Morgan Stanley Finance LLC Launches IBM-Linked Callable Contingent Income Securities Due 2028

Security Structure and Contingent Coupon Mechanism

The securities are structured as unsecured obligations of Morgan Stanley Finance LLC, with a full and unconditional guarantee from Morgan Stanley. Investors purchasing these securities at the stated principal amount of $1,000 per security would receive a contingent coupon payment only under specific conditions tied to the performance of IBM's capital stock. The contingent coupon is set at an annual rate of 15.00%, substantially above typical fixed-income yields, but investors will receive no coupon payments for any interest period in which IBM's stock price closes below the coupon barrier level on the related observation date.

The filing discloses that the coupon barrier level is set at 50% of the initial level, meaning IBM's stock would need to remain above half of its strike date value for coupon payments to be made. This structure creates a meaningful threshold that investors must monitor throughout the two-year term. Multiple observation dates are scheduled for contingent coupon determination, requiring continuous assessment of IBM's equity performance. The contingent nature of these payments introduces significant uncertainty regarding total return, as investors could receive substantial coupons, partial coupons, or no coupons at all depending on IBM's stock trajectory relative to the barrier levels.

Principal-at-Risk Maturity Terms and Downside Exposure

The securities feature a principal-at-risk structure that distinguishes them fundamentally from traditional debt instruments. At maturity, if the securities have not been redeemed early, the payment to investors depends on whether IBM's final stock price meets or exceeds the downside threshold level. Should the final level be greater than or equal to the downside threshold level, investors will receive the stated principal amount along with any contingent coupon due on the final observation date. However, if the final level falls below the downside threshold level, investors will experience losses calibrated on a one-to-one basis with the percentage decline in IBM's stock price over the two-year term.

The filing explicitly states that under downside conditions, "the payment at maturity will be significantly less than the stated principal amount and could be zero." This means an investor's return of capital is not guaranteed and depends entirely on IBM's stock performance relative to the downside threshold. The document emphasizes that "investors in the securities must be willing to accept the risk of losing their entire initial investment," underscoring the severity of potential losses. This structure creates a scenario in which investors receive the full contingent coupon benefit only to experience substantial principal erosion at maturity, compounding the complexity of total return calculation.

Early Redemption Feature and Valuation Model Trigger

The securities include a call feature allowing Morgan Stanley to redeem the notes early based on the output of a risk neutral valuation model. Beginning on the first redemption date of January 22, 2027, Morgan Stanley may elect early redemption on any subsequent redemption date if the valuation model indicates that redemption is economically rational when compared to continuing to hold the securities. The determination of whether to exercise this call is made by the calculation agent, using a valuation model that incorporates prevailing reference market levels, volatilities, correlations, and Morgan Stanley's credit spreads as of the original pricing date.

Early redemption, if exercised, would provide investors with the stated principal amount plus any contingent coupon otherwise due for the related interest period. However, the filing notes that early redemption will occur only in whole, not in part, meaning all securities would be redeemed simultaneously. The document clarifies that "an early redemption of the securities will not automatically occur based on the performance of the underlier," indicating that IBM's stock price alone does not trigger the call—rather, Morgan Stanley's internal valuation model determines whether redemption serves the issuer's economic interests. Investors should note that scheduled redemption dates are January 22, 2027, April 22, 2027, July 22, 2027, October 21, 2027, January 21, 2028, and April 20, 2028, providing multiple windows during which early redemption could occur.

Pricing, Commissions, and Investment Terms

The securities are offered at a price of $1,000 per security to the public, with Morgan Stanley & Co. LLC serving as the agent. The agent's commissions and fees total $10 per security, with selected dealers receiving a fixed sales commission of $10 for each security sold and a structuring fee of $1 per security. This results in net proceeds to Morgan Stanley Finance LLC of $989 per security, or $1 per security when accounting for the structuring fee allocation. The estimated value of the securities on the pricing date was approximately $975.90 per security, or within $25.00 of that estimate, representing a discount to the stated principal amount and reflecting the risk embedded in the contingent coupon and principal-at-risk features.

The original issue date was July 22, 2026, with the pricing date and strike date both set for July 17, 2026. The final observation date is scheduled for July 17, 2028, with the maturity date falling on July 20, 2028. The filing indicates that the aggregate principal amount was not disclosed in this preliminary pricing supplement, suggesting this is a preliminary announcement subject to final sizing. Investors purchasing at the public offering price of $1,000 would face an immediate loss relative to the estimated value if they were to exit the position immediately, highlighting the structured premium built into these securities.

Underlying Asset Performance and Participation Limitations

The securities are linked exclusively to the capital stock of International Business Machines Corporation and derive their return profile from IBM's equity performance. However, the filing explicitly states that "you will not participate in any appreciation of the underlier," meaning investors receive no benefit from IBM stock price increases above the coupon barrier or downside threshold levels. This structural limitation fundamentally restricts upside potential while exposing investors fully to downside risk, creating an asymmetric payoff profile weighted toward loss scenarios.

