NEW YORK Morgan Stanley stock nearly doubled after Japan's Mitsubishi UFJ Financial Group Inc (MUFG) completed its $9 billion investment in the bank on Monday.
U.S. government support helped Morgan nail down a critical deal that many investors had feared could fall apart.
Morgan Stanley shares soared as much as 97 percent after Japan's largest bank bought a 21 percent stake one day earlier than expected. Last week, the New York bank's stock plunged by more than half amid fears that Morgan, forced to wait five days before completing the deal, might not survive the crisis.
"It's different terms, but it's done, and I think people should breathe a sigh of relief that it's done," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.
Merrill Lynch analyst Guy Moszkowski raised his rating on Morgan Stanley to "buy," citing the capital infusion and saying the shares were "cheap" at 50 percent of book value.
But Fitch Ratings on Monday cut its long-term issuer default rating on Morgan Stanley by two notches to "A," or sixth-highest investment grade. It also downgraded the long-term senior debt to "A" and the subordinated debt to "A-minus," or seventh-highest investment grade.
Fitch said it expects the current stresses on the bank's core business to continue for some time.
Amending the terms of a September 29 agreement, Mitsubishi bought only preferred stock in Morgan Stanley, in contrast with the initial deal under which it had agreed to buy $3 billion of common stock at $31.25 a share -- Morgan's book value.
About $7.8 billion of MUFG's investment was in preferred shares with a conversion price of $25.25 a common share and with no maturity date. The other $1.2 billion is in preferred stock that is not convertible and also has no maturity date.
Both preferred series pay a 10 percent interest rate, unchanged from the original pact.
The Japanese bank pushed for new terms after Morgan's stock price plunged last week to $9.28. Morgan's total value had fallen to $10 billion and customers were starting to lose confidence.
For MUFG, owning convertible shares helps it avoid any immediate paper loss on the common stock, ensures a generous $900 million in interest payments per year, and lets MUFG benefit from a recovery in Morgan Stanley.
The U.S. government did not invest in Morgan Stanley, as had been speculated, but federal officials were involved in the talks and assured MUFG over the weekend that its investment would be protected, a person familiar with the matter said.
After two days of talks this weekend, Treasury officials urged a hesitant MUFG to proceed. The Japanese government and MUFG pressed the U.S. Treasury to guarantee that if the United States were to inject money into Morgan, it would ensure that MUFG's investment would not be diluted, the source said.
Morgan Stanley stock closed at $18.10, up $8.42, or 87 percent, on the New York Stock Exchange. Tokyo markets were closed.
"This investment further strengthens our capital position and gives us a powerful strategic partner going forward," Morgan Chief Executive John Mack told employees in a memo.
Morgan Stanley estimates that thanks to the cash infusion, it now has a Tier 1 capital ratio of 15.7 times and a gross leverage ratio below 20 times, considerably stronger than a year ago. Morgan also disclosed it reduced total assets by 9 percent to less than $900 billion since the end of August.
"We think these strong ratios and a strong partner in MUFG should lead to some stability in the client franchise and allay some fears in the credit markets," UBS brokerage analyst Glenn Schorr told clients.
Schorr stopped short of rating the stock "buy," citing erosion in Morgan's prime brokerage and derivatives businesses and broader market weakness.
Morgan's investment deal is similar to one struck by Goldman Sachs Group Inc with billionaire investor Warren Buffett last month when it sold him $5 billion in preferred shares that pay 10 percent. Goldman also sold $5 billion of stock in a public offering.
Shares in Goldman Sachs rose as much as 30 percent, nosing above $115, and closed at $111.00, up 25 percent, on Monday on the New York Stock Exchange.
Goldman Sachs on Monday applied to New York state's banking department to become a "full-service state-chartered bank," New York Governor David Paterson said. With $150 billion in assets, Goldman would rank among the 10 largest U.S. banks.
It was a tense week for Morgan Stanley, which had secured an agreement from MUFG two weeks ago and received antitrust approval, but still had to wait five days before closing. During that period, the Securities and Exchange Commission also lifted its short-sales ban, adding pressure to Morgan's stock.
MUFG delivered its 10-figure payment with a check because bank holidays in the United States and Japan precluded an electronic transfer, people familiar with the situation said.
Mack and other top bank CEOs were meeting with U.S. Treasury Secretary Henry Paulson on Monday to firm up details of a financial markets stabilization plan, which may include taking equity stakes in banks.
Earlier on Monday, British authorities moved to inject 37 billion pounds ($63 billion) into three UK banks, Royal Bank of Scotland Group and the soon-to-be-merged HBOS and Lloyds TSB Group, in a deal that makes Britain the top shareholder in all three institutions.
Morgan Stanley officials said the deal creates a partnership that will fortify the bank and create business opportunities worldwide in areas like asset management and corporate banking.
MUFG also will bolster the market's shaken confidence in Morgan Stanley by providing letters of credit and credit lines. Last month Morgan became a bank holding company, and its links to MUFG will help it expand its deposit-gathering business.
"MUFG and Morgan Stanley are working toward numerous areas of collaboration, including pursuing a lending relationship," Mack wrote. Morgan will pursue deals to expand its deposit base, he said.