Morgan Stanley prices $37.78 million in currency income notes

By Sheri Kasprzak

New York, Nov. 27 - In a week filled with currency-linked offerings, Morgan Stanley negotiated the terms of a $37.78 million offering of zero-coupon capital-protected currency income notes linked to nine currencies.

"These are interesting because I do feel like investors are looking for income-producing notes and these seem to fit the bill without going to reverse convertibles," said one market insider.

The market participant, who was not involved with the Morgan Stanley notes, said normally investors seeking income generally look to reverse convertibles.

"This seems like an interesting alternative, especially since investors are really looking into currencies right now," he added.

Currency notes everywhere

Currency-linked notes have abounded this week.

In just the past few days, Citigroup Funding, Inc. priced $20 million in zero-coupon notes linked to two currency baskets. One basket includes the South African rand, the Brazilian real, the Argentine peso, the Indian rupee and the Turkish lira, all versus the U.S. dollar and the other includes the Swiss franc, the Japanese yen, the Singapore dollar, the Taiwan dollar and the Czech koruna, also against the U.S. dollar.

Goldman Sachs & Co. priced $15.619 million in 97.5% principal-protected bull notes on behalf of AB Svensk Exportkredit. Those notes are linked to the Indonesian rupiah and the Philippine peso.

Also, Royal Bank of Canada priced $5.734 million in zero-coupon notes linked to equal weights of the Brazilian real, the Russian ruble, the Indian rupee and the Chinese renminbi.

Morgan Stanley's notes

The four-year Morgan Stanley notes are linked to equal weights of the Australian dollar, the euro, the Norwegian krone, the British pound, the Japanese yen, the Swedish krona, the Canadian dollar, the New Zealand dollar and the Swiss franc, all versus the U.S. dollar.

Even though the notes do not pay regular interest, investors receive a variable monthly payment, which may be zero, determined according to 75% of any positive performance of monthly interest rate carry trades on the currencies, capped at 10% per year.

The remaining 25% will be added to an initial protection amount of $105 per $1,000 note.

Payout at maturity will be based upon the performance of the basket currencies against the U.S. dollar. If the currencies strengthen or weaken, the payout will be par plus the return and any remaining protection amount, with a floor of par. If at any time, any net loss on the interest rate carry trades exceeds the current protection amount, holders will no longer receive any variable monthly payments for the remainder of the term of the notes due to a defeasance event.

Lehman's currency-linked notes

In other currency-linked offerings, the terms of a few Asian currency-linked notes from Lehman Brothers Holdings Inc. were released on Tuesday.

The investment bank priced $368,000 in principal-protected notes with enhanced participation linked to equal weights of the Indonesian rupiah, the Indian rupee, the Malaysian ringgit and the Singapore dollar, all relative to the U.S. dollar.

The 18-month notes pay par plus the additional amount, which is equal to the greater of zero and $1,000 times the basket return times the 210% participation rate.

Lehman also priced $513,000 in enhanced participation notes linked to the Japanese yen, the euro and the British pound, all relative to the U.S. dollar.

The two-year notes pay par plus the additional amount, which is the greater of zero and $1,000 times the basket return times the 220% participation rate.

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