Morgan Stanley 2015 Annual Report Download - page 88

Capital Covenants.
In April 2007, the Company executed replacement capital covenants in connection with an offering by Morgan Stanley
Capital Trust VIII Capital Securities, which become effective after the scheduled redemption date in 2046. Under the terms
of the replacement capital covenants, the Company has agreed, for the benefit of certain specified holders of debt, to
limitations on its ability to redeem or repurchase any of the Capital Securities for specified periods of time. For a complete
description of the Capital Securities and the terms of the replacement capital covenants, see the Company’s Current Report
on Form 8-K dated April 26, 2007.
Credit Ratings.
The Company relies on external sources to finance a significant portion of its day-to-day operations. The cost and availability
of financing generally are impacted by, among other things, the Company’s credit ratings. In addition, the Company’s credit
ratings can have an impact on certain trading revenues, particularly in those businesses where longer-term counterparty
performance is a key consideration, such as OTC derivative transactions, including credit derivatives and interest rate swaps.
Rating agencies consider company-specific factors; other industry factors such as regulatory or legislative changes; the
macroeconomic environment; and perceived levels of government support, among other things.
As of December 2, 2015, the Company’s credit ratings no longer incorporate uplift from perceived government support from
any rating agency given the significant progress of the U.S. financial reform legislation and regulations. Meanwhile, some
rating agencies have stated that they currently incorporate various degrees of credit rating uplift from non-governmental
third-party sources of potential support.
Parent and MSBNA’s Senior Unsecured Ratings at January 29, 2016.
Parent Morgan Stanley Bank, N.A.
Short-Term
Debt
Long-Term
Debt
Rating
Outlook
Short-Term
Debt
Long-Term
Debt
Rating
Outlook
DBRS, Inc. .................................. R-1(middle) A (high) Stable — — —
Fitch Ratings, Inc.(1) .......................... F1 A Stable F1 A+ Stable
Moody’s Investors Service, Inc.(2) ............... P-2 A3 Stable P-1 A1 Stable
Rating and Investment Information, Inc.(3) ........ a-1 A- Stable — — —
Standard & Poor’s Ratings Services(4) ............ A-2 BBB+ Stable A-1 A Positive Watch
(1) On May 19, 2015, Fitch Ratings, Inc. upgraded the long-term rating of MSBNA by one notch to A+ from A. The rating outlook remained Stable.
(2) On May 28, 2015, Moody’s Investors Service, Inc. (“Moody’s”) upgraded the long-term rating of the Parent and MSBNA by two notches to A3 from Baa2 and
A1 from A3, respectively. The rating outlook for the Parent and MSBNA was revised to Stable.
(3) On November 6, 2015, Rating and Investment Information, Inc. downgraded the long-term rating of the Parent one-notch to A- from A. The rating outlook for
the Parent was revised to Stable.
(4) On December 2, 2015, Standard & Poor’s Ratings Services (“S&P”) downgraded the rating of the non-operating holding companies of all eight U.S. global
systemically important banks by removing the government support uplift from the rating based on S&P’s view that it is uncertain that the U.S. government
would provide extraordinary support to its banking system given S&P’s review of the progress made toward putting in place a viable U.S. resolution plan. The
Parent’s long-term rating was lowered by one-notch to BBB+ from A-. The rating outlook for the Parent was revised to Stable. On November 2, 2015,
MSBNA’s rating outlook was revised to Positive Watch from Positive.
In connection with certain OTC trading agreements and certain other agreements where the Company is a liquidity provider
to certain financing vehicles associated with the Institutional Securities business segment, the Company may be required to
provide additional collateral or immediately settle any outstanding liability balances with certain counterparties or pledge
additional collateral to certain exchanges and clearing organizations in the event of a future credit rating downgrade
irrespective of whether the Company is in a net asset or net liability position.
The additional collateral or termination payments that may be called in the event of a future credit rating downgrade vary by
contract and can be based on ratings by either or both of Moody’s and S&P. The table below shows the future potential
collateral amounts and termination payments that could be called or required by counterparties or exchanges and clearing
organizations in the event of one-notch or two-notch downgrade scenarios, from the lowest of Moody’s or S&P ratings,
based on the relevant contractual downgrade triggers.
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