Morgan Stanley Issues Leveraged Buffered S&P 500 Index-Linked Notes with 130% Upside Participation

Structure and Payoff Profile of the Index-Linked Notes

The Leveraged Buffered S&P 500 Index-Linked Notes are designed to provide investors with amplified exposure to positive movements in the S&P 500 Index while offering limited downside protection. According to the filing, the notes link their redemption value to the percentage change in the S&P 500 Index over the investment period, measured from the trade date to a determination date expected to occur between 13 and 15 months later. The notes employ a leverage multiplier of 130%, meaning that if the index appreciates, investors receive 130% of that gain in addition to their initial principal, subject to a capped maximum settlement amount.

The downside protection mechanism builds in what is termed a "buffer," which shields investors from losses if the underlying index declines modestly. The filing discloses that investors will receive their full $1,000 face value if the S&P 500 Index falls by up to 12.50% from the initial underlier level established on the trade date. However, this buffer is not absolute; if the index declines beyond 12.50%, losses accumulate on a leveraged basis. The filing indicates that in such scenarios, the loss calculation applies a factor of approximately 1.1429 to the decline amount exceeding the buffer threshold, meaning investors experience losses at a rate greater than the underlying index decline. Investors can potentially lose their entire investment if the index falls sufficiently far below the initial level.

Upside Cap and Maximum Settlement Terms

Like many structured notes, these instruments incorporate a ceiling on potential gains to help offset the cost of the downside buffer and leverage mechanics. The filing states that the maximum settlement amount is expected to fall between $1,137.93 and $1,162.24 for each $1,000 face amount of notes. This cap means that even if the S&P 500 Index experiences gains beyond a certain threshold, the investor's return is limited to this pre-determined maximum. The specific cap level has not been finalized in this preliminary pricing supplement and will be set forth in the final pricing supplement.

The interplay between the 130% upside participation rate and the maximum settlement amount determines the effective breakeven point for the notes. If the index rises to a level where the 130% participation would otherwise exceed the maximum settlement amount, the investor receives only the capped amount rather than the full leveraged gain. This trade-off is disclosed as part of the economic terms Morgan Stanley uses to structure the notes, and the filing notes that these terms are determined using the company's internal funding rate, which it states is likely lower than its secondary market credit spreads and therefore advantageous to Morgan Stanley rather than to note holders.

Guarantee Structure and Credit Risk Considerations

The notes are issued by Morgan Stanley Finance LLC, a special-purpose subsidiary, but the filing emphasizes that they are "fully and unconditionally guaranteed by Morgan Stanley." This guarantee is central to the credit risk profile of the instruments. However, the filing also clearly states that the notes are unsecured obligations and that investors will not have any security interest in or access to any underlying reference assets. Accordingly, the investor's recourse in the event of default is limited to claims against Morgan Stanley's general assets and its guarantee obligation.

The filing explicitly warns that all payments are subject to Morgan Stanley's credit risk and that investors could lose some or all of their investment if Morgan Stanley defaults on its obligations. This represents a significant material risk that differs from the market risk embedded in the index-linked payoff structure. The notes are not insured by the Federal Deposit Insurance Corporation or any other governmental agency, and they are not deposits or savings accounts. Investors relying on these notes bear both the leverage and buffer characteristics of the structured payoff as well as the fundamental credit risk of Morgan Stanley as obligor.

Pricing, Valuation, and Embedded Costs

The preliminary pricing supplement discloses that the original issue price of the notes is $1,000 per unit, with no agent commissions charged and all proceeds going to Morgan Stanley Finance LLC. However, the filing provides important disclosure regarding the true economic value of the notes to purchasers on the trade date. Morgan Stanley estimates that the value of each note on the trade date will be approximately $996.00, or within $15.00 of that estimate. This $4 to $19 per-note discount reflects the various costs associated with issuing, selling, structuring, and hedging the notes, which the filing states are borne by the investor.

The filing explains that in valuing the notes, Morgan Stanley accounts for both a debt component and a performance-based component linked to the S&P 500 Index. The valuation incorporates the company's own pricing and valuation models, market inputs, volatility assumptions, interest rate expectations, and an interest rate related to Morgan Stanley's secondary market credit spread. The filing further discloses that the economic terms of the notes, including the 130% upside participation rate, the cap level, the maximum settlement amount, and the buffer amount, are determined using an internal funding rate that Morgan Stanley states is likely lower than its secondary market credit spreads. This asymmetry is presented as advantageous to Morgan Stanley, with the implication that a higher internal funding rate or lower issuance and hedging costs would have produced more favorable terms for note holders.

