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Rating Action:

Moody's downgrades Morgan Stanley to A2, negative outlook

17 Dec 2008
Moody's downgrades Morgan Stanley to A2, negative outlook

Approximately $200 billion in long-term debt affected

New York, December 17, 2008 -- Moody's Investors Service downgraded the long-term senior debt ratings of Morgan Stanley (senior debt to A2 from A1) and its selected subsidiaries, excluding FDIC-guaranteed debt. All short-term ratings were affirmed at Prime-1 and the deposits of Morgan Stanley's rated banks were affirmed at A1. The rating outlook is negative. This concludes the review commenced on October 9, 2008.

The downgrade of Morgan Stanley's senior debt to A2 reflects (1) the increased vulnerabilities that the ongoing credit market crisis has exposed in the model of Morgan Stanley and other wholesale-funded investment, commercial, and universal banks (see "Impact of the Credit Crisis on Moody's Rating Methodology and the Credit Profiles of Investment Banks" dated October 2008); (2) the firm's weak 4Q2008 and full year results which indicate erosion in certain important Morgan Stanley franchises that had previously underpinned the ratings; (3) the likelihood of increased structural subordination for Morgan Stanley creditors relative to its bank-level creditors and (4) a persistent difficult operating environment that will continue to challenge the firm. Tempering these issues, Moody's is now incorporating two notches of benefit to Morgan Stanley's ratings for potential systemic support.

The assignment of the negative outlook reflects Moody's expectation of an extended downturn in capital markets activity, which will reduce Morgan Stanley's revenue and profit potential in 2009 and beyond. "Management will be challenged to adapt the firm's business model and reduce its reliance on capital intensive activities," said Peter Nerby, a Senior Vice President at Moody's.

The risks in Morgan Stanley's and other wholesale-funded banks' business model have been highlighted by the market stresses of the past 18 months. These risks include opaque exposures, risk control failures, high leverage, and confidence-sensitivity.

Moody's commented that Morgan Stanley's large fourth quarter loss and tepid full year results reported today also factored into the downgrade. The write-downs that drove the fourth quarter 2008 loss highlight the firm's concentration risks. Commenting on the full year results, Moody's observed that Morgan Stanley would have reported a significant net loss if gains from asset sales, gains from widening credit spreads on its own debt, and gains from repurchasing its own debt at a discount were excluded.

As stated above, the erosion in certain important Morgan Stanley franchises, including prime brokerage and asset management, was a contributing factor in the downgrade. In contrast to other firms that have been similarly affected, Morgan Stanley did not generate sufficient revenues in the quarter to more fully absorb write-downs, reflecting some weakness in its franchises. Notwithstanding this, Moody's said that the previous acute customer and investor confidence pressures on Morgan Stanley appear to have been alleviated in part due to the far-reaching support supplied by the regulators to Morgan Stanley and other large banks. Positively, Moody's also observed that Morgan Stanley reduced the size of its balance sheet dramatically in the fourth quarter and is reporting high capital ratios compared to many wholesale investment banks.

The decision by Morgan Stanley to register as a bank holding company and submit to regulation and oversight by the Federal Reserve could benefit creditors by placing some additional limits on the firm's ability to aggressively increase its risk profile in the future. However, Moody's also believes that as Morgan Stanley's organizational and funding structure evolves under its new regulatory regime it will likely lead over time to increased structural subordination for holding company creditors relative to bank-level depositors and counterparties. Therefore a one-notch differential between the A1 bank deposit rating and the A2 senior debt rating of the holding company was introduced.

Moody's views Morgan Stanley as a systemically important institution and its ratings benefit from an assumption of a high likelihood of external support. The incorporation of this level of support results in a two notch lift for both Morgan Stanley and its banking subsidiaries relative to the rating level that would exist in the absence of support. Moody's said that the rationale for two notches of support, versus one, is that intrinsically weaker firms benefit to a greater degree from support provided by a highly rated entity (in this case, the United States, rated Aaa).

In affirming all Prime-1 ratings, Moody's noted that Morgan Stanley has a solid liquidity profile. Morgan Stanley continues to maintain a liquidity pool (which averaged $121 billion in the fourth quarter) sufficient to cover a wide variety of potential demands such as changes to collateralized funding terms, changing margin requirements, and customer outflows. In addition to other support programs, Morgan Stanley has access to the Temporary Liquidity Guarantee Program, and Moody's rates qualifying issuance Aaa based on the FDIC guarantee (see Moody's November 23, 2008 press release). As a result, Moody's thinks that Morgan Stanley's liquidity profile remains strong.

Moody's last rating action on Morgan Stanley was on October 9, 2008, when the long-term ratings were placed on review for possible downgrade. The principal methodology used in rating Morgan Stanley is the Global Securities Industry Methodology, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory.

