Morgan Stanley Sells Most U.S. Notes for First Time Since 2011

Morgan Stanley, the bank with the most debt maturing in 2013 of the top 10 U.S. structured note issuers, led monthly sales for the first time in more than a year.

The bank issued $498.8 million of the securities in January in 51 offerings, more than twice its monthly average of $238.4 million in 2012, according to data compiled by Bloomberg. Morgan Stanley was last No. 1 in the U.S. in August 2011, when it sold $1.1 billion of notes.

The bank fell to eighth-largest structured note issuer last year when its five-year credit default swaps averaged 309.2 basis points after being on top in 2010 when the measure of risk was 180.6, Bloomberg data show. While the current level of 149.2 basis points is close to an almost two-year low, it’s still higher than that of any other U.S. bank that issues the securities, forcing the company to pay more for funds and create more attractive terms on debt.

That means the bank can be more “creative” with structuring notes to get investor attention, said John Tessar, senior vice president at JVB Financial Group LLC in Boca Raton, Florida.

Banks create the investments by packaging their own debt with derivatives to offer customized bets to retail investors while earning fees and raising money.

Moody’s Rating

Moody’s Investors Service rates Morgan Stanley, which has $26.1 billion of debt maturing this year, as Baa1 with a negative outlook. Wells Fargo & Co., which has the lowest credit risk among U.S issuers as indicated by the level of its default swaps, is graded A2, or two levels higher.

Credit swaps typically rise as investor confidence deteriorates and fall as it improves. They pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Lauren Onis, a spokeswoman for the New York-based bank, declined to comment on the company’s issuance.

Morgan Stanley’s largest offering last month was $110 million of 15-year, auto-callable step-up notes tied to the Standard & Poor’s 500 Index. The securities, sold Jan. 15, start out yielding 7 percent annually, then rise to 8 percent after five years and end at 12 percent so long as the stock benchmark doesn’t fall below 70 percent of its initial value, according to a prospectus filed with the U.S. Securities and Exchange Commission. Investors can lose their entire investment. The bank distributed the notes for a 3.5 percent commission.

Outside the U.S., Morgan Stanley sold the most notes in five years. The bank has raised $194.1 million in 2013, the most for any similar period since 2008, according to Bloomberg data that exclude securities where amount of principal returned can vary.

Derivatives are contracts whose value is derived from stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.

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