Morgan Stanley Sells Its Biggest Range-Accrual Note in 15 Months

Morgan Stanley (MS) sold $25 million of notes that pay investors the most when the difference between long- and short-term rates widens so long as stocks don’t plummet, its biggest “range-accrual” offering in 15 months.

The 15-year securities, issued June 25, are tied to the gap between 30- and five-year constant maturity swap rates. After two years of yielding 10.5 percent, they pay an annual rate of five times the rate spread, capped at 10.5 percent, for every day the Standard & Poor’s 500 Index is at least 1,100, which was 69 percent of its value at the time of sale, according to a prospectus filed with the U.S. Securities and Exchange Commission.

The spreads for such notes may tighten, with the prospect of Federal Reserve tapering “sending intermediate Treasury yields higher,” said Richard Gilhooly, an interest-rate strategist at Toronto-Dominion Bank’s TD Securities unit in New York. On June 19, Fed Chairman Ben S. Bernanke said that the central bank may begin reducing its $85 billion in monthly bond purchases later this year.

While the 30-year dollar swap rate has climbed 19 basis points since June 18, the five-year rate has risen 31 basis points. That means the Treasury yield curve has become flatter, not steeper, which is what the buyers of the Morgan Stanley notes want.

Morgan Stanley, which received a 3 percent fee for selling the securities, estimated their value to be 13.5 percent less than what investors paid.

Previous Sale

The bank sold $50 million of similar notes on March 27, 2012, the most recent such offering that was larger.

Those securities, which also mature in 15 years, yield 11 percent for the first two years, then pay an annual rate of five times the difference between the 30- and two-year swap rates, capped at 11 percent, for each day the S&P 500 Index (SPX) is at or above 935, according to a prospectus filed with the SEC.

Range-accrual notes typically pay a fixed annual rate for each day an asset’s price remains within certain boundaries.

Lauren Bellmare, a spokeswoman for the largest U.S. structured note issuer by volume, declined to comment on the security.

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

To contact the editor responsible for this story: Alan Goldstein at

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