New York, October 29, 2020 -- Moody's Investors Service (Moody's) has placed on review for
upgrade Morgan Stanley's (MS) and Morgan Stanley Finance LLC's (MSFL)
A2 senior unsecured and issuer ratings. With this rating action,
MS's and MSFL's outlooks have changed to rating under review
from stable.
Moody's said it will review the asset loss rate assumption it uses
when assessing the magnitude of loss that would accrue to MS's creditors
upon the firm's failure.
Moody's said MS's and its rated subsidiaries' other
ratings and assessments are unaffected by today's rating action.
A complete list of affected ratings and entities can be found at the end
of this press release.
RATINGS RATIONALE / FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE
OF THE RATINGS
Moody's said the ongoing and expected future shift in MS's
business mix, together with a number of enhancements in regulatory
oversight and resolution planning since the financial crisis, along
with significant improvements to the resilience and transparency of the
capital markets infrastructure, suggest that a reduction of Moody's
13% at-failure asset loss rate assumption for MS in Moody's
Advanced Loss Given Failure (LGF) analysis should be considered.
Moody's said MS's recently completed acquisition[1] of
E*TRADE Financial, LLC (E*TRADE, A3 stable) and its
announced[2] agreement to acquire Eaton Vance Corp. (Eaton
Vance, A3 stable) were credit positive steps that shift MS's
business mix toward wealth and investment management activities.
These activities generate profitable sources of generally more stable
revenue than MS's capital markets business. The acquisitions will
accelerate strategic developments that were already well underway in the
years leading up to the coronavirus pandemic, when MS made steady,
deliberative progress in developing its wealth and investment management
businesses and positioning them for organic and acquisition-based
growth, said Moody's.
During its review, Moody's will examine MS's concentration
in capital markets activities and will assess the confidence-sensitivity
of these activities, that could give rise to employee attrition
and client defections should the company experience distress. Moody's
said the magnitude of these sensitivities may now have transitioned to
a point sustainably lower than Moody's had previously assessed.
This is because of the significant and sustained improvement in bank regulatory
requirements and practices that have been introduced since the financial
crisis, especially those pertaining to bank resolution planning
that would help mitigate creditor losses should MS fail. There
have also been significant improvements to the resilience and transparency
of the capital markets infrastructure which should help reduce contagion
risk at failure and help mitigate creditor losses, particularly
through the expansion of central clearing and agreements in relation to
derivatives contracts "stay" protocols which provide for temporary
contractual stays on the exercise of default rights by counterparties
to a failed institution.
Moody's said that, should it lower MS's LGF asset loss
rate assumption to a level consistent with global peers, the senior
unsecured debt and issuer ratings of the parent holding company could
be upgraded by one notch to reflect the improved measure of asset recovery
values at failure that would accrue to this class of MS's creditors.
Should MS's senior unsecured and issuer ratings be upgraded,
Moody's would also upgrade MSFL's issuer and senior unsecured
ratings, because MS fully and unconditionally guarantees MSFL's
securities, and as such MSFL's senior unsecured creditors
are in effect pari passu with MS's senior unsecured creditors.
Moody's said that MS's and its rated subsidiaries' other
ratings and assessments would remain unaffected should Moody's conclude
its review by lowering MS's LGF asset loss rate assumption.
Moody's said that any improvement to the assessed creditworthiness
of these operating companies' debt instruments would not be sufficient
to merit any further upward notching from Morgan Stanley Bank, N.A.'s
(MSBNA) a3 Adjusted Baseline Credit Assessment (BCA). In this respect,
Moody's noted that these subsidiaries' deposit and issuer
ratings are already at the maximum three notches above the Adjusted BCA.
Other than MSFL, MS's rated subsidiaries have stable outlooks,
reflecting Moody's expectation that MS will retain a strong liquidity
profile, maintain its improved funding profile, may suffer
a temporary dip in profitability during the coronavirus crisis,
and will over time return increasing amounts of capital and moderately
reduce its regulatory capital ratios once the current temporary regulatory
restrictions on capital payouts for the largest US banks are lifted.
