Morgan Stanley to price one-year call warrants linked to Morgan Stanley High Yield index

By Toni Weeks

San Luis Obispo, Calif., Nov. 12 – Morgan Stanley plans to price 0% call warrants due November 2015 linked to the Morgan Stanley High Yield index, according to a 424B2 filing with the Securities and Exchange Commission.

The index is a quantitative, rules-based asset allocation strategy developed by Morgan Stanley & Co. LLC that aims to generate a return by applying dynamic allocation between two underlying bond exchange-traded funds and a theoretical cash component that accrues interest at a specified federal funds rate. The two ETFs are the iShares iBoxx H/Y Corporate Bond fund, which provides a diversified exposure to high-yield corporate bonds, and the iShares Barclays 20+ Year Treasury Bond fund, which tracks the return of long-dated fixed-rate U.S. Treasury securities. The index, which selects on a monthly basis which index to track, has a daily volatility control feature targeting an annualized volatility of 5% by increasing or decreasing exposure to the tracked ETF. The index charges per annum index fees and servicing fees as well as a rebalancing charge for each change in the reference asset. The investor fee will vary depending on the date the warrants mature or are redeemed and is based upon a daily accrual on the notional amount per warrant at a rate of 1% per year, subject to a fixed minimum investor fee of 0.5%.

The warrants will have an issue price per warrant of $100,000 and a notional amount of $500,000 each. They will be automatically called if the closing value of the index on any day during the term of the warrants is less than the threshold level, 88% of the initial index value. In addition, the warrants are putable in whole or in part at any time through the life of the warrants.

At maturity or upon automatic redemption or optional investor redemption, the payout will be an amount in cash equal to the warrant premium amount plus the product of (i) the notional amount and (ii) the index return minus the investor fee.

Because the return on the warrants is calculated based on the notional amount, which is five times the invested warrant premium, investors will have five-times leveraged exposure to both the performance of the index and the investor fee. Thus if the index percent change, as reduced by the investor fee, is positive, investors will receive a five-times leveraged return on their invested premium. However, if the index return, as reduced by the investor fee, is negative, investors will lose 5% for every 1% by which the index return, as reduced by the investor fee, is negative.

The warrants (Cusip: 61764C820) will price and settle in November.

UBS Financial Services Inc. is the agent.

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