Secondary Market Considerations and Liquidity Disclosures

The filing discloses information about the potential secondary market for the notes, though it emphasizes that Morgan Stanley & Co. LLC is not obligated to provide such liquidity. According to the supplement, Morgan Stanley & Co. will initially purchase all notes from Morgan Stanley Finance LLC at the original issue price of 100% and will sell them to investors at the same price without a discount or commission. The filing notes, however, that the secondary market price at which Morgan Stanley & Co. might purchase notes in the future could differ from the trade date estimated value due to the inclusion of the company's secondary market credit spread and the bid-offer spread typical of secondary market transactions in these instruments.

Notably, the filing states that for a period of up to three months following the issue date, to the extent that Morgan Stanley & Co. makes a secondary market in the notes, it would do so based on values higher than the estimated trade date value of $996.00, absent changes in market conditions related to the underlying index or credit spreads. The filing indicates that these higher secondary market values are expected to be reflected in investor brokerage account statements during this period. However, the filing explicitly states that Morgan Stanley & Co. may but is not obligated to make a market in the notes and may cease doing so at any time, leaving investors without a guaranteed path to liquidate their positions prior to maturity.

Suitability for Fee-Based Account Holders

The filing includes a disclosure regarding the treatment of these notes when held in fee-based investment accounts. Morgan Stanley notes that investors who purchase and hold the notes in fee-based accounts may be charged fees based on the amount of assets held in those accounts, including the notes themselves. This disclosure is significant because it means that the total cost of ownership for some investors may include both the embedded structural costs reflected in the $996 estimated value and additional advisory or account-based fees charged by their investment adviser or financial institution. Investors utilizing fee-based platforms should factor this additional layer of costs into their investment analysis.

Regulatory Status and Investor Protections

The filing makes clear that the preliminary pricing supplement represents an incomplete disclosure document and that final terms have not yet been established. The document notes that the Securities and Exchange Commission and state securities regulators have not approved or disapproved the notes or determined whether the preliminary pricing supplement, product supplement, index supplement, tax supplement, or prospectus is truthful or complete. The filing includes the standard legal warning that any representation to the contrary constitutes a criminal offense. This regulatory framework means that investors should expect material updates and clarifications when the final pricing supplement is delivered.

The notes are issued under Morgan Stanley Finance LLC's Series A Global Medium-Term Notes program, which has active SEC registration statements on file. The complete terms of the notes are governed not only by the preliminary pricing supplement but also by the prospectus dated April 8, 2026, the product supplement dated April 8, 2026, the index supplement dated April 8, 2026, and the tax supplement dated April 8, 2026. The filing states that information in the preliminary pricing supplement supersedes any conflicting information in these other documents, and that some terms or features described in those documents may not apply to these particular notes.

Use of Proceeds and Hedging Framework

The filing references additional disclosure regarding the use of proceeds and hedging activities on page 18 of the document, though the complete text of those sections is not included in the excerpt provided. The filing states that Morgan Stanley uses an internal funding rate to determine economic terms, which implies that hedging and funding strategies are central to how Morgan Stanley structures and manages these obligations. The reference to hedging in the pricing context suggests that Morgan Stanley will undertake derivative transactions to offset its exposure to the S&P 500 Index and the leveraged payoff profile it has committed to provide to note holders. These hedging costs are reflected in the difference between the $1,000 issue price and the $996 estimated value.

Tax Treatment and Related Documentation

The filing includes reference to a Tax Supplement dated April 8, 2026, which is referenced as part of the complete set of disclosure documents that investors should review in conjunction with the preliminary pricing supplement. Tax treatment of these structured notes can be complex and may vary significantly depending on an investor's individual tax situation and jurisdiction. The inclusion of a separate tax supplement in the registration materials suggests that Morgan Stanley recognizes the importance of tax considerations in the investment decision. Investors should carefully review the tax supplement and consider consulting with a tax professional regarding the potential tax consequences of investing in and holding these notes.