morgan stanley CHK SPARQS IPO

**alex_li_98** Wed Jun 15, 2005 12:10 pm

morgan stanley CHK SPARQS IPO
Hi Blast,

I'd like to share the info that morgan stanley is preparing a IPO of Stock Participation Accreting Redemption Quarterly-pay Securities matures at July 1 2006. It will pay 9% interest (annual) and at maturity can receive one share of CHK. Pricing should be 6/23 at close. MS has right to call the SPARQS at 16-20% annual yield to holder.

Is this indication of MS's projection that CHK will go up a lot? I think there are a few cases they can profit:
1) use the capital and borrow money to buy/hedge more shares so they get more than the 9% they will pay
2) Given their call right if CHK up > call yield
3) If CHK stock fall >9%

The SPARQ will be traded on AMEX under proposed ticker CEQ.

Blast can you please share your thought on it? This is the first time I learn about this type of security. Is it better to invest directly in CHK stock or CEQ?

-Alex

**blast_investor** Wed Jun 15, 2005 1:46 pm

I do not get it. What is the benefit for buyers of this type of
derivative CEQ?

Sounds that CHK downside is protected up to -9% yield, upside is capped at 20%. Long term capital gain tax benefit is gone.

If CEQ trades at discounts to CHK, then it would be interesting. Otherwise, at full price or premium price, Not much meat there for CEQ buyers.

With IPO, it is unlikely to see discounts there.

**alex_li_98** Wed Jun 15, 2005 5:07 pm

Hi Blast,

Thanks for your response. What I am trying to figure out here is why MS is doing this.

1. if CHK rise > 20% next year and trigger the call, it is better to buy the stock directly. Still 16-20% is not too bad a return (given that we got protected to -9%). MS makes whatever gain about the call yield (plus the gain on the leveraged buys).

2. If CHK rise between 9-20%, investor will get 9% + stock, not bad (in fact that is what I want), and MS's gain depends the hedging cost, leverage percentage, etc. probably not as good as case 1.

3. -9%< CHK gain < 9%, investor make some money, MS might lose money

4. CHK drops more than 9%, investor lose money, MS might make some

I am curous when will investment houses like MS issue this type of derivative security? That is their target?

Thanks,

-Alex

**blast_investor** Wed Jun 15, 2005 5:12 pm

Alex,

brokerages get IPO fees and management fees from this kind deals. I would not want to assume bullish or bearish position from Morgan Stanley.
Many time, houses only trade on spread with no risk of direction.

This kind of derivatives is complicated, as those options and future.

Wall Street nowadays are crazy about derivatives. Just be careful and do some homework of all the risk and reward if you like the concept.

**alex_li_98** Wed Jun 15, 2005 7:17 pm

Thanks! I guess it's better to only buy those things that you understands.

-Alex

**alex_li_98** Wed Jul 20, 2005 4:35 pm

hi Blast,

Now CEQ is trading at 5% discount to CHK. Adding the 9% yield it is about 14%. Do you think it is worthwhile?

Thanks,

-Alex