Oct. 14 (Bloomberg) -- Mitsubishi UFJ Financial Group Inc. wrested better terms from Morgan Stanley for a $9 billion investment, securing an additional $300 million in annual dividends after the U.S. securities firm's shares dropped.

The entire infusion, giving Mitsubishi UFJ 21 percent of Morgan Stanley, will be in preferred shares paying 10 percent interest, according to a statement yesterday. Under an agreement announced Sept. 29, Mitsubishi UFJ would get $6 billion in preferred shares and $3 billion of common stock.

Mitsubishi UFJ, Japan's largest bank, moved to renegotiate terms after Morgan Stanley shares tumbled 60 percent last week. The new deal is more similar to the one billionaire Warren Buffett struck with Goldman Sachs Group Inc. a day after Mitsubishi's investment was first announced, and will give the bank $900 million in annual dividend payments from Morgan Stanley.

``In any condition, a 10 percent return for a Japanese financial institution is good,'' said Masafumi Oshiden, a Tokyo- based fund manager at BlackRock Inc., which oversees more than $1.4 trillion. ``We just have to hope that this deal really helps Morgan Stanley and it doesn't go bankrupt.''

Morgan Stanley rose in German trading to $19.11, 5.6 percent up from its close in New York yesterday. Mitsubishi UFJ's shares rose by their 100 yen limit, or 14 percent, to 810 yen at the 3 p.m. close in Tokyo. While financial stocks around Asia surged today and yesterday, Japan's stock market was closed yesterday for a national holiday.

U.S Government

A fellow Morgan Stanley shareholder will be the U.S. government. The Treasury Department will invest $10 billion in Morgan Stanley as part of a $125 billion cash injection into nine of the biggest U.S. banks, people briefed on the plan said.

Federal officials assured Mitsubishi UFJ that its investment in Morgan Stanley would be protected, the New York Times reported, citing unidentified people involved in the talks. The statement from the two companies didn't say anything about the U.S. government providing protection.

Morgan Stanley Chief Executive Officer John Mack, 63, sought to regain investor confidence after shares dropped to 62 percent below the price Mitsubishi UFJ had agreed to pay. The decline ignited concern the transaction wouldn't be completed, jeopardizing Morgan Stanley's credit rating.

``Japanese capital will be a significant player in this crisis, and it won't be shy capital when it comes to deal- making,'' said Tom Murphy, managing partner at Family Office Research & Management Ltd. in Sydney.

Better Than Bonds

Under the revised deal, Mitsubishi UFJ receives $7.8 billion of preferred shares that convert to stock at a price of $25.25, down from the previous level of $31.25.

The remaining $1.2 billion is in non-convertible preferred stock. Both classes pay a 10 percent dividend. The $900 million interest payment to Mitsubishi UFJ is about 16 percent of Morgan Stanley's adjusted net income next year, based on the average of nine analysts' estimates.

Mitsubishi UFJ had originally agreed to buy 10 to 20 percent of common stock from Morgan Stanley on Sept. 22. The Japanese bank is forecasting 640 billion yen in net income for the year ending March 31.

Mitsubishi UFJ held 19 billion yen ($186 million) of Japan government bonds at the end of March, equivalent to more than 40 percent of the bank's securities portfolio. The benchmark 10- year government bond yielded 1.575 percent as of 3:01 p.m. in Tokyo, according to Japan Bond Trading Co.

Buffett's Deal

Buffett bought $5 billion of perpetual preferred stock in Goldman, the Wall Street firm that has best navigated the credit market turmoil. He also secured the right to buy an additional $5 billion of common stock at any time in the next five years. His preferred shares will pay 10 percent interest.

Led by Mitsubishi UFJ, Japan's 124 commercial lenders have amassed a combined 565.2 trillion yen ($5.5 trillion) of deposits as an aging population sought a safe haven for its cash. They have lent about 75 percent of that money, leaving the banks with funds for acquisitions and some of the lowest loan-to- deposit ratios among developed nations.

Mizuho Financial Group Inc., Japan's second-largest bank by revenue, invested $1.2 billion in Merrill Lynch & Co. Inc. in January, while Sumitomo Mitsui invested 500 million pounds ($873 million) in Barclays Plc in July.

Fed Assurance

None of the nine U.S. banks getting government money was given a choice about it, said one of the people familiar with the plans. All of the banks involved will have to submit to compensation restrictions, said the person.

The government will also guarantee the banks' newly issued senior unsecured debt, making it easier for them to refinance their liabilities, the person said.

``Despite a very challenging environment, MUFG and Morgan Stanley have demonstrated our mutual commitment to this strategic alliance and have revised the terms of our investment in the best interests of both companies and our shareholders,'' Nobuo Kuroyanagi, Mitsubishi UFJ's president and CEO, said in the statement.

To contact the reporters on this story: Christine Harper in New York at charper@bloomberg.net; Finbarr Flynn in Tokyo at fflynn3@bloomberg.net

Last Updated: October 14, 2008 04:19 EDT