Tuesday, May 8, 2012

Morgan Stanley outlines downgrade costs

By Rick Rothacker

(Reuters) - Morgan Stanley (MS) said on Monday that credit rating agency downgrades of its long-term debt would have required the company to provide additional collateral and make termination payments under derivatives contracts ranging from $868 million to $7.2 billion as of March 31.

The New York-based investment bank disclosed the potential costs in a quarterly securities filing as one of the rating agencies, Moody's Investors Service, weighs possible downgrades of 17 financial institutions with global capital markets operations, including Morgan Stanley. Other banks have been making similar disclosures in their quarterly filings.

Credit ratings are opinions on a company's creditworthiness that help determine its borrowing costs and the availability of credit. Under derivatives agreements, changes in ratings can also require financial institutions to provide additional collateral or make other payments to counterparties.

In Monday's filing, Morgan Stanley said it is also required to pledge additional capital to certain exchanges and clearing organizations in the event of downgrades. As of March 31, the increased collateral requirements ranged from $160 million to $2.4 billion, depending on the severity of the downgrade.

The impact of additional collateral requirements is "fully considered" in the company's contingency funding plan, according to the filing.

To prepare for a possible downgrade, Morgan Stanley has been moving derivatives into its higher-rated bank entity and has reduced the size of its structured products business, which would be most impacted by the change, the firm's chief financial officer, Ruth Porat, said in April.

Moody's warned in February that it might lower Morgan Stanley's rating by three notches to Baa2, putting its rating below peers, including Goldman Sachs Group Inc (GS). The downgrade scenarios disclosed on Monday are with the highest amount of collateral owed factored in a three-notch downgrade by Moody's.

(Reporting by Rick Rothacker in Charlotte)

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