Market Insider

Facebook Fiasco Is Just Latest Blow to Morgan Stanley


A poor showing by Facebook was the last thing underwriter Morgan Stanley needed.

Investors are turning on Facebook , driving it down 11 percent on its second day. But they’ve been turning on Morgan Stanley shares for weeks, and its stock has underperformed other banks year to date.

And then there's the debt.

Morgan Stanley bonds are significantly cheaper than its peers. The most actively traded bond Monday morning had a yield of over 6.5 percent, nearly five points higher than 10-year treasurys.

Even Spain’s widely-watched 10-year has a slightly lower yield.

Why the discount? Fixed income analysts say it's not a solvency issue. The firm has money. However, the cheap price reflects a belief that Morgan Stanley faces a very tough year, with exposure to Europe and new U.S. regulations.

Its bonds are about +490 basis points above 10-year treasurys, a slight tightening from Friday.

Goldman Sachs is +392.

Bank of America is +355.

Citi is +270.

JPMorgan is +220.

Wells Fargo is +178.

Morgan Stanley debt has more than twice the yield of JPMorgan, even though spreads on the debt of JPMorgan (and other financial issuers) have widened since JPMorgan reported trading losses earlier in the month.

Traders are waiting for Moody's to downgrade Morgan Stanley's credit rating, a move that is expected by the end of the month.

A two-notch downgrade could now be three notches because of JPMorgan's bad news. Three notches, say traders, would require Morgan Stanley to have close to $10 billion in extra liquidity, which will not be a problem. The firm last reported $178 billion in total liquidity. It’ll just make a tough situation tougher.

But some analysts believe the negative reaction has been an overreaction.

"Enough is enough," writes UBS in upgrading Morgan Stanley stock to a "buy" last week, believing much of the bad news had been priced in.

As for the firm's debt: "We believe the impact should be manageable given MS’s debt schedule and ability to continue to retire debt. We get to a $0.09 per share funding headwind."

Susquehanna recommended Friday morning that investors go long Morgan Stanley and short Jefferies.

"We believe a three notch rating downgrade is more than discounted in MS stock at this point," said Doug Sipkin. "Somewhat surprisingly, a three notch downgrade to Baa2 would give MS the same credit rating as JEF."

However, both of those reports came out before Facebook started trading, putting Morgan Stanley in the spotlight for all the wrong reasons.

Even so, one fixed income specialist said there was no "feeding frenzy" in Morgan Stanley debt on Friday. Instead, "We are all bracing ourselves on how many notches Moody's will hit the company with."

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