If Morgan Stanley decides to accelerate the purchase of the 49% of the Morgan Stanley Smith Barney LLC joint venture that
Citigroup Inc. owns — rather than exercise the option over three years — the move could jeopardize its credit rating.
On Feb. 15, Moody's Investors Service Inc. put Morgan Stanley, along with 16 other banks and securities firms that have global capital markets operations, on review for possible credit rating downgrades. “These firms face challenges that are not fully captured in their current ratings,” the ratings firm explained in a research report.
Morgan Stanley, however, is one of only three banks that face a possible three-notch downgrade from its current A2 rating. The purchase of Citi's 49% stake in MSSB would likely cost $7 billion to $10 billion or more, depending on who's doing the valuation.
In a Feb. 17 report on Morgan Stanley, Moody's analyst David Fanger wrote that the 100% acquisition of the joint venture would ultimately be positive for bondholders and the company's credit rating, as it would reduce Morgan's reliance on capital markets activities.
“However … much depends on how the acquisition of the remaining stake would be financed. To the extent that the acquisition resulted in increased leverage, it could offset any positive benefits,” wrote Mr. Fanger.
MSSB spokeswoman Christine Pollak said the firm had no comment on the terms and timing of the joint-venture purchase.
But with Morgan Stanley's stock price still in the doldrums, an outright purchase of MSSB would almost certainly require debt financing — likely increasing the chances of a downgrade and possibly damaging its capital markets business, said Brad Hintz, an analyst for Sanford C. Bernstein & Co. Inc.
“If they get a ratings downgrade, the demand for their derivatives products will drop,” he said. “If I'm the treasurer of Exxon and I want to swap a 10-year bond, I wouldn't go to a Baa2 bank.”
“If Morgan Stanley buys in all of Smith Barney, they'll weaken their capital position and it's less likely they'll avoid the three-notch downgrade,” said Mr. Hintz.
