Morgan Stanley Sells Largest Note Tied to Lululemon Stock

Morgan Stanley sold $10.7 million of one-year securities tied to Lululemon Athletica Inc. (LULU), the largest such offering in at least three and a half years.

The securities, issued June 21, yield as much as 12 percent so long as the stock doesn’t end up below 70 percent of its starting value, with all principal at risk, according to a prospectus filed with the Securities and Exchange Commission. The bank distributed the securities for a 1.5 percent commission.

Lululemon, the Vancouver-based athletic clothing maker that recalled some of its women’s pants in March for being too sheer, tumbled 18 percent on June 11. The day before, Christine Day, the company’s chief executive officer, said she would leave the company.

“I think what Lulu has done well is create an immensely strong consumer following that is pretty sticky,” said Camilo Lyon, a New York-based analyst for Canaccord Genuity Corp. Whoever succeeds Day “doesn’t really have a lot to change,” he said.

Canaccord lowered its 12-month target price for the stock to $87 on June 11 from $92.

Shares fell 16 percent this year to close at $63.88 today. Morgan Stanley (MS) will automatically redeem the notes quarterly if the stock rises above its initial level of $61.90.

Lauren Bellmare, a spokeswoman for Morgan Stanley in New York, didn’t return an e-mail seeking comment on the note. The bank is the largest U.S. structured note issuer by volume.

Banks create structured notes by packaging debt with derivatives to offer customized bets to retail investors while earning fees and raising money. Derivatives are contracts whose value is derived from stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.

To contact the reporter on this story: Kevin Dugan in New York at kdugan4@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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