By Gabriel Chen

THE ongoing structured notes saga has deepened with Morgan Stanley's Pinnacle Notes Series 1 becoming the latest to come under the spotlight.

The complicated Pinnacle products do not appear to have any link to the now-bankrupt Lehman Brothers. Unlike the well-publicised Minibonds, they were not issued by Lehman Brothers and do not count the failed United States bank among the main 'reference' firms that could trigger a 'credit event'.

The Monetary Authority of Singapore (MAS) said yesterday that Morgan Stanley had informed it and the distributors of the notes that 'credit events' - this could involve, for instance, bankruptcy or the failure to pay - have occurred in relation to the securities underlying the notes.

The triggering of the credit events has led to drops in the value of the Pinnacle Series 1 notes, The Straits Times understands.

Morgan Stanley yesterday declined to disclose how much they had fallen.

Pinnacle Notes Series 1 forms part of a collection of credit-linked notes issued by Pinnacle Performance and arranged by Morgan Stanley Asia.

Already, Pinnacle Notes Series 9 and 10 are said to have seen their values plunge to near zero.

Pinnacle Notes Series 1 was sold to 342 retail investors who paid around $11.4 million for the complex product. A total of about $14.7 million was invested in it.

Main distributors were Maybank, OCBC Securities, CIMB-GK, Phillip Securities, Kim Eng Securities and DMG and Partner Securities, the central bank said yesterday.

MAS said it was informed by Morgan Stanley that while credit events have occurred in relation to the underlying securities, there has not been a 'mandatory redemption event'.

Should a so-called mandatory redemption event occur, the terms of the notes provide for them to be 'early redeemed'. It is questionable whether investors can retrieve anything from the notes' redemption, industry watchers say.

A broker said: 'Despite the recent market rally, the value of the notes should have fallen very substantially because the debt of some companies that they are linked to has plummeted in value.'

According to MAS, Morgan Stanley has said it is likely that a mandatory redemption event may shortly occur.

'Morgan Stanley will issue a notice, if and when that occurs,' MAS added.

Based on the recent historical pricing information posted on Morgan Stanley's website, no indicative price for Pinnacle Notes Series 1 was quoted on the latest May 15 posting date.

Pinnacle Notes are not 'principal guaranteed', which means investors will not get back the full sum invested if the product fails. Investors will be repaid the principal sum at maturity only if, among other things, the reference entities do not suffer any credit event or default.

The reference entities linked to Pinnacle Notes 1 include The Korea Development Bank, Bank of China and People's Republic of China.

This article was first published in The Straits Times.