By LYNETTE KHOO

INVESTORS who had bought into another structured product, this time arranged by US bank Morgan Stanley, are now seeing the value of their investments going to zero.

Morgan Stanley Asia (Singapore) Pte has called for an early redemption of Pinnacle Notes Series 9 and 10 after 'a number of credit events' in the underlying securities of the notes.

'Given the current market values of the underlying assets and the credit default swap transaction, we anticipate that investors will lose all of their original principal investment,' Morgan Stanley said on its website.

The Monetary Authority of Singapore (MAS) said yesterday that it has been informed of this and is in close contact with the bank to ensure that it provides all the necessary information on the early redemption of the notes to interested parties.

The two series of Pinnacle Notes have been sold since December 2007 and some 700 retail investors here have invested $26 million in the notes through five distributors: DMG & Partners Securities, Hong Leong Finance, Kim Eng Securities, OCBC Securities and UOB Kay Hian.

MAS said that it has asked the distributors of the notes to ensure that all affected investors are contacted and informed of the early redemption of these notes immediately.

These notes are linked to collateralised debt obligations or CDOs. They were rated investment grade 'AA' by Standard & Poor's when they were issued last year, but were recently cut to junk rating of 'CCC-'.

Pinnacle Notes are not principal guaranteed and 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.

A principal writedown has been triggered by 'credit events' in its underlying assets, which include troubled financial institutions Lehman Brothers, US mortgage companies Fannie Mae and Freddie Mac, and Iceland's Kaupthing Bank.

'The Hong Kong and Shanghai Banking Corporation, being the custodian for the notes and acting as agent for the issuer, will arrange for and administer the sale of the underlying assets,' Morgan Stanley said on its website.

Morgan Stanley will redeem the notes after the sale proceeds of the underlying assets have been received and the process of determining the early redemption amount is completed. This may take four to six weeks.

MAS reiterated that it requires financial institutions (FIs) to have a rigorous process to look into every complaint and to ensure that legitimate grievances are dealt with expeditiously.

While it does not have the power to compel FIs to pay compensation to consumers, which is the same for regulators in other jurisdictions such as Hong Kong, MAS has set in place processes for investors to pursue their claims against the FIs.

Last month, DBS Group said that based on the number of cases reviewed, the bank estimated that compensation to be paid out for High Notes 5 would be $70-80 million in Singapore and Hong Kong.

This article was first published in The Business Times on November 15, 2008.