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Bond of the Week: 13 September 2013

Morgan Stanley RPI linked retail bond.


After their failed attempt to bring an RPI linked bond to the retail market (see Bond of the Week 9th April)Morgan Stanley and their advisor Linear Investments Ltd are having a second go. Here are the terms of the offering

Issuer and Guarantor: Morgan Stanley (USA)

Bond type: Senior, unsecured

Credit rating: A- (S&P), Baa1 (Moody’s), A (Fitch)

Term:10 years

Indicative coupon: 0.60% adjusted for inflation, floored at zero

Indicative maturity payment: 100, or if greater 100*100% RPI final / RPI initial

Initial UK RPI Level: The level of the UK RPI reported for Jan 2013 (245.80)

Issue price: 100% of par

Settlement: CREST / Euroclear

Offer period: 12th September to 25th September (the offer may close earlier at the issuer’s discretion)

Denominations: GBP 1,000, and GBP 1 thereafter

Minimum Investment: GBP 1,000

Listing: LSE Order Book for Retail Bonds

Issue size: Uncapped

Documentation: Prospectus, Final terms, and Issuers factsheet

This time the bond has been issued with standard RPI linked terms – in particular the principal as well as the interest is linked to RPI. This overcomes my criticisms last time that the bond previously offered only had its coupon linked to RPI not its maturity amount and that this could or indeed would give a misleading idea of total return or “value”. With the new format of this bond, these problems have been overcome.

The credit of this bond is very sound; Morgan Stanley along with Goldman Sachs being one of the last two major investment banks left standing post the Lehman’s crash. The rating of A (on average) puts the bond at the high end of the credit spectrum of the retail bond market.

The other RPI linked issues on the ORB (also all of good credit) yield slightly less than the yield offered for the current new issue. Mid-market the spread over RPI inflation using mid-market prices is as follows: Places for People 0.36%, National Grid 0.46%, Severn Trent 0.46% and Tesco with 0.50%. Relative to these the new bond has marginal value.

However, we should also value the bonds against the Gilt market linkers and how Morgan Stanley trades in the fixed rate market. Firstly the Gilt market: the benchmark 1.875% 2022 trades at RPI minus 0.32%. However the yield has in fact been in retreat having risen from stonkingly (excuse my language) bad value of RPI minus 1.62% in March. Therefore Gilt linkers have been widening, yet this Morgan Stanley bond comes with a tighter headline yield (0.6%) than all the other ORB issues (headline yields of 1% to 1.3%). In other words this bond is being issued at a propitious moment, in the RPI linked bond cycle, for borrowers rather than lenders.

In the fixed income market, Morgan Stanley trades at something like Treasuries plus 1.75%. Using an RPI linked Gilt spread of minus 0.32% than wold imply on an equal value basis a linker bond for Morgan Stanley should be offered to yield RPI plus 1.43% (1.75 – 0.32). On this basis the current offering appears poor value. This, however, is probably taking the analysis a step too far as there are many peculiarities and idiosyncrasies in the market (ie how something trades in one versus another market), and an investor should always focus on what is good for him rather than what someone else might be making out of a trade. Nevertheless the aforementioned figures do suggest why Morgan Stanley may be happy to issue into the market at this level. There is enough arbitrage for them compared to the normal borrowing cost.

Conclusion. This bond has overcome my previous objections to the Morgan Stanley bond launched in April and the value of it seems reasonable if not exciting and assuming you like RPI linked bonds. However, I personally would take a step back and say to myself why lock money away for ten years only to receive a real return before tax of 0.6%? Until spreads change now is not the time to be buying inflation linked bonds. I just do not see the point of them/ it. There must be better things to do with your money. To sum up my thoughts? ZZZzzzzz.

Oliver Butt is a Partner in City and Continental LLP, a leading independent broker in fixed income. The author and or the LLP may hold a position in or trade in any of the securities mentioned above.


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