Corporate Loans Come Back to Haunt Morgan Stanley Earnings

(Bloomberg) — Morgan Stanley incurred a $356 million writedown on corporate loans stuck on its balance sheet in the fourth quarter as the market for leveraged buyout debt, including Twitter Inc., remained weak.

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The James Gorman-led lender reported the mark-to-market losses on the debt held for sale and loan hedges, which were partially offset by net interest income and fees of $287 million over the period.

The figures include Morgan Stanley’s day-to-day corporate lending as well as risky bridge loans for debt-fueled acquisitions that the bank got stuck with when credit conditions rapidly deteriorated in early 2022. Roughly $3.4 billion of Morgan Stanley’s balance sheet is tied up with loans it lent to Twitter as part of Elon Musk’s acquisition of the social-media company.

The other five major US investment banks didn’t specify paper losses for corporate loans in the fourth quarter as JPMorgan Chase & Co., Bank of America Corp, Citigroup Inc., Wells Fargo & Co., and Goldman Sachs Group Inc. reported earnings on Friday and Tuesday.

That may underscore the scale of the problem at Morgan Stanley, which led the Twitter financing. Paper losses for the group of seven banks that backed Musk’s takeover are potentially around $4 billion, Bloomberg has reported. Morgan Stanley led the financing and has the biggest exposure at about 27% of the debt.

When asked by Wells Fargo banking analyst Mike Mayo about the transaction on the Tuesday earnings call, Morgan Stanley CEO Gorman declined to talk specifics and defended the leveraged-lending business.

“I’m not going to talk about Twitter. We don’t talk about single names as you would expect,” he said.

“The way I think about this is we run a portfolio business. We obviously have single credits at any point in time that disappoint relative to others, but it’s the total package,” Gorman added. “And the total package, if you look at it, actually turned out to be very fine given the environment we’re in.”

For full-year 2022, Morgan Stanley saw $876 million of mark-to-market losses on corporate loans held for sale and loan hedges, softened by a $701 million gain in net interest income and fees.

A representative for the bank declined to comment beyond the earnings call.

Overall, Morgan Stanley’s revenue narrowly beat analysts’ expectations on a wealth-management record even as the firm’s traders fell short of estimates.

Banks saddled with so-called hung debt typically have to mark-to-market the assets based on where the secondary market might value the debt if it were offloaded. The lenders subsequently realize these losses once they eventually sell at a discounted price. Banks don’t typically specify whether a loss is on paper or realized in their earnings.

In the second quarter of 2022, when junk bond and leveraged loan prices crashed, the top six US banks reported about $1.3 billion of these losses in total.

In the third quarter, when prices remained depressed but steady, only Morgan Stanley and Citigroup fully broke out the figures in the US, for a loss of about $200 million total. And now in the fourth quarter, Morgan Stanley stands out for specifying the pain.

On a media call for Bank of America’s earnings on Friday, which contributed about 21% of the Twitter debt, chief financial officer Alastair Borthwick declined to provide a fresh update on the outlook for leveraged-finance writedowns, which he described as a “similar story” to the prior quarter.

But just because other banks aren’t disclosing their losses doesn’t mean they are free from the pain, since only material writedowns need to be disclosed.

“Each bank has their own threshold for how they define material, and it’s usually relative to the size of the company,” said Brennan Hawken, a bank analyst at UBS Group AG.

–With assistance from Lisa Lee, Katherine Doherty and Sally Bakewell.

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