MS's and MSFL's senior unsecured and issuer ratings could
be upgraded should Moody's conclude its review by reducing its 13%
at-failure asset loss rate assumption for the firm.
MS's and its rated subsidiaries' long-term ratings could be upgraded
should there be an improvement in MSBNA's BCA and an upgrade of support-provider
Mitsubishi UFJ Financial Group, Inc. (MUFG, A1 senior
with stable outlook, a3 BCA at MUFG Bank, Ltd.).
MSBNA's BCA could be improved should MS drive and sustain a fundamental
shift in business mix towards recurring revenue streams with a continued
trend of improved and more stable profitability, accompanied by
the maintenance of robust capital and liquidity.
An improvement in MSBNA's BCA without an improvement in the creditworthiness
of MUFG is less likely to result in MS's ratings being upgraded.
Were MSBNA's BCA to be upgraded by one notch, its BCA would be at
the same level as MUFG's lead bank's BCA, at which point it would
be unlikely that MS's ratings would continue to benefit from a notch of
affiliate support under Moody's joint default analysis, and accordingly
MSBNA's Adjusted BCA would remain unchanged.
The ratings could be downgraded with evidence of a prolonged weakening
of results, a significant deterioration in loan credit quality or
loan underwriting standards, an increase in portfolio concentrations,
a deterioration in the firm's liquidity profile, a general increase
in risk appetite, or if there are any indications of control or
risk management failures. Also, MS's ratings would likely
be downgraded should support-provider MUFG be downgraded,
or should there be a weakening in MS's and MUFG's operational and strategic
relationship.
The principal methodology used in these ratings was Banks Methodology
published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
LIST OF AFFECTED RATINGS
Placed on Review for Upgrade:
..Issuer: Morgan Stanley
....LT Issuer Rating, Placed on Review
for Upgrade, Currently A2, Rating Under Review from Stable
....Senior Unsecured Regular Bond/Debenture
(Local Currency), Placed on Review for Upgrade, Currently
A2, Rating Under Review from Stable
....Senior Unsecured Regular Bond/Debenture
(Foreign Currency), Placed on Review for Upgrade, Currently
A2, Rating Under Review from Stable
....Senior Unsecured Shelf, Placed on
Review for Upgrade, Currently (P)A2
....Senior Unsecured Medium-Term Note
Program (Local Currency), Placed on Review for Upgrade, Currently
(P)A2
....Senior Unsecured Medium-Term Note
Program (Foreign Currency), Placed on Review for Upgrade,
Currently (P)A2
..Issuer: Morgan Stanley Finance LLC
....Backed LT Issuer Rating, Placed
on Review for Upgrade, Currently A2, Rating Under Review from
Stable
....Backed Senior Unsecured Regular Bond/Debenture
(Local Currency), Placed on Review for Upgrade, Currently
A2, Rating Under Review from Stable
....Backed Senior Unsecured Regular Bond/Debenture
(Foreign Currency), Placed on Review for Upgrade, Currently
A2, Rating Under Review from Stable
....Backed Senior Unsecured Shelf, Placed
on Review for Upgrade, Currently (P)A2
....Backed Senior Unsecured Medium-Term
Note Program, Placed on Review for Upgrade, Currently (P)A2
Outlook Actions:
Issuer: Morgan Stanley
..Outlook, Changed to Rating Under Review from Stable
Issuer: Morgan Stanley Finance LLC
..Outlook, Changed to Rating Under Review from Stable
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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 credit rating action on the
support provider and in relation to each particular credit 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 credit rating action,
and whose ratings may change as a result of this credit 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
REFERENCES/CITATIONS
[1] Form 8-K (SEC) 02-Oct-2020
[2] Form 8-K (SEC) 08-Oct-2020
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.
Donald Robertson
Senior Vice President
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Ana Arsov
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
