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Rating Action:

Moody's places the rating of Morgan Stanley Derivative Products Inc., a termination derivative product company, on review for possible downgrade

Global Credit Research - 28 Aug 2013

New York, August 28, 2013 -- Moody's Investors Service announced today that it has placed the counterparty rating of Morgan Stanley Derivative Products Inc. ("MSDP") on review for possible downgrade.

Counterparty Rating, A2 (sf) Placed on Review for Possible Downgrade; previously on June 27, 2012 downgraded to A2 (sf).

RATING RATIONALE

Today's rating action was prompted by Moody's placement of the senior unsecured debt rating of Morgan Stanley on review for possible downgrade. Moody's considers MSDP's rating to be linked to the senior unsecured debt rating of its sponsor's ultimate parent, Morgan Stanley, whose Baa1 rating was placed on review for possible downgrade (see "Moody's reviews US bank holding company ratings to consider reduced government support" dated 22 August 2013).

Concerns of an MSDP voluntary bankruptcy in the event its sponsor, Morgan Stanley Capital Services LLC, were to ever file for bankruptcy creates the link between the ratings of MSDP and its sponsor's ultimate parent Morgan Stanley, as outlined in previous press releases regarding MSDP and in October 5, 2012, methodology "Moody's Approach to Rating Derivative Product Companies".

Although counterparties might recover amounts owed them in the event of a bankruptcy, such recoveries might involve a significant delay as the result of any such bankruptcy process. In the event of a bankruptcy, we expect that the recovery of MSDP's counterparties under MSDP's current obligations would ultimately be high based on our assessment of capital adequacy and the unlikelihood of consolidation with its sponsor in bankruptcy. Nevertheless, the potential for delays in recovery in bankruptcy, and the risk that the bankruptcy of MSDP's sponsor would prompt a voluntary bankruptcy of MSDP itself, diminishes the value of that recovery, currently limiting MSDP's rating to two notches above its sponsor. Thus, among other factors, Moody's rating is a reflection of voluntary bankruptcy risk as well as the adequacy of MSDP's current capital holdings and timeliness of recovery in bankruptcy.

Capital adequacy is one important consideration for the rating of derivative products companies ("DPCs") such as MSDP. Moody's considers various capital adequacy measures in its ratings of DPCs including the capital model output, which is currently in compliance with MSDP's operating guidelines.

DPCs are special purpose operating companies set up by leading financial institutions primarily to trade with non-affiliated counterparties in interest rate and currency swaps. Their counterparty ratings are based on factors such as bankruptcy remoteness, non-consolidation with its sponsor in the event of the sponsor's bankruptcy, dynamic capital and collateral requirements, insulation from market risk via mirror trades with a sponsor-affiliated entity (prior to a trigger event) and adherence to a set of operating guidelines that, among other things, restricts the types of products in which the DPC may transact.

The principal methodology used in this rating was "Moody's Approach to Rating Derivative Product Companies" published in October 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Moody's will continue monitoring this rating. Any change in the rating will be publicly disseminated by Moody's through appropriate media.

REGULATORY DISCLOSURES

Moody's did not receive or take into account a third-party assessment on the due diligence performed regarding the underlying assets or financial instruments related to the monitoring of this transaction in the past six months.

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Herve-Pierre Beauchesne
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Rodrigo Araya
Senior Vice President/Manager
Structured Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's places the rating of Morgan Stanley Derivative Products Inc., a termination derivative product company, on review for possible downgrade
No Related Data.

 

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