Issuer: MS Capital Trust II

..Downgrades:

....Preferred Stock Shelf, Downgraded to (P)A3 from (P)A2

..Outlook Actions:

....Outlook, Changed To Negative From Rating Under Review

Issuer: MS Capital Trust IV

..Downgrades:

....Preferred Stock Preferred Stock, Downgraded to A3 from A2

....Preferred Stock Shelf, Downgraded to (P)A3 from (P)A2

..Outlook Actions:

....Outlook, Changed To Negative From Rating Under Review

Issuer: Morgan Stanley

..Downgrades:

.... Issuer Rating, Downgraded to A2 from A1

....Multiple Seniority Medium-Term Note Program, Downgraded to A3, A2 from A2, A1

....Multiple Seniority Shelf, Downgraded to (P)Baa1, (P)A2 from (P)A3, (P)A1

....Preferred Stock Preferred Stock, Downgraded to Baa1 from A3

....Subordinate Regular Bond/Debenture, Downgraded to A3 from A2

....Senior Unsecured Conv./Exch. Bond/Debenture, Downgraded to A2 from A1

....Senior Unsecured Medium-Term Note Program, Downgraded to A2 from A1

....Senior Unsecured Regular Bond/Debenture, Downgraded to A2 from A1

....Senior Unsecured Shelf, Downgraded to (P)A2 from (P)A1

..Outlook Actions:

....Outlook, Changed To Negative From Rating Under Review

Issuer: Morgan Stanley & Co. International plc

..Downgrades:

.... Issuer Rating, Downgraded to A2 from A1

....Senior Unsecured Medium-Term Note Program, Downgraded to A2 from A1

....Senior Unsecured Regular Bond/Debenture, Downgraded to A2 from A1

..Outlook Actions:

....Outlook, Changed To Negative From Rating Under Review

Issuer: Morgan Stanley (Jersey) Limited

..Downgrades:

.... Issuer Rating, Downgraded to A2 from A1

....Senior Unsecured Medium-Term Note Program, Downgraded to A2 from A1

....Senior Unsecured Regular Bond/Debenture, Downgraded to A2 from A1

..Outlook Actions:

....Outlook, Changed To Negative From Rating Under Review

Issuer: Morgan Stanley Australia Finance Limited

..Downgrades:

....Multiple Seniority Medium-Term Note Program, Downgraded to A3, A2 from A2, A1

..Outlook Actions:

....Outlook, Changed To Negative From Rating Under Review

Issuer: Morgan Stanley Bank AG

..Downgrades:

.... Bank Financial Strength Rating, Downgraded to C from B-

..Outlook Actions:

....Outlook, Changed To Negative From Rating Under Review

Issuer: Morgan Stanley Bank International Limited

..Downgrades:

.... Bank Financial Strength Rating, Downgraded to C from B-

..Outlook Actions:

....Outlook, Changed To Negative From Rating Under Review

Issuer: Morgan Stanley Bank, N.A.

..Downgrades:

.... Bank Financial Strength Rating, Downgraded to C from B-

..Outlook Actions:

....Outlook, Changed To Negative From Rating Under Review

Issuer: Morgan Stanley Capital Trust III

..Downgrades:

....Preferred Stock Preferred Stock, Downgraded to A3 from A2

....Preferred Stock Shelf, Downgraded to (P)A3 from (P)A2

..Outlook Actions:

....Outlook, Changed To Negative From Rating Under Review

Issuer: Morgan Stanley Capital Trust IX

..Downgrades:

....Preferred Stock Shelf, Downgraded to (P)A3 from (P)A2

..Outlook Actions:

....Outlook, Changed To Negative From Rating Under Review

Issuer: Morgan Stanley Capital Trust V

..Downgrades:

....Preferred Stock Preferred Stock, Downgraded to A3 from A2

....Preferred Stock Shelf, Downgraded to (P)A3 from (P)A2

..Outlook Actions:

....Outlook, Changed To Negative From Rating Under Review

Issuer: Morgan Stanley Capital Trust VI

..Downgrades:

....Preferred Stock Preferred Stock, Downgraded to A3 from A2

....Preferred Stock Shelf, Downgraded to (P)A3 from (P)A2

..Outlook Actions:

....Outlook, Changed To Negative From Rating Under Review

Issuer: Morgan Stanley Capital Trust VII

..Downgrades:

....Preferred Stock Preferred Stock, Downgraded to A3 from A2

....Preferred Stock Shelf, Downgraded to (P)A3 from (P)A2

..Outlook Actions:

....Outlook, Changed To Negative From Rating Under Review

Issuer: Morgan Stanley Capital Trust VIII

..Downgrades:

....Preferred Stock Preferred Stock, Downgraded to A3 from A2

....Preferred Stock Shelf, Downgraded to (P)A3 from (P)A2

..Outlook Actions:

....Outlook, Changed To Negative From Rating Under Review

Issuer: Morgan Stanley Capital Trust X

..Downgrades:

....Preferred Stock Shelf, Downgraded to (P)A3 from (P)A2

..Outlook Actions:

....Outlook, Changed To Negative From Rating Under Review

Issuer: Morgan Stanley Finance plc

..Downgrades:

....Multiple Seniority Shelf, Downgraded to (P)A3 , (P)A2 from (P)A2, (P)A1

....Subordinate Regular Bond/Debenture, Downgraded to A3 from A2

..Outlook Actions:

....Outlook, Changed To Negative From Rating Under Review

Issuer: Morgan Stanley Group Inc.

..Downgrades:

....Multiple Seniority Medium-Term Note Program, Downgraded to A3, A2 from A2, A1

....Multiple Seniority Shelf, Downgraded to (P)Baa1 from (P)A3

....Preferred Stock Preferred Stock, Downgraded to Baa1 from A3

....Subordinate Medium-Term Note Program, Downgraded to A3 from A2

....Senior Unsecured Medium-Term Note Program, Downgraded to A2 from A1

....Senior Unsecured Regular Bond/Debenture, Downgraded to A2 from A1

..Outlook Actions:

....Outlook, Changed To Negative From Rating Under Review

New York
Peter E. Nerby
Senior Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Young
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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