Demand seen for CPI-linked notes; Morgan Stanley preps for sale of notes linked to 20 stocks

By Sheri Kasprzak

New York, Sept. 26 - Morgan Stanley is coming to market with fixed-to-floating-rate notes linked to the Consumer Price Index. Not everyone thinks the notes are a safe bet, but some investors are looking to take the gamble nonetheless.

"As a general rule, it's really hard to tell what's going to happen with the CPI in any given month," one market source said.

"These go out seven years. That's a long stretch for something that unpredictable. Obviously, there's a market for it, or else [Morgan Stanley] wouldn't be offering them."

The notes, which are due Oct. 14, 2018, will bear interest at 6% for the first year. From the second year through maturity, the rate will equal the year-over-year change in the Consumer Price Index plus 300 basis points. Interest is payable monthly and cannot be less than zero. The payout at maturity is par.

The CPI has mostly risen since February. In every month except for June, the index for all items has increased by anywhere from 0.2% to 0.5%. In June, the index dipped 0.2%. In August, the index rose by 0.4% for a total increase of 3.8% for the year so far.

Pretty good return

Still, for the risk, the return is pretty good, said a sellside source reached Monday afternoon.

"It's a fairly decent return," he said.

"You get the change in CPI plus 300 [bps]. There's no cap. It's not bad. I get that seven years is a long term, but this is obviously for someone who expects to see some growth. If it's not for you, it's not for you."

The bonds are expected to price sometime in September and settle on Oct. 14.

Morgan plans stock-linked notes

Morgan Stanley is also preparing to come to market with contingent annual interest notes linked to a diverse basket of 20 stocks. The notes are due Sept. 30, 2017.

The equally weighted basket includes Altria Group, Inc., American Electric Power Co., Inc., Bristol-Myers Squibb Co., Carnival Corp., Colgate-Palmolive Co., Duke Energy Corp., Exxon Mobil Corp., Frontier Communications Corp., General Electric Co., International Business Machines Corp., International Paper Co., Johnson & Johnson, JPMorgan Chase & Co., Microsoft Corp., Nucor Corp., Occidental Petroleum Corp., Time Warner Inc., Travelers Cos., Inc., Verizon Communications Inc. and Waste Management, Inc.

On Sept. 30 of each year, the notes pay a coupon equal to the sum of the basket stocks' weighted component returns, subject to a minimum coupon of 2%. If the basket stock's return is flat or positive, its component return will be fixed at 9.9% to 11.9%. Otherwise, its component return will be the greater of the stock return and negative 20%. The payout at maturity is par.

The notes are expected to price Tuesday and settle on Sept. 30.

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