Morgan Stanley Renegotiating Terms with Mitsubishi UFJ Group

Morgan Stanley (MS) and Japanese banking giant Mitsubishi UFJ Financial Group [MUFG], according to New York Times – are engaged in talks of altering the terms of MUFG’s $9 billion capital injection into the Wall Street firm.

On Sept. 29, the two companies reached a definitive agreement under which the Japan-based holding co. would invest $9 billion in equity in Morgan Stanley for a 21% stake in the firm on a fully diluted basis. MUFG in return agreed to acquire 9.9% of Morgan Stanley’s common stock on a primary basis at a price of $25.25 per share, for a total of $3 billion. MUFG also agreed to acquire $6 billion of perpetual non-cumulative convertible preferred stock with a 10% dividend and a conversion price of $31.25 per share.

However, facing massive paper losses on its Wall Street stakebuilding play – after the market’s nosedive action of last week, the Japanese bank is now discussing eliminating the common stock portion and using preferred stock instead, with a 10% annual dividend. About $7.8 billion of those shares, notes the Times, would be convertible into common stock at a price of $25.25, far lower than originally proposed.

Morgan Stanley shares closed below $10 levels on Oct. 10, more than 60% below the price Mitsubishi UFJ initially agreed to pay for the co.’s common stock.

While the negotiations remained fluid, people close to both sides expressed confidence that a deal would be struck. Mitsubishi officials said on Friday that the bank expected to close the deal on Tuesday. The companies are hoping to announce the terms of the transaction before the stock market opens Monday.

Closing the investment from Mitsubishi UFJ will be “critical to maintaining current rating levels” for Morgan Stanley — Moody’s Investors Service said in a statement on Oct. 9. Moody’s, after placing Morgan Stanley’s A1 long-term debt rating on review for downgrade, said its review was based upon its expectation that an extended downturn in global capital market activity will reduce Morgan’s revenue and profit potential in fiscal ’09. Moody’s also said it expects the investment by Mitsubishi-UFJ to close as scheduled on October 14.

Morgan Stanley has become the latest high-profile Wall Street entity to suffer the effects of a massive collapse in investor confidence. The bank reported $4 billion in earnings in the first nine months of fiscal ’08.

MS plummeted 22% on Friday, printing a 13-year low. At one point, shares fell as much as 45%.

Update: MUFG and Morgan Stanley have closed the deal. Under the revised agreement, the Japanese bank will acquire $7.8 billion of convertible preferred stock with a 10% dividend and a conversion price of $25.25 a share, and $1.2 billion of non-convertible preferred stock with a 10% dividend. MS is currently up more than 50% in midday trading on NYSE.

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