Morgan Stanley Sells a Billion Dollar Fixed to Floating Rate Preferred

Securities firm Morgan Stanley has sold a giant fixed-to-floating rate preferred stock issue.  The offering is 40,000,000 shares and comes with an initial fixed rate of 5.85%.

From our perspective this is a stingy coupon from an issuer that is less than investment grade.  It is not just the initial coupon that is stingy, but it is also the base rate beginning in 2027.  In 2027, which is the year the coupon begins to float, the base rate is 3.491% which will be added on to 3 month Libor.  Obviously no one has any idea what rates will be in 2027, but we can’t envision any situation that would make this issue attractive.  Morgan Stanley has 3 other preferred issues currently outstanding, 2 of which are fixed to floating rate and one is a floating rate with a minimum coupon floor.  Each of them has traded very strongly, so obviously there are investors that like these low coupon better than we do.  You can compare the outstanding issues on our “swaps” page here.  We do note that even though we do not like this particular issue the floating rate structure will support the share price somewhat better than a fixed rate coupon issue in the event that interest rates rise.

Being a financial firm the dividends on this issue will be non-cumulative.  While being non-cumulative is not an issue for us (if we had an interest),  many investors do not buy non cumulative issues.  The distributions will be qualified for preferential tax treatment.

This new issue is now trading on the OTC Grey Market under the ticker symbol MSDDP.  For those not familiar with the OTC Grey Market you can read our primer here.  Shares are trading in the range of $25.20-$25.40.

Details of this issue can be found here.

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