Several rating agencies have affirmed their ratings on Morgan Stanley, but put a negative ratings watch on its Discover Bank credit card division, following the investment bank's announcement this morning that it would spin off its Discover division. Morgan Stanley expects to complete the spin off by the third quarter of 2007.
"The spin off will allow Discover to continue building on its strong brand and significant scale," John J. Mack, Morgan Stanley Chairman and CEO said. "We also believe the spin off will unlock considerable value for the shareholders of Morgan Stanley."
As for its fixed-income debt investors, the value of Morgan Stanley's strategic move is less certain. Fitch, Moody's Investor's Service and Standard & Poor's affirmed the investment bank's debt and issuer default ratings. Noting, however, that Discover Bank's would soon lose financial support from Morgan Stanley, the agencies now maintain a negative outlook on Discover's credit ratings.
"Discover's standalone financial profile would warrant the assignment of a lower, albeit investment grade, long-term dent rating," wrote Fitch analysts. For its part, Fitch Ratings said it expects to assign Discover Bank a triple-B rating, and F2 short-term rating.
Morgan Stanley's news did not exactly take the financial markets by storm, as the bank had previously planned a spin off of the Discover Bank division in April 2005, only to call it off. At the time, Mack said the unit played a valuable role in supporting the company's financial strength. Fitch appeared to agree with that outlook this time around, too, as it factored in a loss of earnings from Discover into its negative outlook.
To date, Morgan Stanley has enjoyed sufficient funding and a capital structure and has generated enough earnings to compensate for its increased risk appetite. Today's announcement, however, eliminates a stable and diversifying source of earnings. Although its wealth and asset management businesses have contributed increased earnings, they are not enough to dampen volatility from its Institutional Securities division, said Fitch.
The rating agency also said it believes Morgan Stanley's market and credit risk appetites will expand in certain industries and that overall, it might reach beyond levels expected for firms in its 'AA' credit ratings range.
Aside from the Discover Bank spin off, Morgan Stanley said it would also cut its securities business and do a $6 billion share repurchase program over the next 12 to 18 months.