Morgan Stanley, Mitsubishi clear hurdles

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New York, October 8: : Morgan Stanley said on Tuesday its deal to sell a stake to Japanese bank Mitsubishi UFJ Financial Group Inc (MUFG) was on track to close promptly, easing fears about the agreement that sent its shares plummeting as much as 40 per cent. Morgan Stanley, which recently changed its status to a bank holding company from an investment bank, said Tuesday that "early termination" under the Hart-Scott Rodino antitrust law has been granted by the US government, clearing another hurdle for the deal.

"The transaction is expected to close imminently, upon expiration of the Federal Reserve five-day post-approval waiting period," Morgan Stanley spokesman Mark Lake said.

Morgan Stanley stock closed down 25 per cent to $17.65 on concerns that MUFG could withdraw from the $9 billion deal for a 21 per cent stake, despite approval by the Federal Reserve on Monday.

Morgan Stanley's 6.75 per cent notes due in 2011 widened by 49 basis points to 20.70 per centage points over Treasuries before Morgan Stanley's statement, according to MarketAxes data.

Debt protection costs for Morgan Stanley fell after the announcement, to the point where it would cost $1.9 million to insure $10 million of debt plus $500,000 a year.

'RATINGS UNDER PRESSURE'

"Credit default spreads on Morgan Stanley senior debt have reached unprecedented levels," Brad Hintz, an analyst with Sanford Bernstein, said in a research note. "This has raised concerns among equity investors, bondholders and counterparties. Effectively, the debt issuance market is now closed to the company."

Morgan Stanley said its Tier 1 capital ratio is estimated to be more than 15.5 per cent on a pro-forma basis as of August 31. Tier 1 capital consists largely of shareholders' equity and is a core measure of a bank's financial strength.

The figure reflects the MUFG investment but not including a decline in total assets to less than $900 billion from $987 billion at the end of August.

The decline in assets would signify lower leverage for the bank, which would tend to boost Tier 1 further.

Hintz said he believed the company could successfully operate without access to the long-term debt markets through at least the third quarter of next year.

"In the unlikely event that credit markets are still completely frozen at that point, the company would likely find its credit ratings under pressure as its core liquidity position weakens," he wrote.