Morgan Stanley’s $1.7 million trigger PLUS on indexes introduce unusual downside payout

By Emma Trincal

New York, Feb. 28 – Morgan Stanley Finance LLC’s $1.7 million of 0% dual directional trigger Performance Leveraged Upside Securities due Jan. 22, 2027 linked to the least performing of the Russell 2000 index, the Nasdaq-100 index, and the Dow Jones industrial average provide innovative features on the downside giving investors absolute return and protection at different levels, which increases the chances of getting more than 100% of par if the underlying finishes negative.

If each index finishes at or above its initial level, the payout at maturity will be par plus 1.4 times the return of the least-performing index, according to a 424B2 with the Securities and Exchange Commission.

If any index finishes below its initial level but each index finishes at or above its downside threshold level, 75% of its initial level, the payout will be par plus half of the absolute value of the return of the least-performing index.

If the least-performing index finishes below the downside threshold level but at or above the 50% barrier level, the payout at maturity will be par. Otherwise, investors will lose 1% for every 1% that the least-performing index declines from its initial level.

Not simple

Carl Kunhardt, wealth adviser at Quest Capital Management, said that he typically invests in “simple notes,” which this one is not. But he would make an exception.

“This is a complex note. It’s not like saying: I’m buying you an ETF. You have to explain to clients what you’re putting them in. The more moving parts, the more difficult it is for them to understand. Typically, I avoid those types of products,” he said.

“But I might do something like that in large part due to the market conditions we’re in,” he said.

“The world is about to go to war. Normally that’s a low point. With almost every post-war environment, you have a strong economic activity.”

Long-term outlook

Kunhardt also said he liked the fact that the notes had no call features.

“If there was a call, it would make my decision more difficult. Here, I’m holding it until maturity. I don’t have to worry about getting called. Even if the entire world is about to go to war, there’s a pretty good chance that five years from now the market will be higher not lower,” he said.

This outlook rendered the uncapped leveraged exposure all the more attractive, he said.

“If I’m wrong, I have a 50% barrier with absolute return on the first 25%.”

Getting half of the inverse participation was not a problem.

“You still get more than just your money back,” he said.

Only one scenario had the potential to be truly negative.

“That’s if Putin makes good on his threat to use nuclear weapons. But it’s highly unlikely. That’s a line he is not going to cross. I discount that possibility and if I’m wrong, it may not matter because the planet won’t be here.”

The least attractive feature of the notes for this adviser was its duration.

“To us, five-year is a long-term investment. I would be reticent to go that long,” he said.

“But it wouldn’t change my decision-tree. The market is going to be higher in five years than it is today.”

Credit, fee, correlations

Steven Foldes, wealth manager and founder of Evensky & Katz / Foldes Financial Wealth Management, said the downside structure was innovative. But the complexity it introduced may not be worth the benefits it offered.

“This is a very interesting note,” he said.

“While I appreciate Morgan Stanley’s creativity, I shudder to try to explain this to a client.

“Sometimes a clever product can also be very complicated, taking some time to explain.”

On the positive side, Foldes mentioned the creditworthiness of the issuer and the 0.5% fee.

“I have no problem with Morgan Stanley’s credit and the fee over five years is very decent,” he said.

His view about the worst-of payout was overall positive as well.

“We don’t love worst-of, especially with three indices. But these three have reasonable correlations with each other,” he said.

While large-cap, tech and small-cap underliers may have “significant disparities,” they still may move in the same direction.

“The correlation of the movement is probably relatively high and that’s what really matters,” he said.

Unneeded protection

Foldes pointed to what makes the structure “creative.”

“Making money on the first 25% of decline followed by some protection applied to the next 25% is highly unusual. This set of two barriers is innovative,” he said.

Unfortunately, it also may be “unnecessary,” he added.

“The idea that on a five-year period any of these three indices is going to finish negative is extremely unlikely if you look at five-year rolling periods in the past.”

Such outcome is even less likely given the current market environment.

“We’re in a correction,” he said.

When the notes priced on Feb. 18, the Dow Jones industrial average was 8% lower than its Jan. 5 52-week high; the Russell 2000 index had dropped 12% from its Jan. 4 peak and the Nasdaq-100 was 16% off its Nov. 22 high.

“While the note is very elaborated, I wouldn’t want to build this kind of protection over a five-year term. It’s not a good use of the options.

“Instead, I would rather see more upside leverage,” he said.

Five-year term

Boosting the leverage is all the more important with longer notes as the non-payment of dividends stretches over longer periods of time, augmenting the opportunity cost, he said. Foldes typically does not buy longer-dated products, including five-year notes. But if he did, removing the downside protection and enhancing the upside leverage would be his requirements.

“This is an interesting but complex note, one that’s difficult to understand,” he said.

“And the innovation in there doesn’t bring much benefit since it’s designed to reinforce the downside protection, which you don’t really need.

“At first, the structure looks clever. But as you drill deeper, you find a lot of bells and whistles that are not necessary.”

The notes are guaranteed by Morgan Stanley.

Morgan Stanley & Co. LLC is the agent.

The notes settled on Thursday.

The Cusip number is 61773QBB4.

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