Morgan Stanley plans issue of 0% securities linked to undervalued stocks, S&P 500

By Jennifer Chiou

New York, Aug. 22 - Morgan Stanley plans to price an issue of 0% outperformance securities due Sept. 30, 2007 linked to how much a basket of the most undervalued stocks in the S&P 500 index outperforms the entire S&P 500, according to a 424B2 filing with the Securities and Exchange Commission.

The undervalued basket - named the intrinsic value basket - will be made up of about 98 stocks that Morgan Stanley's investment strategy team identifies as the most undervalued. The stocks will be identified using a model on the third trading day before pricing and will be equally weighted.

The basket performance will equal 98% times the sum of the performance of the undervalued stocks and 50% of the difference between the performance of the undervalued stocks and that of the S&P 500.

The securities have a par of $10.

If on any day, the value of the securities is less than or equal to $5.00, they will be redeemed for an amount equal to the arithmetic average of the daily performance values over the three index business days immediately following the early redemption trigger date.

The payout at maturity will be the average of the daily performance values on the three index business days beginning on Sept. 25, 2007.

Morgan Stanley will be the underwriter.

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