DBRS Comments on Morgan Stanley/Citigroup Brokerage Joint Venture

DBRS has today commented that it views positively the announced joint venture (JV) between Morgan Stanley (the Company) and Citigroup Inc. (Citigroup). The JV will combine the retail brokerage units of each firm, forming Morgan Stanley Smith Barney. The Company’s ratings remain unchanged, including the Issuer & Senior Debt rating of AA (low) and Short-Term Instruments rating of R-1 (middle). The long-term ratings for Morgan Stanley and related entities were placed Under Review with Negative Implications on December 17, 2008. The trend on all short-term ratings remains Stable.

DBRS views the JV positively, as it enables Morgan Stanley to benefit from an immediate increase in scale and substantially increase its retail brokerage business over time. Under the announced plan, Citigroup will exchange 100% of its Smith Barney, Smith Barney Australia and Quilter units for a 49% stake in the joint venture. Morgan Stanley will exchange 100% of its Global Wealth Management business for a 51% stake in the joint venture. Additionally, under the agreement, each organization will retain its current deposits, while any new deposits will be allocated in accordance with the JV ownership split. Realizing the benefits, however, will require success with combining two retail brokerage franchises and achieving operational efficiencies in a joint venture structure.

Morgan Stanley will provide an upfront payment of $2.7 billion, which will be paid in cash, as the Company has sufficient liquidity to cover the payment. After year three, both Morgan Stanley and Citigroup will have various rights with regard to the purchase and sale of the JV, while Citigroup will continue to own a significant stake through year five. The rights are structured in the form of options that give Morgan Stanley the right to purchase additional tranches of the JV at fair market value. DBRS views this as an important step for Morgan Stanley in building out its wealth management franchise.

The long-term ratings for the Company remain Under Review with Negative Implications reflecting sustained disruptions in the financial markets, the rapid deterioration in the U.S. economy, as well as the weakening of economies and financial markets around the world. For financial institutions generally, this deteriorating environment has resulted in diminished investor confidence, increased volatility in asset prices, lower client activity, increased risk aversion and higher funding costs. Even though the operating environment remains difficult, DBRS believes Morgan Stanley has the necessary franchise strengths, liquidity and capital to successfully manage through these challenging times.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Securities Firms Operating in the United States, which can be found on our website under Methodologies.

This is a Corporate rating.