Morgan Stanley prices index-linked PLUSes, launches rate-curve product; Lehman ties to worst of 2 banks

By Kenneth Lim

Boston, Feb. 20 - Morgan Stanley priced a large $200 million offering of 0% Buffered Performance Leveraged Upside Securities (PLUS) on Wednesday that drew interest because of its link to the S&P 500 Index.

"Given all the uncertainty in the market today, something like this definitely looks interesting," a structured products distributor said.

Upon maturity at Feb. 26, 2009, the PLUSes will pay par of $1,000 plus 1.75 times the index increase if the index finishes higher than the initial value, capped at a return of 23.3625%. If the index ends between the downside protection value at 98% of the initial value and the initial value, the payout will be par. The notes have full exposure if the index falls below the downside protection value, but there is a minimum payout of $20.

Morgan Stanley & Co. Inc. is the agent for the offering.

"Leveraged products are a dime a dozen, but what's interesting here is they're selling so much of it, and the underlying has quite a bit of uncertainty to it these days," the distributor said. "There's very minimal principal protection, so unless you're confident that the S&P 500 is going to do well over the next year, you stand to lose almost all your principal."

"If you think the market's bottomed out or it's about to bottom out, if you're not so concerned about a recession, you'll find this interesting," the distributor said. "You got to be an optimist, especially in this market."

But the distributor said there was a chance the products could serve a hedging purpose.

"I imagine there could be someone who's short on the market, and this could offer a long strategy," the distributor said.

Morgan Stanley links to CMS curve

Morgan Stanley also launched a series of 20-year accrual notes linked to the Constant Maturity Swap rate.

Interest will accrue on the notes at 10% per year in years one to three. From year four onwards, interest will accrue at 10% for each calendar day that the 30-year CMS rate is equal to or greater than the 10-year CMS rate. No interest will accrue on any day that the 30-year rate is less than the 10-year rate.

The notes are callable from Feb. 28, 2011.

The notes have full principal protection.

Lehman ties to worst of Wachovia, JPMorgan

Lehman Brothers Holdings Inc. priced $2 million of semi-annual review notes with contingent protection due Feb. 24, 2010, linked to the worst-performing common stocks of Wachovia Corp. and JPMorgan Chase & Co.

The notes are automatically called at increasing premiums if the closing price of each of the stocks is above its initial level on any of four semi-annual review dates.

If the notes are not called early and either of the stocks falls below its trigger level - 60% of its initial level - during the life of the notes, the payout will be a number of the worse-performing shares equal to par divided by the initial price of that the stock.

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