Morgan Stanley 1998 Annual Report Download - page 36

*FORTY *
MORGAN STANLEY DEAN WITTER *1998 ANNUAL REPORT
things, business opportunities, capital availability and rates of return
together with internal capital policies, regulatory requirements and
rating agency guidelines and therefore, in the future, may expand
or contract its capital base to address the changing needs of its busi-
nesses. The Company also has returned to shareholders internally
generated equity capital which was in excess of the needs of its busi-
nesses through common stock repurchases and dividends.
The Company’s liquidity policies emphasize diversifi-
cation of funding sources. The Company also follows a funding strat-
egy which is designed to ensure that the tenor of the Company’s
liabilities 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 bor-
rowed. 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 fluc-
tuates in response to changes in the amount of repurchase transactions
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 depending upon mar-
ket conditions, the volume of certain trading activities, 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 capac-
ity. In addition, the Company attempts to maintain cash and unhy-
pothecated marketable securities equal to at least 110% of its
outstanding short-term unsecured borrowings. 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 all current assets are financed with a com-
bination 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 and Transaction Services business)
are used to finance the Company’s consumer loan portfolio. Consumer
loan financing is targeted to match the repricing and duration char-
acteristics of the loans financed. The Company uses derivative prod-
ucts (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 revenues, particularly in
those businesses where longer term counterparty performance is
critical, such as over-the-counter derivative transactions.
As of January 31, 1999, the Company’s credit ratings
were as follows: Commercial Senior
Paper Debt
Dominion Bond Rating Service R-1 n/a
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 BankWatch, Inc. TBW-1 AA
During fiscal 1998, Moody’s Investors Service upgraded the
Company’s senior debt rating from A1 to Aa3. In January 1999, Duff
& Phelps Credit Rating Co. upgraded the Company’s senior debt rat-
ing from AA– to AA.
As the Company continues its global expansion and
derives revenues increasingly from various currencies, foreign cur-
rency management is a key element of the Company’s financial poli-
cies. The Company benefits from operating in several different
currencies because weakness in any particular currency often is off-
set by strength in another currency. The Company closely monitors
its exposure to fluctuations in currencies and, where cost-justified,
adopts strategies to reduce the impact of these fluctuations on the
Company’s financial performance. These strategies include engag-