Morgan Stanley’s $7.15 million jump securities on S&P show quarterly premium, one-year no-call

By Emma Trincal

New York, March 22 – Morgan Stanley Finance LLC’s $7.15 million of 0% jump securities with autocallable feature due March 22, 2027 linked to the S&P 500 index offer investors the possibility of earning a double-digit, cumulative call premium each quarter after one year.

The notes will be called at par plus an annual premium of 11% if the index closes at or above its initial price on any quarterly observation date after one year, according to a 424B2 filing with the Securities and Exchange Commission.

At maturity, if the index finishes above its 70% downside threshold, the payout will be $1,440 per security.

If the index finishes below its downside threshold level, investors will be fully exposed to the decline of the index.

70% threshold

A market participant said the lower call threshold at maturity was a plus.

“I like it. It’s almost necessary to have a lower coupon barrier at maturity to make those deals work,” he said.

Without the downside threshold triggering the final 44% payout, investors incurred the risk of getting nothing after holding the notes for four years, which for many is not acceptable, he added.

“I also like that it’s a quarterly, not an annual call. That’s the kicker.

“Finally, it’s good that it’s tied to a single index, but I’m not surprised about it. The snowball structure is conducive of single indices,” he said.

Snowball

The notes are not designed as a pure income play, observed a sellsider, although they share some common characteristics with the typical Phoenix autocallable contingent coupon structure.

“It’s a very classic structure, the type of note private banks put out every month because their clients have a lot of appetite for it,” he said.

While investors can get paid on a quarterly basis, once the notes are called, no further coupon will be paid obviously.

“It’s a snowball. You get paid on the call. Some people like it. One obvious benefit is the memory. You’ll never miss a premium if you get called. At the same time, what you’re getting is not pure income. It’s a matter of personal choice,” he said.

Volatility

Samuel Rosenberg, managing partner at Lutetia Capital, said the yield was appealing.

“You get a very good return at 11%. That’s attractive because your principal and also your coupon...both are at risk,” he said.

“Volatility has spiked, and it helps price higher coupons. We can see it with the VIX, which is the one-month vol. It has jumped recently,” he said.

The VIX index nearly touched 30 last week in the wake of the failure of Silicon Valley Bank and Signature Bank, along with jitters over Credit Suisse prior to its acquisition by rival bank UBS.

“This is a four-year note. The long-term volatility has also increased because of the recent stress in the banking sector.

“The funding at Morgan Stanley may have also widened for the same reason. All these factors contribute to a nice payout,” he said.

The notes are guaranteed by Morgan Stanley.

Morgan Stanley & Co. LLC is the agent.

The notes settled on Wednesday.

The Cusip number is 61774XAA1.

The fee is 0%.

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