Morgan Stanley 1998 Annual Report Download - page 39

*FORTY-THREE *
MORGAN STANLEY DEAN WITTER *1998 ANNUAL REPORT
of the portion of the Company’s mortgage-related portfolio at
November 30, 1998 traded in markets that the Company believed
were experiencing lower levels of liquidity than traditional mortgage-
backed pass-through securities approximated $1,369 million.
In addition, at November 30, 1998, the aggregate
value of high-yield debt securities and emerging market loans and secu-
ritized instruments held in inventory was $2,395 million (a substan-
tial portion of which was subordinated debt). These securities, loans
and instruments were not attributable to more than 6% to any one
issuer, 22% to any one industry or 18% to any one geographic region.
Non-investment grade securities generally involve greater risk than
investment grade securities due to the lower credit ratings of the
issuers, which typically have relatively high levels of indebtedness and,
therefore, are more sensitive to adverse economic conditions. In addi-
tion, the market for non-investment grade securities and emerging mar-
ket loans and securitized instruments has been, and may in the
future be, characterized by periods of volatility and illiquidity. The
Company has in place credit and other risk policies and procedures
to control total inventory positions and risk concentrations for non-
investment grade securities and emerging market loans and securi-
tized instruments that are administered in a manner consistent with
the Company’s overall risk management policies and procedures (see
“Risk Management” following “Management’s Discussion and Analysis
of Financial Condition and Results of Operations”).
The Company also has commitments to fund certain
fixed assets and other less liquid investments, including at November
30, 1998 approximately $181 million in connection with its private
equity and other principal investment activities. Additionally, the
Company has provided and will continue to provide financing,
including margin lending and other extensions of credit to clients.
In November 1998, the Company announced that it
had entered into an agreement that will result in the development
of an office tower in New York City. Pursuant to this agreement, the
Company has entered into a 99-year lease for the land at the pro-
posed development site.
The Company may, from time to time, also provide
financing or financing commitments to companies in connection with
its investment banking and private equity activities. The Company
may provide extensions of credit to leveraged companies in the
form of senior or subordinated debt, as well as bridge financing on
a selective basis. At November 30, 1998, the Company had two com-
mitments to provide an aggregate of $82 million and had one loan
in the amount of $8 million outstanding in connection with its
high-yield underwriting activities. Between November 30, 1998 and
January 31, 1999, the Company’s aggregate commitments increased
to $89 million and had two loans in the amount of $112 million
outstanding.
In September 1998, the Company made an investment
of $300 million in the Long-Term Capital Portfolio, L.P. (“LTCP”). The
Company is a member of a consortium of 14 financial institutions par-
ticipating in an equity recapitalization of LTCP. The objectives of this
investment, the term of which is three years, are to continue active
management of its positions and, over time, reduce excessive risk
exposures and leverage, return capital to the participants and ulti-
mately realize the potential value of the LTCP portfolio. At November
30, 1998, the carrying value of the Company’s investment in LTCP
approximated fair value.
The Company also engages in senior lending activities,
including origination, syndication and trading of senior secured
loans of non-investment grade companies. Such companies are
more sensitive to adverse economic conditions than investment
grade issuers, but the loans generally are made on a secured basis
and are senior to the non-investment grade securities of these
issuers that trade in the capital markets. At November 30, 1998,
the aggregate value of senior secured loans and positions held by the
Company was $1,259 million, and aggregate senior secured loan
commitments were $447 million.
The gross notional and fair value amounts of deriva-
tives used by the Company for asset and liability management and
as part of its trading activities are summarized in Notes 6 and 9,
respectively, to the consolidated financial statements (see also
“Derivative Financial Instruments” herein).
YEAR 2000 AND EMU
Year 2000 Readiness Disclosure
Many of the world’s computer systems (including those in non-
information technology equipment and systems) currently record years
in a two-digit format. If not addressed, such computer systems may
be unable to properly interpret dates beyond the year 1999, which
could lead to business disruptions in the U.S. and internationally (the
“Year 2000” issue). The potential costs and uncertainties associ-
ated with the Year 2000 issue will depend on a number of factors,