Morgan Stanley $250 million credit-linked notes offering and Fed capital approval

Davis Polk advised Morgan Stanley and Morgan Stanley Finance LLC (MSFL), a wholly owned finance subsidiary of Morgan Stanley, in connection with MSFL’s offering of $250 million aggregate principal amount of senior floating-rate credit-linked notes due 2030.

The notes effectively transfer first-loss credit risk on a pool of loans held by Morgan Stanley Bank, N.A. to the noteholders through a combination of contractual provisions (which incorporate standard industry credit derivative documentation such that payments on the notes are calculated as if a credit default swap were in place) and an automatic write-down of the aggregate principal amount of the notes to the extent that losses are incurred on these loans. The notes bear interest by reference to the Secured Overnight Financing Rate, or SOFR, compounded daily over each quarterly interest payment period.

Davis Polk also advised Morgan Stanley in connection with obtaining the approval of the Board of Governors of the Federal Reserve System to recognize the notes as a credit risk mitigant having the same effect as financial collateral consisting of cash on deposit, under the U.S. Basel III capital rules’ operational requirements for synthetic securitization exposures.

The Davis Polk financial institutions team included partner Luigi L. De Ghenghi and associates Andrew Rohrkemper and Zachary T. Stone. The corporate team included partner Christopher S. Schell, counsel Vidal Vanhoof and Erika D. White, special counsel Donald S. Bernstein and associate Nicollette Farkas. All members of the Davis Polk team are based in the New York office.