Morgan Stanley's $78 million jump notes linked to S&P 500 well bid for their growth potential

By Emma Trincal

New York, Aug. 31 - Morgan Stanley's $78 million of 0% buffered jump securities due Feb. 27, 2015 linked to the S&P 500 index, the top deal last week, were heavily bid due to their uncapped upside and high contingent minimum return, sources said.

If the final index level is greater than the initial index level, the payout at maturity will be par of $10 plus the greater of the index return and 42%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index declines by 10% or less and will lose 1% for every 1% that it declines beyond 10%.

No cap

"Assuming you're comfortable with Morgan Stanley's credit risk and that you understand that you're giving up dividends, the payout is pretty attractive," a New York sellsider said.

"It's not surprising that they got such a large subscription. It's a structure that looks pretty interesting," he said.

Investors give up about 2% in dividends each year, or 7% for the three-and-a-half-year tenor, he said.

In exchange, though, they are getting at least 42% over the term, or 12% a year, if the index closes higher at maturity.

Hard buffer

"What's particularly attractive here is that you don't have a cap on the upside," he said.

"There is a 10% buffer and a rather high contingent minimum return.

"But your upside is unlimited."

In addition, the downside protection is "a hard buffer," he said, "not a knock-out or a conditional barrier."

Standard buffered notes tend to be shorter in duration, the market participant noted.

"This is a little bit longer, but ... it's still very attractive."

Stagnation-proof

A derivatives and equity trader said that he liked the deal too based on his market outlook.

"It's a great deal, and I like it for two reasons," he said.

"First, the S&P 500 will be higher in three and a half years, I'm convinced of that.

"Second, we may go into slow growth mode; we might only go up 10% during that time. If that's the case, the floor will help you out a lot.

"And if all of a sudden, we get a bunch of new pro-business policies, the sky is the limit."

Asked about the credit risk of Morgan Stanley (rated single-A), this trader said, "I hate to say that, but Morgan Stanley is too big to fail. No government is going to let it go anywhere. So, to me, it doesn't matter."

Morgan Stanley & Co. LLC is the agent.

Fees were 2.25%.

The deal priced on Aug. 25.

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