Morgan Stanley warrant units offer flexibility at low cost, analyst says; Barclays ETF Plus coupon at a low

By Kenneth Lim

Boston, June 27 - Morgan Stanley's note-and-warrant units linked to the Nikkei 225 index are relatively attractive products that could offer flexibility to investors with little cost, said structured products analyst Tim Mortimer of Future Value Consultants.

Meanwhile, Barclays Bank plc's ETF Plus notes that pay a coupon tied to the borrow rebate spread are likely to do better in a bullish market, Mortimer said.

Morgan Stanley notes show value

Morgan Stanley's note-and-warrant offering has an attractively high value for a low amount of risk, Mortimer said.

Morgan Stanley is offering zero-coupon capital-protected units, each consisting of a note and a cash-settled warrant, due Nov. 29, 2011 linked to the Nikkei 225 index.

At maturity, investors will receive par of $10 plus the cash settlement amount in respect of the warrant if the warrant has not been exercised yet. The cash settlement amount will be 1% of the principal for every 1% increase in the index, subject to a maximum return on the units of $14 to $15 per unit, or 40% to 50%. Investors will receive at least par.

The warrants may be separated from the note and traded or exercised before maturity, provided the holder has the required brokerage account. If exercised before maturity, the warrants will be settled based on the cash settlement amount.

"It is quite interesting," Mortimer said. "I haven't really seen this before. At face value, it's a principal-protected note with a capped return linked to the Nikkei, and it scored well on our site."

In a research note, Future Value said the principal-protected structure helped the product to rate as relatively safe on the firm's risk scale. The overall rating of the product was also higher than average compared to other recently launched products.

"This investment would therefore likely appeal to cautious investors seeking a known minimum return at the end of the investment term," Future Value said in its report.

The detachable warrants give investors flexibility in how they use the product, Mortimer said.

"It's $10 to buy in, and having bought it you can then separate it out and trade it in two parts," he said. "So you can just buy it as a standard product, in which case there's nothing special about it, but the ability to trade the parts separately, you might want to do that because of market timing or because of taxation."

Investors are more likely to want to exercise the warrants before maturity if they feel that the Nikkei has climbed to a peak, Mortimer said.

"It's more likely that if the Nikkei rises and you want to lock that in," he said.

The structure does not appear to cost investors too much, he added.

"It doesn't appear to cost you anything because it's got a good score," he said. "But I guess it gives you some flexibility which could be useful for some people in some situations."

Barclays notes coupon at low

The new Barclays ETF Plus notes tied to the iShares MSCI Emerging Markets index fund bear coupons that are pegged to rebate rates at a low, Mortimer said.

The ETF Plus notes will pay par plus the fund return at maturity.

The notes will also bear monthly interest equal to the average daily intrinsic rate of the underlying ETF minus the greater of 50 basis points and 30% of the intrinsic rate.

The intrinsic rate is the spread between the applicable benchmark overnight rate and the rebate rate that would be paid to a borrower of the ETF.

The underlying ETF aims to track the price and yield of the MSCI Emerging Markets index.

"What's interesting is that looking at the graph [of the intrinsic rate] is the intrinsic rate kind of peaked in March and April last year and since then the markets have gone the other way and the market rates have gone down to almost zero," Mortimer said. "In late '06 and early '07 it was pretty high, and China had a good period and other countries as well, and it's been a bit tougher since September."

The intrinsic rate and the coupon are likely to go up if the underlying markets improve, he said.

"It's more likely to go up in a bull market," Mortimer said.

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