IBM's stock performance is monitored on multiple observation dates throughout the two-year term, beginning with the strike date of July 17, 2026. The coupon barrier, set at 50% of the initial level, creates a meaningful floor below which no income is generated. The downside threshold level, referenced in the payment-at-maturity calculation, represents another critical price level but the specific dollar amount was not disclosed in the filing. Investors must therefore track IBM's stock movements carefully, recognizing that performance relative to these undisclosed thresholds determines both coupon payments and principal recovery.

Credit Risk and Guarantee Structure

While Morgan Stanley Finance LLC issues the securities, they are fully and unconditionally guaranteed by Morgan Stanley, the parent company. The filing notes that "all payments are subject to our credit risk" and warns that "if we default on our obligations, you could lose some or all of your investment." This guarantee, though unconditional, does not eliminate Morgan Stanley credit risk from the investor's perspective and does not provide a separate recovery avenue if Morgan Stanley itself experiences financial distress. The securities are unsecured obligations, meaning investors hold no security interest in any underlying reference asset or assets, placing them in an unsecured creditor position relative to Morgan Stanley.

The filing emphasizes that these securities are not deposits or savings accounts and receive no protection from the Federal Deposit Insurance Corporation or any other governmental agency or instrumentality. Investors bear the full credit risk of Morgan Stanley, in addition to the market risk associated with IBM's stock performance and the structural risks inherent in the contingent coupon and principal-at-risk features. This multi-layered risk profile—combining equity volatility exposure, contingent income risk, principal loss risk, and credit risk—distinguishes these securities from conventional fixed-income investments.

Registration Statement and Regulatory Framework

The securities are filed pursuant to Rule 424(b)(2) under the Securities Act, with the preliminary pricing supplement incorporating Registration Statement Nos. 333-293641 and 333-293641-01. The offering is supported by accompanying documentation including a product supplement for principal-at-risk securities dated April 8, 2026, a tax supplement dated April 8, 2026, and a prospectus dated April 8, 2026. These documents, referenced in the filing and available via hyperlinks, contain additional terms and conditions governing the securities.

The filing carries the standard regulatory disclaimer that the Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities and have not determined whether the prospectus or supplements are truthful or complete. The document indicates this is a preliminary pricing supplement, suggesting that final terms and aggregate principal amount remain subject to market conditions and investor demand. Investors are instructed to read the preliminary pricing supplement together with the related product supplement, tax supplement, and prospectus to understand the full scope of terms, conditions, and risk factors.

Investor Suitability and Risk Acknowledgment

The filing explicitly targets a specific investor profile: those "who seek an opportunity to earn interest at a potentially above-market rate in exchange for the risk of losing a significant portion or all of their principal, the risk of receiving no coupons over the entire term of the securities and the risk of an early redemption of the securities based on the output of a risk neutral valuation model." This characterization acknowledges that the 15.00% contingent coupon rate must be weighed against three distinct risks: principal loss, coupon forfeiture, and redemption at issuer discretion. The offering is not suitable for investors seeking principal protection, consistent income streams, or equity upside participation.

The securities structure creates multiple scenarios in which investor outcomes diverge significantly from expectations. An investor could receive no coupons over the entire two-year term if IBM's stock price falls below the coupon barrier on every observation date. Simultaneously, that same investor could experience principal recovery at maturity if IBM's stock remains above the downside threshold. Conversely, an investor receiving substantial contingent coupons could face significant principal loss if IBM's stock declines sharply before maturity. The early redemption feature introduces additional uncertainty, as Morgan Stanley's valuation model could trigger redemption at unfavorable points in the market cycle, forcing reinvestment at potentially different yield levels.

Terms and Conditions Documentation and Supplemental Information

The preliminary pricing supplement references supplemental information regarding the plan of distribution and conflicts of interest, noting that Morgan Stanley & Co. LLC serves as agent and is an affiliate of MSFL and a wholly owned subsidiary of Morgan Stanley. Selected dealers and their financial advisors will collectively receive the agent's fixed sales commission and structuring fee as disclosed in the pricing table. The document directs investors to the "Plan of Distribution (Conflicts of Interest)" section in the accompanying product supplement for additional details regarding the distribution arrangement and any potential conflicts between Morgan Stanley's interests and those of investors.

The filing states that this represents a preliminary pricing supplement, indicating that final terms may be adjusted before the securities are offered to investors. Key terms including the aggregate principal amount, specific coupon barrier level dollar amount, downside threshold level dollar amount, and final estimated value remain subject to change. Investors should expect a final pricing supplement to follow with confirmed terms and complete pricing details. The document references "Additional Terms of the Securities" and "Additional Information About the Securities" at the end, directing investors to consult the complete document and related product supplement for comprehensive coverage of all contractual provisions and operational mechanics.