20081013-UBS-Morgan Stanley (MS.N)

M S Closes $9 Billion MUFG Investment
􀂄 MS Closes $9 Billion MUFG Investment With Modified Terms
Under the new terms, MUFG moved up the cap structure and purchased $7.8
billion of perpetual non-cumulative convertible preferred stock with a 10% coupon
and $25.25 conversion price (2.5x where the stock closed Friday), plus $1.2 billion
of perpetual non-cumulative non-convertible preferred, also with a 10% coupon.
Both MS and MUFG reiterated their vision of a global alliance going forward.
􀂄 MS Gets Strong Capital Ratios and a Solid Long-Term Partner
MS’s pro forma Tier 1 ratio rises to ~15.7%, gross leverage dips below 20x and
adjusted leverage to around 10x. Also, MS has brought its total assets below $900
bn since the end of 3Q (down ~9%, so ratios should follow). We think these strong
ratios and a strong partner in MUFG ($1.1 trillion of deposits) should lead to some
stability in the client franchise and allay some fears in the credit markets.
􀂄 MS is Paying Up for Stability, But Should Benefit Longer Term
MS will be paying $900 mm in annual dividends to MUFG and there is the
potential for ~28% dilution, which will be a further drain on EPS. While strategic
benefits could include wealth management, the IB, and a credit facility, funding in
the unsecured markets and future earnings potential are still question marks (given
environment and some franchise erosion).
􀂄 Valuation: Given Weak Macro Outlook we Remain Neutral
Given the dilution resulting from the raise, client slippage in places like PB &
derivatives, and the weakening macro backdrop, we remain on the sideline despite
the stock’s low valuation. Our price target is based on 1.0x our forward book value
estimate.