Sunday, November 8, 2009

The Leveraged Loan by Morgan Stanley to CF Industries says buy Morgan and Sell Terra

The prior weekend, it was announced that Morgan Stanley (MS) had agreed to provide CF Industries (CF) with $2.5B in financing for the potential takeover of Terra Industries (TRA). Considering that we've been bullish on this deal and negative on MS for not being more aggressive in lending, this appears to be a game changer in both ways.

Also, Bloomberg reported that this $2.5B deal is the largest leveraged lender commitment this year. It should provide plenty of fees for MS and signals a turn in MS that we find appealing. Especially considering they have chosen a very juicy sector to start loading up on. Even though the deal possibly won't go through as the drama in the numerous deals in the fertilizer sector continue to unfold.

  • Morgan Stanley’s outstanding loans and lending commitments to non-investment grade companies peaked at $43 billion as of Aug. 31, 2007, before shrinking to $18.5 billion as of Sept. 30 of this year, according to the firm’s quarterly financial statements. The firm recorded $4 billion of losses in 2007 and 2008 related to loans and lending commitments.

Buy MS on this deal and we're suggesting to stay away from TRA for now. We were originally interested in TRA based on getting into CF stock on the cheap. The new deal is for $32 per share in cash and just a fraction of shares in CF stock so that defeats the purpose of our investment. If TRA approves this deal, its mindboggling because it in no way creates long term value as you'll be cashed out and have to pay taxes and then have to reinvest in CF stock. Might still hold the stock but we won't likely add more.

MS on the other hand will likely see an increase in deals and they just one of the handful of companies able to provide the financing. The stock closed right above the 20EMA at $32.50 on Friday leaving it an ideal buying point.

Disclosure: Long MS

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