Morgan Stanley Settles MBIA Dispute - Analyst Blog
2011年12月15日 - 1:55AM
Zacks
In an attempt to strengthen its balance sheet and remove the
vestiges of the financial crisis, Morgan Stanley
(MS) announced a comprehensive plan to settle its legal fight with
MBIA Inc. (MBI). The 2-year-old legal dispute
involved conflict over guarantees on commercial mortgage-backed
securities (CMBS).
Terms
As a part of the settlement agreement, Morgan Stanley will close
the outstanding credit default swap (CDS) protection deal (worth
$4.9 billion approximately), which was purchased from MBIA. In
addition to that, all the pending litigations between the two
parties would be resolved with the payment of cash consideration to
Morgan Stanley.
The agreement also states that Morgan Stanley will pull out from
the lawsuits challenging MBIA’s restructuring. Similarly, MBIA has
agreed to withdraw charges against the company related to the
quality of bonds underlying the guarantees on CMBS.
Some people familiar with the deal stated that MBIA will pay
$1.1 billion to settle the legal claims as well. This amount would
be borne by MBIA Insurance, MBIA’s structured finance division.
The Back Story
It all started before the financial crisis in 2008. Though MBIA
mainly focused on municipal bonds, it guaranteed and sold a large
number of credit-default swaps (CDS) on CMBS and other structured
financial products when the U.S. real estate market was
booming.
Following the financial crisis, MBIA’s CDS started defaulting
and there were huge amount of claims that threatened its
profitability. Hence in 2009, MBIA decided to split itself in to
two units – a municipal guarantee business and a structured finance
unit. However, a group of 18 banks including Morgan Stanley
objected to the restructuring and claimed that MBIA’s ability to
pay its policyholders will get reduced if the division in its
business occurs.
With Morgan Stanley withdrawing its objection for restructuring
and settling the legal charges, a total of 13 banks have reached an
agreement with MBIA. Now only UBS AG (UBS),
Bank of America Corporation (BAC), Societe
Generale Group, Natixis and BNP Paribas (BNP)
remain as a part of the original lawsuit.
A Win-Win Situation
For MBIA, the settlement will bring down large amount of
obligations to guarantee regular principal and interest payments on
commercial real estate related bonds, which could again default
under the present economic scenario. The deal also clears the big
obstacle that was standing in its way of restructuring.
By removing the MBIA exposure from its balance sheet, Morgan
Stanley will be able to free $5 billion of capital. Additionally,
this will improve its Tier 1 common ratio by 75 basis points under
Basel III requirements by the end of next year. The agreement would
diminish a huge volatile factor from the company’s quarterly
results.
Morgan Stanley will write off the entire value of the
investment, thereby leading to $1.8 billion of pre-tax charge in
the current quarter. This charge would reflect the difference
between the cash that the company received in the settlement and
the contracts' market value.
Since 2007, the company has lost about $3 billion from its
exposure to bond-insurance companies, including MBIA. As of
September 30, 2011, Morgan Stanley had net exposure to MBIA’s
derivative contracts worth $2.7 billion.
Since last year, Morgan Stanley has been shedding and divesting
risky trading businesses. The company had spun off its derivative
hedge fund unit, FrontPoint Partner last year. Earlier this year,
the company also amended its ties with Mitsubishi UFJ
Financial Group Inc. (MTU), which resulted into Mitsubishi
UFJ converting about 7.8 million Morgan Stanley preferred shares
into 385.5 million shares of common stock. This also enhanced the
company’s capital ratios.
Morgan Stanley’s decision to de-risk its balance sheet will
allow it to comply with the various new regulatory requirements.
Additionally, the current agreement would free up the additional
capital that can be invested in its core businesses.
Currently, Morgan Stanley retains a Zacks #3 Rank, which
translates into a short-term ‘Hold’ rating.
BANK OF AMER CP (BAC): Free Stock Analysis Report
MBIA INC (MBI): Free Stock Analysis Report
MORGAN STANLEY (MS): Free Stock Analysis Report
MITSUBISHI-UFJ (MTU): Free Stock Analysis Report
UBS AG (UBS): Free Stock Analysis Report
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