By JAMIE LEE

INVESTORS in Morgan Stanley's Pinnacle Series 1 notes may soon lose every cent they put in.

There are some 342 retail investors here who invested a total of about $14.7 million, the Monetary Authority of Singapore said yesterday in response to BT queries on Monday.

This is about half as many as the 700 retail investors in Series 9 & 10 notes who pumped in a total of $26 million.

Buyers of Pinnacle Series 1 notes are likely to lose their principal investments after the US investment bank said a mandatory redemption could be triggered by a 'credit event' involving Syncora Guarantee Inc, according to a notice dated May 7.

'It is likely that a mandatory redemption event may shortly occur as a result of this credit event,' Morgan Stanley said in a note to the six distributors here.

The distributors are CIMB-GK Securities, DMG & Partners Securities, Kim Eng Securities, Maybank, OCBC Securities and Phillip Securities.

Syncora Guarantee Inc - now a junk-rated insurer in the US - has failed to pay interest on its bonds after the New York Insurance Department ordered the company to stop doing so and to return any surplus to policyholders instead, wire reports from Bloomberg and Reuters said.

The company has a policyholders' deficit of US$2.4 billion and must reverse this to the minimum surplus of US$65 million as required by the state, Reuters reported on May 1.

In the case of Series 1 notes, Syncora is among 100-odd reference entities listed under underlying assets in the structured product's portfolio. The assets include what are known as synthetic collateralised debt obligations (CDOs).

'Credit events' - such as a payment default, in Syncora's case - by reference entities cause the portfolio to lose a certain percentage of its value. And once such losses cross a threshold set by rating agencies, a mandatory redemption is triggered.

When a mandatory redemption occurs, the arranger of the note sells the remaining CDOs in the market and, from the proceeds, deducts the marked-to-market losses from the unwinding of first-to-default swaps.

Given the depressed markets, the final recovery amount is likely to be zero.

Other reference entities in the underlying assets include banks such as Barclays and Citigroup, as well as notable consumer brands such as Johnson & Johnson and Mattel.

Morgan Stanley has also sent out notices for Series 2, 3, 5, 6 & 7 series notes following the 'credit event' involving Syncora.

'The issuer can give no assurance as to whether a mandatory redemption will or will not occur in relation to the notes in the future,' Morgan Stanley said in notices dated May 7.

This article was first published in The Business Times.