Analysis: How Morgan Stanley sank to junk pricing

Fri Jun 1, 2012 5:29pm EDT
 
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By Lauren Tara LaCapra

(Reuters) - The bond markets are treating Morgan Stanley like a junk-rated company, and the investment bank's higher borrowing costs could already be putting it at a disadvantage even before an expected ratings downgrade this month.

Bond rating agency Moody's Investors Service has said it may cut Morgan Stanley by at least two notches in June, to just two or three steps above junk status. Many investors see such a cut as all but certain.

Many U.S. banks are at risk of a downgrade, but ratings cuts could affect Morgan Stanley most because of the severity of the cut and because of its relatively large trading business.

Even before any downgrade, the bank is suffering in the bond markets. Prices for Morgan Stanley's bonds and credit derivatives have been trading at junk levels since last summer, according to Moody's Analytics. Prices moved further into the non-investment-grade category over the past two weeks amid troubles in Greece and other Euro zone nations.

"The numbers have changed for the worse," said Otis Casey, director of credit research at Markit. "What has driven that, obviously, is Europe. The perception is - correctly or incorrectly - that Morgan Stanley is one of the U.S. banks most exposed to Europe's problems."

Over time, Morgan Stanley's weaker bonds will translate to higher borrowing costs for the bank. Morgan Stanley already has higher interest expenses relative to its assets than does chief rival Goldman Sachs Group Inc.

Between downgrades and higher funding costs, "Morgan Stanley is going to make less money than Goldman doing the same types of activities," said Jason Graybill, senior managing director at Carret Asset Management, which owns Morgan Stanley bonds.

Morgan Stanley's troubles are manifold now.   Continued...

 
The headquarters of Morgan Stanley is pictured in New York June 1, 2012. REUTERS/Eric Thayer