Pricing deals in current markets is like playing Russian roulette, and Mitsubishi UFJ Financial Group knows this to its cost, notes Lex. Last Friday, under its original deal to invest $9bn in Morgan Stanley for a 21% per cent stake, MUFG could have bought nearly the entire US bank (excluding a control premium). Now MUFG will plough $7.8bn into preferred stock, which will convert into common stock at $25.25 -  lower than the $31.25 initially agreed but well ahead of Friday’s $14.22 share price. The residual $1.2bn will, meanwhile, take the form of perpetual non-converting preference stock; in essence a permanent loan. This seems a fair compromise: MUFG gets more interest income from its Wall Street prize for the same money thanks to the prefs’ 10% yield. In the meantime, Morgan Stanley gets capital without a wholesale takeover by the Japanese. But it has risks. The US bank has to cough up more in higher dividends while MUFG has also imported a whole lot of volatility. Sure, Morgan Stanley dividends will be equivalent to almost a 10th of MUFG’s earnings last year. But this remains a portfolio investment, warns Lex, and Japanese banks know how fickle such things are – especially when markets tank.

This entry was posted by Gwen Robinson on Tuesday, October 14th, 2008 at 5:29 and is filed under Capital markets. Tagged with morgan stanley, MUFG. Edit this entry.