NEW YORK — Morgan Stanley may have to put up $7.2 billion in additional collateral or termination payments to counterparties, and may face $2.4 billion collateral requirements at certain exchanges and clearing organizations, in the event of a three-notch credit-rating downgrade.
Under that scenario, the potential collateral needs for Morgan Stanley — disclosed in a quarterly report filed with the Securities and Exchange Commission — are higher than the projections that the securities firm issued in late February.
Morgan Stanley is the only major U.S. financial firm facing a possible three-notch downgrade, a move that would lower the firm’s long-term credit rating from A2 to Baa2, the second-lowest investment grade.
In February, Moody’s put 17 global banks on review for potential downgrade, including Bank of America, Citigroup, Goldman Sachs and JPMorgan Chase. In that report, the credit-rating firm said it was evaluating “structural vulnerabilities” in the business models of global investment banks.
In the filing, Morgan Stanley again gave forecasts for three possible credit-rating scenarios. The firm said it could need $868 million for a one-notch cut and $5.2 billion for a two-notch downgrade. For some exchanges and clearing organizations, the rating move would mean collateral requirements of $160 million and $1.6 billion, respectively.
Talk of a ratings downgrade has been looming over Morgan Stanley in recent months, even after the firm posted better-than-expected first-quarter results in April.
In a conference call with analysts last month, Morgan Stanley chief financial officer Ruth Porat said the firm has “done a lot to narrow the impact of any potential ratings change.” Porat added: “Our view is that the impact of potential outcomes are manageable.”
In conversations with Moody’s in recent months, Morgan Stanley officials have highlighted how the firm has taken steps — including boosting its liquidity reserve, making its borrowing more stable by taking on longer-term debt and building deposits — and diversified its revenue away from the volatile trading business to the more stable wealth-management unit that houses a large retail-brokerage joint venture with Citigroup.
Moody’s has said it plans to make a decision on Morgan Stanley’s credit rating by June.
