Morgan Stanley’s notes on index basket offer partial principal protection over three-year bet

By Emma Trincal

New York, June 21 – Morgan Stanley Finance LLC’s 0% equity-linked partial principal at risk securities due June 30, 2021 linked to an equally weighted basket of the S&P 500 index, Russell 2000 index and Euro Stoxx Select Dividend 30 index offer investors nearly full principal protection in a short investment period as well as uncapped gains.

In exchange, leveraged gains and high-dividend payments are not available to investors.

While this tradeoff may leave the bulls unimpressed, it is likely to appeal to the more conservative investors, according to buysiders.

The payout at maturity will be par of $1,000 plus at least 100% of any basket gain, according to a 424B2 filing with the Securities and Exchange Commission.

If the index finishes flat or declines, investors will receive par plus the basket return, subject to a minimum payout of $900 per security.

Not an alpha engine

A financial adviser noted how the note differed from the typical leveraged buffered structure.

“You’re long on the upside...and you take the first 10% losses. It’s very different,” said Steve Doucette, financial adviser at Proctor Financial.

A leveraged note with a 10% buffer would put 90% of principal at risk instead of just 10%, doing the opposite of what this note does, he observed. His preference went for the leveraged buffered note.

“With this one, you’re not going to outperform on the upside. There’s no leverage. The only way you’ll outperform is if the basket is down more than 10%.

“You have to have a bearish outlook. I just don’t like to invest in a note where the only way you can beat the market is if it’s down. You have to be pretty sure it’s going to be down otherwise why not buy the index directly?

“I like to stick to the basic leveraged buffered note where I can outperform in both directions.”

Risk-averse profile

Scott Cramer, president of Cramer & Rauchegger, Inc., said the product could match the needs of more conservative clients.

“For somebody looking for diversification and stability along with some downside protection, it sounds like a good note,” he said.

The “stability” characteristic derived in part from the use of high-yielding basket components, he noted.

High-dividend stocks tend to appreciate at a slower pace. However, their price is more stable than growth securities.

Higher rates

Cramer said he was not totally surprised to see a 90% protection on a duration as short as three years. Up until recently, equity-linked notes providing 90% to 100% principal protection were infrequent and rarely shorter than six years, according to data compiled by Prospect News.

“Clearly interest rates are driving this,” he said. “Ten years ago, there used to be a lot of good deals with protection. It looks like they’re starting to come back again.”

The uncapped upside was favorable to investors, even without the return enhancement.

“The no-leverage thing doesn’t bother me,” he said.

Bulls need not apply

Cramer said the notes were not designed for all investors. Bulls would need the leverage.

“This is really something that was created for those who want almost full downside protection while still willing to participate in the upside.

“It’s a three-year project. Investors are not locked in forever.

“I like it. But it’s got to be for that particular type of investor,” he said.

That would exclude those seeking strong growth or excess returns.

“If you’re not worried about protecting the downside, by all means, get liquidity, buy the index and don’t worry about it.

“But if your goal is risk mitigation, this is a good one,” he said.

The notes are guaranteed by Morgan Stanley.

Morgan Stanley & Co. LLC is the agent.

The notes will price on June 25.

The Cusip number is 61768C5H6.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.