Morgan Stanley 1999 Annual Report Download - page 72

99 AR |page 70 equity swap contracts and purchased options which effectively con-
vert the borrowing costs into floating rates based upon LIBOR.
These instruments are included in the preceding table at their
redemption values based on the performance of the underlying
indices, baskets of stocks or specific equity securities at Novem-
ber 30, 1999 and 1998.
OTHER BORROWINGS
Included in the Company’s long-term borrowings are subordinated
notes of $1,356 million and $1,309 million at November 30,
1999 and 1998, respectively. The effective weighted average
interest rate on these subordinated notes was 7.0% in fiscal 1999
and 7.1% in fiscal 1998. Maturities of the subordinated notes
range from fiscal 2001 to fiscal 2016.
Certain of the Company’s long-term borrowings are
redeemable prior to maturity at the option of the holder. These
notes contain certain provisions which effectively enable notehold-
ers to put the notes back to the Company and therefore are sched-
uled in the foregoing table to mature in fiscal 2000 through fiscal
2001. The stated maturities of these notes, which aggregate
$2,081 million, are from fiscal 2001 to fiscal 2014.
MS&Co., a U.S. broker-dealer subsidiary of the Company,
has outstanding $357 million of 8.22% fixed rate subordinated
Series A notes, $243 million of 8.51% fixed rate subordinated
Series B Notes, $313 million of 6.81% fixed rate subordinated
Series C notes, $96 million of 7.03% fixed rate subordinated Series
D notes, $82 million of 7.28% fixed rate subordinated Series E
notes and $25 million of 7.82% fixed rate subordinated Series F
notes. These notes have maturities from fiscal 2001 to fiscal 2016.
The terms of such notes contain restrictive covenants which require,
among other things, that MS&Co. maintain specified levels of
Consolidated Tangible Net Worth and Net Capital, each as defined.
ASSET AND LIABILITY MANAGEMENT
A portion of the Company’s fixed rate long-term borrowings is used
to fund highly liquid marketable securities and short-term receivables
arising from securities transactions. The Company uses interest rate
swaps to more closely match the duration of these borrowings to the
duration of the assets being funded and to manage interest rate
risk. These swaps effectively convert certain of the Company’s fixed
rate borrowings into floating rate obligations. In addition, for non-
U.S. dollar currency borrowings that are not used to fund assets in
the same currency, the Company has entered into currency swaps
which effectively convert the borrowings into U.S. dollar obliga-
tions. The Company’s use of swaps for asset and liability manage-
ment reduced its interest expense and effective average borrowing
rate as follows:
FISCAL FISCAL FISCAL
(dollars in millions) 1999 1998 1997
Net reduction in interest
expense from swaps for
the fiscal year $22 $48 $21
Weighted average coupon
of long-term borrowings
at fiscal year-end(1) 5.9% 6.1% 6.1%
Effective average borrowing
rate for long-term borrowings
after swaps at fiscal
year-end(1) 5.8% 5.9% 6.0%
(1) Included in the weighted average and effective average calculations are non-U.S. dol-
lar interest rates.
The effective weighted average interest rate on the Company’s
index/equity linked notes, which is not included in the table above,
was 5.8% and 5.2% in fiscal 1999 and fiscal 1998, respectively,
after giving effect to the related hedges.