Morgan Stanley Issues Auto-Callable Securities Linked to IBM Stock With 13.85% Contingent Coupon Rate

Structure and Coupon Payment Mechanics of the Auto-Callable Notes

The securities issued by Morgan Stanley Finance LLC are unsecured obligations with a stated principal amount of $1,000 per security and an original issue date of August 5, 2026. The product represents a contingent income structure rather than a traditional fixed-income instrument, meaning coupon payments depend entirely on whether IBM's closing stock price meets or exceeds a specified coupon barrier level on each observation date. The announcement indicates a contingent coupon will be paid at an annual rate of 13.85%, but only if the closing level of the IBM stock is greater than or equal to the coupon barrier level on the related observation date.

If IBM's stock falls below the coupon barrier level on any observation date, investors receive no coupon payment with respect to that interest period, creating significant reinvestment and income uncertainty over the 13-month holding period. The coupon barrier level is set at 57% of the initial level established on the strike date of July 31, 2026. This structure means investors must tolerate substantial stock price declines before losing coupon eligibility, fundamentally altering the income profile of the securities compared to conventional debt instruments where coupon payments are contractually guaranteed regardless of external market conditions.

Automatic Early Redemption Framework and Trigger Dates

The securities incorporate an automatic early redemption feature that activates if IBM's stock price meets or exceeds the call threshold level, set at 100% of the initial level, on any redemption determination date. The announcement establishes seven redemption determination dates: January 29, 2027, February 26, 2027, March 31, 2027, April 30, 2027, May 28, 2027, June 30, 2027, and July 30, 2027. If the stock price satisfies the redemption condition on any of these dates, investors receive the stated principal amount plus the contingent coupon for that period and the securities terminate immediately, with no further payments made.

The early redemption dates themselves fall shortly after each determination date, with the first early redemption date scheduled for February 3, 2027, contingent on the January 29, 2027 determination. This structure effectively caps upside participation for investors, meaning that even if IBM stock rallies significantly, investors will not benefit from appreciation beyond the initial level. The mechanism represents a fundamental trade-off inherent in the product: investors accept principal risk and contingent income in exchange for the theoretical early exit opportunity if IBM's stock maintains or exceeds its initial pricing level.

Downside Protection Threshold and Principal at Maturity

The filing establishes a downside threshold level at 57% of the initial IBM stock price, which serves as the critical demarcation point for determining the final payment amount at maturity on September 3, 2027. If the final level—defined as the closing level of IBM stock on the final observation date of August 31, 2027—is greater than or equal to this downside threshold, investors receive the full stated principal amount of $1,000 per security in addition to any contingent coupon payment due on the final observation date, if the coupon barrier condition is satisfied. This means investors can absorb stock price declines of up to 43% from the initial level and still recover principal in full.

However, if the final level falls below the downside threshold level, investors face direct loss of principal. The payment at maturity is calculated by multiplying the stated principal amount by the performance factor, which equals the final level divided by the initial level. Under these circumstances, the announcement explicitly states that the payment at maturity will be significantly less than the stated principal amount and could be zero. An investor whose IBM stock position declines by 57% or more from the initial pricing level could lose most or all of their $1,000 investment, creating substantial downside exposure for the 13-month investment period.

Estimated Value and Issue Price Details

Morgan Stanley provided an estimated value on the pricing date of July 31, 2026, of approximately $970.10 per security, with a range of within $35.00 of that estimate. The announcement indicates that the price to the public is $1,000 per security, though the filing does not disclose the specific agent's commissions and fees or the proceeds amount, listing these figures as blank fields to be completed. This valuation discount of approximately $30 per security reflects the structural risks embedded in the product, particularly the contingency of coupon payments and the potential for principal loss.

The securities are issued as part of Morgan Stanley Finance LLC's Series A Global Medium-Term Notes program under registration statement numbers 333-293641 and 333-293641-01. Morgan Stanley & Co. LLC, an affiliate of MSFL and a wholly owned subsidiary of Morgan Stanley, serves as the agent for distribution. The company did not disclose the aggregate principal amount being offered in this preliminary pricing supplement, as this figure remained blank in the announcement. The CUSIP number is 61781GR45 and the ISIN is US61781GR457, though the filing notes the securities will not be listed on any securities exchange.

Credit Risk and Guarantee Structure

The announcement emphasizes that these securities are unsecured obligations of Morgan Stanley Finance LLC, with a full and unconditional guarantee from Morgan Stanley serving as the parent company. This guarantee structure means that in the event of default by MSFL, the full faith and credit of Morgan Stanley backs investor claims. However, the filing explicitly states that all payments are subject to Morgan Stanley's credit risk, and if Morgan Stanley defaults on its obligations, investors could lose some or all of their investment. The securities carry no security interest in any underlying reference assets, meaning investors have no claim to IBM stock or other collateral if Morgan Stanley fails to perform.

