Morgan Stanley’s $31.65 million autocalls on indexes offer step-down, memory, timely entry

By Emma Trincal

New York, Feb. 9 – Morgan Stanley Finance LLC’s $31.65 million of 0% step-down trigger autocallable notes due Feb. 6, 2025 linked to the Russell 2000 index and the S&P 500 index provided a few attractive features, which in part contributed to the successful deal size, sources said.

After one year, the notes will be automatically called at par of $10 plus 8.57% per year if each index closes at or above its initial level on any quarterly observation date, except the final one when the call level will be the 70% downside threshold, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not subject to an automatic call, investors will lose 1% for every 1% decline of the worst performer from its initial level.

Step-down

The S&P 500 and the Russell 2000 indexes paired in worst-of deals have often been used since the start of the year, according to data compiled by Prospect News.

“The Russell may perform better in this environment. It’s already down almost as much as the Nasdaq,” a market participant said.

“The lower call threshold at maturity, which they call the step-down...I like that. It solves one of the troubles clients may have with traditional Phoenix autocalls.

“What if you’re not called and you didn’t breach your barrier at maturity? You get your money back and that’s all.

“It’s a tough conversation to have with a client especially when you pitch those products for the income.”

Private wealth distribution

The $32 million bid on the notes did not surprise this market participant.

“This type of size is not unusual for a shelf offering sold within the wealth channel of a wirehouse. It’s not as if it was sold to a single adviser,” he said.

UBS Financial Services Inc. and Morgan Stanley are the agents, according to the prospectus.

“Snowballs like this one are increasingly popular. People like those deals because it’s not a one-time payment per observation. You can miss a number of calls and if the market recovers, you catch up at a later date. You’re not missing out on any coupon.”

Frequent observation

The quarterly call frequency combined with the one-year call protection was another tangible advantage.

“The call on those snowballs is typically observed annually or semiannually. The quarterly frequency is much better because it increases the odds of getting called. You want to maximize the chances of a call. When you’re called you get paid the full amount and the risk is removed.

“It’s a compelling product. It can appeal to a wide range of investors,” he said.

Entry point

Samuel Rosenberg, managing partner at Lutetia Capital, said the trade was timely.

“You’re getting in at a good entry point. We had jitters in the market because of fears of a recession and inflation. Now it looks like it was mostly overdone,” he said.

The notes priced on Feb. 2 when the S&P 500 index was 5% lower than its 52-week high of January. The Russell 2000 index on that day was 11.3% off its January high.

“You also have a lot of good features in there,” he added.

“No call for the first year, cumulative quarterly income, a protection at the end with a lower call threshold.

“There is a lot to like about the structure.”

The notes are guaranteed by Morgan Stanley.

The notes settled on Monday.

The Cusip number is 61773U332.

The fee is 1%.

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