October 13, 2008 / 9:19 PM / 10 years ago

Fitch cuts ratings on Morgan Stanley

NEW YORK, Oct 13 (Reuters) - Fitch Ratings on Monday cut its long-term issuer default rating on Morgan Stanley (MS.N) and said it expects the current stresses on the bank’s core businesses to continue for some time.

Fitch cut the ratings 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.

The move reflects “continued expected challenges in profitability and funding despite the additional capital injection from Mitsubishi UFJ (8306.T),” the agency said in a statement.

Japan’s biggest bank earlier closed a deal to buy a 21 percent stake in Morgan Stanley for $9 billion after renegotiating the original terms. Mitsubishi bought only preferred stock instead of the common stock it had earlier agreed on after Morgan shares tumbled by more than 50 percent last week. For more, see [ID: nLD319859].

Fitch said Morgan is also facing continued challenges in its transition from investment bank to financial holding company.

The rating outlook is negative, “to reflect the weakened earnings potential of investment banking operating in this tumultuous economic period.”

Fitch is expecting revenues to fall sharply as the bank’s prime brokerage business is hit by deleveraging and uncertainty about the protection of client assets. At the same time, the bank’s investment banking division and commodities trading business are facing headwinds.

Reporting by Ciara Linnane; Editing by Diane Craft

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