential grabbed his attention.

“If you are optimistic about Europe, if that’s an asset class you want to be invested in, this note is favorable. You can do extremely well with only a small move on the upside,” he said.

“But this is a bullish note. You have to like Europe. I don’t have the conviction in this particular play.”

Dawson said he would be “cautious” about Europe given the political risks coming up and a series of headwinds, such as still unresolved sovereign debt issues, especially in Southern Europe.

“The 90% barrier is thin. No question you’re taking on some risk here, but you get some compensation with the 25% return on the upside. And if the index is up more, you still participate.

“It’s really not a bad trade-off if you have a positive view on Europe.”

Morgan Stanley & Co. LLC is the agent.

The notes (Cusip: 61766V271) are guaranteed by Morgan Stanley.

The fee is 2%.

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