The filing clarifies that these securities are not deposits or savings accounts and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency or instrumentality, nor are they obligations of, or guaranteed by, a bank. This distinction is critical for investors accustomed to bank products, as it removes any federal insurance protection that might otherwise apply to traditional savings vehicles. Investors must evaluate both the credit quality of Morgan Stanley as guarantor and the performance of IBM stock as the underlying reference asset to assess total risk exposure in these securities.

Investor Risk Profile and Suitability Considerations

Morgan Stanley's disclosure positions these securities for investors who actively seek an opportunity to earn interest at a potentially above-market rate in exchange for accepting substantial risk of losing a significant portion or all of their principal and the risk of receiving no coupons over the entire 13-month term. The 13.85% annual contingent coupon rate substantially exceeds typical market yields on unsecured corporate debt from investment-grade issuers, reflecting the embedded risks. Investors receive no participation in any appreciation of IBM stock beyond the call threshold level, meaning the risk-reward profile is asymmetrical, with limited upside but substantial downside exposure.

The announcement explicitly states that investors in these securities must be willing to accept the risk of losing their entire initial investment. This language underscores the principal-at-risk nature of the product and distinguishes it fundamentally from traditional fixed-income securities where principal repayment at maturity is guaranteed. The product targets sophisticated investors with high risk tolerance and specific yield objectives who understand structured products and can model various IBM stock price scenarios through maturity. Retail investors unfamiliar with contingent payment mechanics and principal-at-risk structures should carefully evaluate whether these securities align with their investment objectives and risk capacity before committing capital.

IBM Stock Performance as Underlying Reference Asset

The securities are entirely dependent on International Business Machines Corporation stock performance measured at specific observation dates and final observation dates through the August 31, 2027 maturity period. IBM's technology segment and cloud infrastructure services represent critical business drivers affecting the company's market valuation and shareholder returns. The announcement does not provide IBM-specific financial metrics or disclosure regarding IBM's business performance, profitability, competitive positioning, or market outlook, as the supplement focuses exclusively on the structured product mechanics rather than analysis of the underlying stock.

Investors should independently evaluate IBM's fundamental business conditions, earnings trends, competitive dynamics within the technology sector, and macroeconomic factors affecting technology stocks before committing capital to these securities. Volatility in IBM stock price directly affects the probability of achieving coupon payments, early redemption, and principal recovery at maturity. Technology sector headwinds, corporate restructuring initiatives, or shifts in competitive positioning could pressure IBM's share price below the 57% downside threshold level, triggering material principal loss for security holders.

Observation Dates and Coupon Payment Schedule

The preliminary pricing supplement references specific observation dates and coupon payment dates that govern when Morgan Stanley measures IBM's stock price for determining coupon eligibility and final maturity payments. The announcement states that observation dates are subject to postponement for non-trading days and certain market disruption events, providing Morgan Stanley discretion to adjust timing if markets face operational disruptions or holidays. Coupon payment dates correspond to observation dates, with the final coupon payment scheduled for the maturity date of September 3, 2027, contingent on whether the final observation date of August 31, 2027 satisfies the coupon barrier condition.

The filing indicates that if any coupon payment date is not a business day, the coupon payment will be made on the next succeeding business day with no adjustment to the coupon amount. This administrative provision ensures timely settlement while maintaining the contingent payment structure. Investors must track IBM stock prices on each observation date against the coupon barrier level to understand their expected income stream, as missing even a single coupon payment significantly impacts the yield and total return profile of the investment over the 13-month holding period. The announcement does not provide a complete schedule of observation dates in the preliminary supplement, referring readers to additional documentation for the full calendar.

Regulatory Status and Investor Disclosure Obligations

The announcement notes that the Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities or determined whether the pricing supplement or accompanying product supplement, tax supplement, and prospectus are truthful or complete. Morgan Stanley filed this preliminary pricing supplement pursuant to SEC Rule 424(b)(2), establishing that the securities registration falls under Morgan Stanley's existing shelf registration statements. The final pricing supplement and definitive terms will be subject to SEC review and approval before the securities can be offered to investors.

Investors should review the complete product supplement dated April 8, 2026, the tax supplement dated April 8, 2026, and the prospectus dated April 8, 2026, which are referenced in the preliminary supplement but not reproduced in this filing. These supporting documents provide detailed risk factors, additional terms, tax treatment guidance, and plan of distribution information. The filing recommends investors read the preliminary pricing supplement together with the product supplement and prospectus to understand the complete legal and financial terms governing these securities before investment decisions.