June 30, 2011 / 8:12 PM / 9 years ago

Japan's MUFG converts Morgan Stanley shares

* Mitsubishi UFJ’s Morgan Stanley stake raised to 22.4 pct

* Morgan Stanley to take $1.7 bln non-cash charge in Q2

* Saves Morgan Stanley $200 mln in dividend due in July

NEW YORK, June 30 (Reuters) - Mitsubishi UFJ Financial Group (8306.T) raised its stake in Morgan Stanley (MS.N) to 22.4 percent by converting its preferred shares into common stock, saving the U.S. bank some $200 million in a dividend payment that would otherwise have been due in July.

Morgan Stanley said it would book a non-cash charge of $1.7 billion against second-quarter earnings as a result of the conversion, which was announced in April.

For Mitsubishi UFJ (MUFG), the deal will result in more than 200 billion yen (US$2.48 billion) in profit in the April-June quarter, according to Japanese newspaper Nikkei.

The Japanese company’s earnings are expected to get an estimated 80 billion yen boost from its share of Morgan Stanley’s net profit, Nikkei reported. MUFG will also get an additional seat on Morgan Stanley’s board.

Mitsubishi UFJ rode to the rescue of Morgan Stanley at the height of the financial crisis, buying $9 billion of convertible preferred shares from the U.S. investment bank in October 2008. While the deal was a lifeline for Morgan Stanley at the time, the roughly $800 million dividend on the stake put a big dent in the U.S. bank’s earnings.

The two partners renegotiated their original deal two months ago, giving MUFG the right to convert an additional 75 million shares, valued at roughly $1.7 billion today and resulting in the non-cash charge against Morgan Stanley’s second-quarter earnings.

The conversion will raise Morgan Stanley’s capital levels and increase its so-called Tier 1 common equity ratio, a key measure of a bank’s capital strength, by 2.7 percentage points to a comfortable 14.5 percent, based on first-quarter numbers.

MUFG still owns some $500 million worth of preferred shares, on which Morgan Stanley pays about $50 million a year in dividends. (Reporting by Rachana Khanzode in Bangalore and Knut Engelmann in New York; Editing by Saumyadeb Chakrabarty)

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