Morgan Stanley Credit Risk Plunges for Fourth Day, Swaps Show
The cost to protect Morgan Stanley (MS) bonds against losses dropped for the fourth day as concern eased that its balance sheet will be impaired by Europe’s sovereign debt crisis and Goldman Sachs Group Inc. (GS) analysts said investors should wager on the bank’s creditworthiness.
Credit-default swaps on Morgan Stanley fell 43 basis points to 431 basis points as of 3:49 p.m. in New York, according to prices from London-based data provider CMA. The five-year contracts have declined from 650 basis points on Oct. 4, the highest since October 2008, the month after Lehman Brothers Holdings Inc. filed for bankruptcy.
Creditor confidence in New York-based Morgan Stanley is rebounding after crumbling for two straight weeks amid speculation the firm faced losses tied to Europe’s fiscal imbalances that has sent borrowing costs on governments from Greece to Italy to records and triggered drops in the stocks of the region’s lenders, led by French banks.
“We believe concerns regarding its European swap and loan exposures appear overdone, as the firm signaled its net exposures to France and the periphery are modest if not immaterial,” Goldman Sachs analysts and strategists including John Marshall , Louise Pitt and Daniel Harris said in a note today.
The analysts recommended investors sell protection with one-year contracts tied to Morgan Stanley debt that were quoted at about 640 basis points. That’s equivalent to about $640,000 on a contract protecting $10 million of debt.
The surge in credit swaps doesn’t “reflect actual credit fundamentals” for a bank a with a $182 billion global liquidity pool at the end of the second quarter, they said.
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.
Morgan Stanley had about $28 billion of cross-border exposure to French banks at the end of June before accounting for offsetting hedges and collateral, according to a filing with the U.S. Securities Exchange Commission.
Cross-border outstandings include cash deposits, receivables, loans and securities, as well as short-term collateralized loans of securities or cash known as repurchase agreements or reverse repurchase agreements.
While Morgan Stanley hasn’t updated those figures, the total risk to France and the country’s lenders is less than $2 billion when collateral and hedges are included, Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York estimated in a Sept. 23 note to clients. The bank’s current exposure to the nation and its banks is zero after hedges and collateral, a person close to the firm said Sept. 30.
Relative to Peers
Disclosures by the company when it announces third-quarter earnings this month are likely to calm fears, causing credit swaps to narrow relative to peers, the Goldman Sachs strategists said.
Morgan Stanley’s credit swaps through yesterday were trading 164 basis points wider than the average of the six- biggest U.S. banks, according to prices from London-based data provider CMA. The gap reached 226 basis points at the close of trading on Oct. 3, the widest since October 2008.
Swaps on other banks also decreased today. Contracts on Citigroup Inc. (C) fell 10 basis points to a mid-price of 290 basis points, Bank of America Corp. (BAC) dropped 5 to 394 and swaps on Goldman Sachs declined 19 to 355, CMA prices show.
A benchmark gauge of U.S. company credit risk snapped three days of declines as Fitch Ratings downgraded Spain and Italy, overshadowing positive jobs data in the U.S.
The Markit CDX North America Investment Grade Index , which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, added 0.7 basis point to a mid- price of 139.6 basis points as of 3:58 p.m. in New York, according to index administrator Markit Group Ltd. The measure had earlier declined as much as 2.6.
The swaps index, which typically rises as investor confidence deteriorates and falls as it improves, has dropped from 150.1 on Oct. 3 as investor speculation grew that Europe’s leaders are progressing in stemming the debt crisis.
“September’s payrolls data is a light in the middle of the tunnel for the credit markets,” said Guy LeBas, chief fixed- income strategist at Janney Montgomery Scott LLC in Philadelphia. “It’s not enough to ease investor anxiety permanently, but it should provide a catalyst for some relief to these wider spreads.”
Payrolls climbed by 103,000 workers after a revised 57,000 increase the prior month that was more than originally estimated, Labor Department data showed today in Washington.