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Equity Default Note Offered To U.S. Retail

Morgan Stanley has structured a portfolio of deep out-of-the-money equity put options on North American corporates which offers investors a high return, providing most stocks remain above a barrier and the corporates remain solvent. It is being marketed to retail investors through Morgan Stanley distribution channels, and--although structured through options--it is designed to mirror credit-default swap portfolios.

According to a prospectus, the notes pay out five times capital invested providing no stocks fall more than 85% and none of the referenced companies have gone bankrupt before close of the portfolio September 2013. If a trigger event occurs on one stock the return is four times capital invested, three times for two trigger events, and twice for three events. Capital is not protected but initial investment is returned if there are no more than four events. The 100 names in the portfolio include firms such as MetLife, Sprint Nextel Corp., Goldman Sachs and Time Warner.

An equity market observer familiar with the offering noted it is similar to structures sold by IXIS Corporate & Investment Bank, JPMorgan (DW 11/24/04) and Credit Suisse (DW, 11/11/05), but the loss trigger is higher and it includes a definition of bankruptcy. In other deals, the equity event trigger was set at 65-70% of initial value and there has not been a provision for bankruptcy of referenced companies. He also noted, however, these structures have not yet been offered to retail clients and it is not clear how much demand Morgan Stanley will see.

Officials in Morgan Stanley's structured products group in New York declined all comment.

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