Duff & Phelps Credit Rating Co. (DCR) has rated Morgan Stanley Dean Witter & Co.’s (MSDW) GBP200 million floating-rate note offering ‘AA-‘ (Double-A-Minus). The securities have an issue price of 99.946 and have a final maturity of August 3, 2011, with a call in August 2001. The bonds pay a coupon of three-month LIBOR plus 17 basis points.
On April 20, 1998, DCR placed the ratings of MSDW on Ratings Watch–Up. The three areas cited were a desire to see improvement in asset quality measures related to the firm’s credit card portfolio, an evaluation of the firm’s appetite for balance sheet leverage in light of the $3 billion stock repurchase program and continued realization of revenue synergies from merger integration. MSDW’s current ratings reflect the firm’s considerable market position in its three major business segments, healthy and relatively stable earnings profile, highly liquid and very reasonably leveraged balance sheet and sound risk management (i.e., liquidity, credit, market). In addition, integration of the two firms with an emphasis on revenue synergies continues to proceed smoothly. Integration of the powerful global product origination and research capability with the firm’s substantial U.S. retail distribution network holds substantial promise with respect to several revenue segments.
Beyond this, the merger creates a more diversified, lower volatility revenue base. The ratings also incorporate the firm’s judicious alternative liquidity/contingency funding plans, as well as its prudent holding company financial policies and funding structure. While the recently announced authorization to repurchase up to $3 billion of common stock will affect balance sheet leverage, current overall leverage measures are conservative relative to other securities firms. Furthermore, internal capital generation, preferred issuance and compensation-related stock issuance should largely offset the repurchase-driven capital reduction, which will be implemented over a 12- to 24-month period.
Net income for the first six months of the fiscal year of $1.545 billion represents a 33 percent increase over 1997’s first half. Pretax profit margin rose to a solid 29.3 percent versus 28 percent in the first quarter of fiscal year 1998 and 26 percent for the first half of 1997. Net revenues increased 23 percent fueled by a 62 percent surge in investment banking, healthy trading results and continued growth in asset management and commissions. Investment banking revenue soared on the strength of a robust global M&A environment and strong high-yield issuance, a sector in which MSDW has markedly expanded market share. Asset management and commissions continued to benefit from healthy equity markets (i.e., volume and level) and surging retail investor demand. Credit services continues to earn reasonable returns. However, loss provisions and charge-offs remain high, although NCOs show signs of declining.
MSDW’s liability structure and funding profile portray a prudent approach to managing funding/liquidity risk. Key elements of the firm’s liquidity management include substantial use of term debt, use of a ‘long funding’ policy relative to the related asset for unsecured funding, concentration of most unsecured borrowing at the holding company, and diversification of sources by investor and maturity.
Contingency funding models are based on shifting to a secured funding environment and/or asset liquidation. The firm’s position is monitored using the concepts of net cash capital and a liquidity ratio. Net cash capital measures the excess of long-term funding over that which would be necessary to fund the balance sheet on a fully secured basis. The liquidity ratio compares cash and unhypothecated securities to short-term unsecured borrowings. Both are calculated regularly and have prudent target minimums. Committed bank facilities, secured and unsecured, total $9.7 billion, excluding the $2.55 billion in place to support issuance of asset-backed commercial paper. Substantial term debt provides funding stability and comfortably exceeds illiquid and potentially less liquid assets. Overall leverage measures remain moderate relative to other securities firms, although the aforementioned repurchase program is moving MSDW toward peers. The holding company’s funding structure is sound with an equity double leverage ratio of 90.6 percent, inclusive of preferred equity, and precise policies in place limiting secondary double leverage.
MSDW is the U.S.-based holding company for a diversified financial services firm with major market positions in global investment banking, institutional sales and trading, retail brokerage, asset management and credit cards. The firm has a powerful franchise in higher-margin businesses. The asset management business has scale, a full array of products and good brand identity. Credit services will focus on controlling credit losses, building on the Discover brand and international expansion. Recent sales of global custody, clearance and SPS transaction services are consistent with the firm’s focus on core businesses.Details