Morgan Stanley's $11.66 million knock-out notes on Brazil, Mexico ETFs offer unlimited upside

By Emma Trincal

New York, Dec. 15 - Morgan Stanley's $11.66 million of 0% knock-out notes due June 18, 2012 linked to a basket of two emerging market exchange-traded funds appealed to investors bullish on Brazil and Mexico.

The notes are tied to the iShares MSCI Brazil index fund with a 70% weight and the iShares MSCI Mexico Investable Market index fund with a 30% weight, according to a 424B2 filing with the Securities and Exchange Commission.

Sky's the limit

"As long as the investor needs exposure to these markets, the product makes sense. But it's really the structure that makes this deal appealing," said Brad Livingston, a distributor with Laidlaw & Co.'s Income Solutions Group.

A knock-out event occurs if the closing basket level has fallen by more than 30% from the initial level during the life of the notes.

If a knock-out event has not occurred, the payout at maturity will be par plus the greater of the contingent minimum return of 6% and the basket return.

Otherwise, the payout will be par plus the basket return with exposure to any losses.

"The structure, I really like for two words: no cap," said Livingston.

"Anytime you're going to put that in a deal it's going to be attractive.

"The underlying, if this is what you want, is fine. But it's really the no cap that makes this product interesting."

Distribution powerhouse

A sellsider said that while the product was attractively priced, the name of the distributor - JPMorgan - was the main factor behind the success of the offering.

"They're the No. 1 private bank. Of course it's going to sell," he said.

"They may have an asset allocation recommendation. Their guys will call a bunch of banks to find out their levels."

For bulls

For bullish investors who do not anticipate a drop of the basket by more than 30% any time during the 18-month term, the notes offer a good opportunity to earn an attractive return, he said.

"A 6% minimum is not bad at all. This is a beautiful product.

"For anyone bullish on these markets, it makes a lot of sense."

However, the diversification among the two basket components and their respective weights give precedence to Brazil, a regional market that has shown a less stellar performance than Mexico, sources noted.

The iShares MSCI Mexico ETF, which accounts for less than a third of the basket, is up 24% so far this year.

Meanwhile, the iShares MSCI Brazil ETF, the main basket component, is flat for the year to date, up less than 1%.

The fee was 1.25%.

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