Morgan Stanley 2009 Annual Report Download - page 175

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
effectively convert 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, credit or other position or index. The Company carries either the entire
structured borrowing at fair value or bifurcates the embedded derivative and carries it at fair value. The swaps
and purchased options used to economically hedge the embedded features are derivatives and also are carried at
fair value. Changes in fair value related to the notes and economic hedges are reported in Principal transactions—
trading revenues.
Subordinated Debt and Junior Subordinated Debentures.Included in the Company’s long-term borrowings
are subordinated notes (including the Series F notes issued by MS&Co. discussed below) of $3,983 million
having a contractual weighted average coupon of 4.78% at December 31, 2009 and $4,342 million having a
weighted average coupon of 4.78% at December 31, 2008. Junior subordinated debentures outstanding by the
Company were $10,594 million at December 31, 2009 and $10,312 million at December 31, 2008 having a
contractual weighted average coupon of 6.17% at December 31, 2009 and 6.17% at December 31, 2008.
Maturities of the subordinated and junior subordinated notes range from fiscal 2011 to fiscal 2046. Maturities of
certain junior subordinated debentures can be extended to 2067 at the Company’s option.
At December 31, 2009, MS&Co. had a $25 million 7.82% fixed rate subordinated Series F note outstanding. The
note matures in fiscal 2016. The terms of the note contain restrictive covenants that require, among other things,
MS&Co. to maintain specified levels of Consolidated Tangible Net Worth and Net Capital, each as defined therein.
Asset and Liability Management. In general, securities inventories not financed by secured funding sources
and the majority of 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 rate. Fixed assets are generally financed with fixed rate long-term
debt. The Company uses interest rate swaps to more closely match these borrowings to the duration, holding
period and interest rate characteristics 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 that effectively convert the borrowings into U.S. dollar obligations. The Company’s
use of swaps for asset and liability management affected its effective average borrowing rate as follows:
2009
Fiscal
2008
Fiscal
2007
One Month
Ended
December 31,
2008
Weighted average coupon of long-term borrowings at period-end(1) ........ 3.7% 4.9% 5.0% 4.8%
Effective average borrowing rate for long-term borrowings after swaps at
period-end(1) ................................................. 2.3% 4.0% 5.1% 3.8%
(1) Included in the weighted average and effective average calculations are non-U.S. dollar interest rates.
Subsequent to December 31, 2009 and through January 31, 2010, the Company’s long-term borrowings (net of
repayments) decreased by approximately $0.6 billion.
Other. The Company, through several of its subsidiaries, maintains funded and unfunded committed credit
facilities to support various businesses, including the collateralized commercial and residential mortgage whole
loan, derivative contracts, warehouse lending, emerging market loan, structured product, corporate loan,
investment banking and prime brokerage businesses.
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