Morgan Stanley in Talks to Acquire CLO Assets of Assurant

Morgan Stanley MS is planning to acquire the collateralized loan obligation (“CLO”) assets of Assurant Inc. According to people with knowledge of the matter, the lender is currently in talks and a deal could be finalized in the coming week, reported Bloomberg.

However, there is also a possibility that no agreement will be reached upon. Morgan Stanley’s spokesperson declined to comment on the matter as the talks are private and representatives of Assurant did not respond to requests for comment.

Notably, the coronavirus outbreak in mid-March shook the market for CLO issuance. As uncertainties regarding the impact of the virus on financials increased, the prices on underlying debt plunged to their lowest levels in March.

However, before the outbreak of the virus, the CLO market flourished, stimulated by investors, who were deprived of yield by years of low interest rates.

Notably, the fair value of Assurant’s CLO notes as of Mar 31, 2020, was $1.6 billion and Morgan Stanley will likely pay a fraction of the amount to get the rights to manage the CLO assets.

Like Goldman Sachs GS, Morgan Stanley showed a keen interest in CLO sales in 2019. The company wanted to get involved in assembling deals that package leveraged loans into bonds with varying risk and return.

Last year, Morgan Stanley committed $150 million in equity to Morgan Stanley Investment Management’s CLO platform. Its first deal raised $457 million in November.

Notably, in February 2020, in a move to be positioned as a leader in the Wealth Management industry, Morgan Stanley entered an all-stock acquisition deal worth $13 billion with E*TRADE Financial ETFC.

Our Take

Morgan Stanley’s focus on corporate-lending operation along with the strength in investment management operations are expected to support its top-line growth. However, while the company is aiming to change revenue mix to focus on less capital-market driven sources, the financial impact of the same will likely be seen after some time. Near-zero interest rates and elevated expenses are major near-term concerns for the company.

So far this year, shares of Morgan Stanley lost 8.2% compared with a decline of 13.1% recorded by the industry.

Currently, the company carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A better-ranked stock from the same space is GAIN Capital Holdings GCAP. Its current-year earnings estimates have moved up significantly over the past 60 days. The company’s shares have gained 56.2% year to date. At present, it carries a Zacks Rank #2 (Buy).

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