Morgan Stanley’s trigger PLUS linked to S&P, Dow offer leveraged bet on rebound

By Emma Trincal

New York, March 25 – Morgan Stanley Finance LLC’s 0% trigger Performance Leveraged Upside Securities due April 1, 2025 linked to the Dow Jones industrial average and the S&P 500 index offer all the features sought out by bullish investors including those with a conservative edge.

If each index finishes above its initial level, the payout at maturity will be par plus 226% of the lesser-performing index’s return, according to an FWP filing with the Securities and Exchange Commission.

If the final level of either index is less than or equal to its initial level but the final level of each index is greater than or equal to its trigger level, the payout will be par. For each index, the trigger level is 55% of its initial level.

If the final level of either index is less than its trigger level, investors will be exposed to the decline of the lesser-performing index from its initial level.

Correlation

“It sounds pretty good especially at that barrier level,” a market participant said.

“Worst-of notes can give you that kind of high leverage, but usually you need to use two underlying that are negatively correlated to do that.

“In this case, the S&P and the Dow are much more highly correlated.

“To be able to get that kind of leverage with that correlation is pretty attractive.”

Worst-of structures are riskier, which is how they can enhance the terms of a note.

With two underlying indexes, the risk of a barrier breach is higher than with one single asset. The greater the correlation, the lower the risk.

Nearly all worst-of deals have been autocallable or callable contingent coupon trades, according to data compiled by Prospect News over the past two weeks.

Investors tend to bid on income notes for both the yield and barrier protection, sources said.

“But we do see some of those leveraged notes. There are people out there trying to capture the recovery,” the market participant said.

“We don’t see many – and they’re not pricing that well – but we see them from time to time.”

Credit spreads

The 2.26 times leverage multiple and low barrier made for a balanced structure offering growth and deep downside protection, he said.

“The spike in volatility helps,” he said.

“Credit spreads have widened out, and some banks benefit from this type of funding.”

The five-year credit default swap rates of Morgan Stanley have widened to 166 basis points on Wednesday from 48 bps in the beginning of February, according to Markit.

So far, Goldman Sachs was the issuer with the widest spreads followed by Morgan Stanley, but this ranking just reverted this week, according to Markit.

All banks have seen their spread widen by 100 bps or more since early February at the exception of JPMorgan, whose spreads increased to 113 bps from 34 bps.

Tradeoff

The structure looked reasonably priced, but it does not mean investors do not have to make some concessions, an industry source said.

“From a cosmetic standpoint, the terms are attractive. Whether it’s a good deal or not is another question,” he said.

“You’re locked in for five years.

“You’re not getting the dividend for five years.

“These two things get recycled to give you such good terms. There is a tradeoff.

“It’s hard to argue with the fact that it priced well. The 55% barrier is good.

“But it’s a long-dated note, and you don’t get the dividends for some time.”

The Dow Jones industrial average yields 3.21%.

The S&P 500 index pays a dividend yield of 2.47%.

The notes are guaranteed by Morgan Stanley.

Morgan Stanley & Co. LLC is the agent.

The notes will price on March 27.

The Cusip number is 61770FWT9.

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