This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
See Cramer's multi-million dollar portfolio for FREE and get his new book Get Rich Carefully! Learn More

Morgan Stanley Just Got a $6.8 Billion Headache

Updated with Morgan Stanley's reaction to the downgrade of its credit ratings by Moody's Investor Service.

NEW YORK (TheStreet) -- Based on the company's own liquidity stress tests at the end of the first quarter, Morgan Stanley (MS) faces additional requirements of $6.8 billion, following a two-notch credit rating downgrade by Moody's Investor Service.

Moody's late Thursday afternoon announced that it had "repositioned the ratings of 15 banks and securities firms with global capital markets operations," with four companies seeing their long-term credit ratings lowered by one notch, 10 firms by two notches, and one firm by three notches.

Morgan Stanley CEO James P. Gorman

The ratings agency lowered its long-term senior unsecured debt rating for Morgan Stanley to Baa1 from A2, with a negative outlook, while cutting its short-term rating for the firm to P-2 from P-1.

Morgan Stanley (MS) previously disclosed in its first-quarter 10-Q filing that according to the company's stress tests of its March 31 trading positions, its trading counterparties could call "additional collateral, termination payments or other contractual amounts" of $5.2 billion in the event of two-notch downgrades from Moody's and Standard & Poor's.

In addition to the counterparty calls, Morgan Stanley could face "increased collateral requirement at certain exchanges and clearing organizations" of $1.6 billion from the two-notch long-term rating downgrade.

In after-market trading, just minutes after Moody's made its ratings action announcement, Morgan Stanley's shares were up 3.5% to $14.42. Many analysts and investors had been anticipating a three-notch downgrade from Moody's, which would have brought Morgan Stanley's collateral call up to $9.6 billion, based on the company's liquidity stress tests as of March 31.

Morgan Stanley released a statement saying that "While Moody's revised ratings are better than its initial guidance of up to three notches, we believe the ratings still do not fully reflect the key strategic actions we have taken in recent years."

The firm also said that the acknowledgement by Moody's of Morgan Stanley's "long-term partnership with[Mitsubishi UFJ Financial Group ] as well as our industry-leading capital and liquidity highlight some of the transformative steps we have taken," adding that "with our de-risked balance sheet, stable sources of funding, diverse business mix and strong leadership team, we are well positioned to deliver for clients and shareholders."

Credit Agricole analyst Mike Mayo said on Wednesday that the downgrades by Moody's seemed "inevitable given the correlation of banking with sovereigns and the weaker geopolitical outlook given the macro slowdown, problems in Europe, and less government backstops (or at least this intention by governments)," but that "most of these expectations are likely already in the stock prices."

Mayo -- who rates Morgan Stanley "Underperform" -- also said that "a multi-notch downgrade, almost by definition, seems like a move that is well behind the market," and that "the banks arguably have excess funding given the deposit surge, and these excess deposits will only increase as Europe and its banks look more vulnerable."

Before the announcement by Moody's, Morgan Stanley's shares pulled back 2% to close at $13.96. The shares have now declined 7% year-to-date, after dropping 44% during 2011.

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

At the market close, the shares traded for just over half their reported March 31 tangible book value of $27.37 and for six times the consensus 2013 EPS estimate of $2.25. The consensus 2012 EPS estimate is $1.39.

After meeting with Morgan Stanley CFO Ruth Porat, UBS Analyst Brennan Hawken said earlier on Thursday that Morgan Stanley expected that a rating downgrade would "not have an outsized impact on the firm," and that "the primary revenue impact" from a downgrade would be "in its long-dated, uncollateralized interest rate derivatives, which MS has already de-emphasized."

Hawken rates Morgan Stanley a "Buy," with a $19 price target, saying the shares "are cheap, even when we assume very negative outcomes from some of the exogenous issues facing the firm."

Deutsche Bank analyst Michael Carrier late on Wednesday lowered his price target for Morgan Stanley to $20 from $22, and said that despite the company's "upside potential in wealth management and its current valuation" and "potential for the stock long term," he was sticking with his neutral rating on the shares "given some near term pressures" on the company's return on tangible equity, "the negative impact from a Moody's downgrade and to [tangible book value] with the MSSB buy-in, and continuing macro uncertainty."

Interested in more on Morgan Stanley? See TheStreet Ratings' report card for this stock.

RELATED STORIES:




-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Stock quotes in this article: MS 
Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
DOW 16,510.81 +9.16 0.06%
S&P 500 1,879.32 +3.93 0.21%
NASDAQ 4,149.7690 +22.8020 0.55%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs