Morgan Stanley 1999 Annual Report Download - page 44

99 AR |page 42 rating agency guidelines and therefore may, in the future, expand
or contract its capital base to address the changing needs of its
businesses. The Company returns internally generated equity capi-
tal which is in excess of the needs of its businesses to its share-
holders through common stock repurchases and dividends.
The Company’s liquidity policies emphasize diversification
of funding sources. The Company also follows a funding strategy
which is designed to ensure that the tenor of the Company’s liabili-
ties equals or exceeds the expected holding period of the assets
being financed. Short-term funding generally is obtained at rates
related to U.S., Euro or Asian money market rates for the currency
borrowed. Repurchase transactions are effected at negotiated rates.
Other borrowing costs are negotiated depending upon prevailing mar-
ket conditions (see Notes 5 and 6 to the consolidated financial state-
ments). Maturities of both short-term and long-term financings are
designed to minimize exposure to refinancing risk in any one period.
The volume of the Company’s borrowings generally fluctu-
ates in response to changes in the amount of repurchase transac-
tions outstanding, the level of the Company’s securities inventories
and consumer loans receivable, and overall market conditions.
Availability and cost of financing to the Company can vary depend-
ing upon market conditions, the volume of certain trading activi-
ties, the Company’s credit ratings and the overall availability of
credit. The Company, therefore, maintains a surplus of unused
short-term funding sources at all times to withstand any unforeseen
contraction in credit capacity. In addition, the Company attempts
to maintain cash and unhypothecated marketable securities equal
to at least 110% of its outstanding short-term unsecured borrow-
ings. The Company has in place a contingency funding strategy,
which provides a comprehensive one-year action plan in the event
of a severe funding disruption.
The Company views long-term debt as a stable source of
funding for core inventories, consumer loans and illiquid assets
and, therefore, maintains a long-term debt-to-capitalization ratio at
a level appropriate for the current composition of its balance sheet.
In general, fixed assets are financed with fixed rate long-term debt,
and securities inventories and the majority of current assets are
financed with a combination of short-term funding, floating rate
long-term debt or fixed rate long-term debt swapped to a floating
basis. Both fixed rate and floating rate long-term debt (in addition
to sources of funds accessed directly by the Company’s Credit
Services business) are used to finance the Company’s consumer
loan portfolio. Consumer loan financing is targeted to match the
repricing and duration characteristics of the loans financed. The
Company uses derivative products (primarily interest rate, currency
and equity swaps) to assist in asset and liability management,
reduce borrowing costs and hedge interest rate risk (see Note 6 to
the consolidated financial statements).
The Company’s reliance on external sources to finance a
significant portion of its day-to-day operations makes access to
global sources of financing important. The cost and availability of
unsecured financing generally are dependent on the Company’s
short-term and long-term debt ratings. In addition, the Company’s
debt ratings can have a significant impact on certain trading rev-
enues, particularly in those businesses where longer term counter-
party performance is critical, such as over-the-counter derivative
transactions.
As of January 31, 2000, the Company’s credit ratings were
as follows:
COMMERCIAL PAPER SENIOR DEBT
Dominion Bond Rating Service Limited R-1 (middle) AA (low)
Duff & Phelps Credit Rating Co. D-1+ AA
Fitch IBCA, Inc. F1+ AA
Japan Rating & Investment Information, Inc. a-1+ AA
Moody’s Investors Service P-1 Aa3
Standard & Poor’s A-1 A+
Thomson Financial BankWatch TBW-1 AA+
During fiscal 1999, Duff & Phelps Credit Rating Co. upgraded the
Company’s senior debt rating from AA- to AA, Japan Rating &
Investment Information, Inc. upgraded the Company’s senior debt
rating from AA- to AA, Standard & Poor’s placed the Company’s
senior debt ratings on Positive Outlook, Thomson Financial
BankWatch upgraded the Company’s senior debt rating from AA to
AA+ and Fitch IBCA, Inc. upgraded the Company’s senior debt
rating from AA- to AA. On January 27, 2000, Dominion Bond Rating
Service Limited established a senior debt rating of AA (low) for
the Company.
As the Company continues its global expansion and derives
revenues increasingly from various currencies, foreign currency
management is a key element of the Company’s financial policies.
The Company benefits from operating in several different curren-
cies because weakness in any particular currency often is offset by
strength in another currency. The Company closely monitors its
exposure to fluctuations in currencies and, where cost-justified,