DealBook: Herbalife Increases Share Buyback Plan

DealBook: Morgan Stanley Announces a Buyback, and Its Shares Rise

Mark Lennihan/Associated PressMorgan Stanley’s headquarters in New York. The firm posted a 42 percent rise in profit and said it would buy back part of its stock.

Morgan Stanley shares rose more than 4 percent on Thursday after the firm announced it planned to buy back a chunk of its own stock.

News that the firm had received approval from the Federal Reserve to repurchase $500 million worth of its stock was good for shareholders, whose stake in the company has been diluted in recent years as the firm issued millions of shares to pay employees. This dilution has weighed on the stock, and it was trading in the teens earlier this year.

The stock rose about 4.4 percent, or $1.16, to close at $27.70, a level it has not hit since 2011. It is the first buyback Morgan Stanley has undertaken since the financial crisis and comes after the firm’s decision to buy the remaining stake of its wealth management business, a move James P. Gorman, the firm’s chairman and chief executive, has heralded as “transformational.”

Morgan Stanley received approval from regulators in June to buy the rest of its wealth management division, a joint venture it formed with Citigroup during the crisis. Since then, the firm has been working to diversify its earnings, moving away from riskier businesses like trading and into wealth management, which offers steady, albeit lower returns. Its ability to purchase all of that division gave it full control of the operation and the full share of the profits.

Mr. Gorman told analysts that the firm was careful to have the wealth management purchase in order — and paid for — before it started spending money on stock buybacks.

The other good news for shareholders was the firm’s second-quarter earnings, which came in slightly ahead of analysts’ expectations.

The firm reported that second-quarter profit applicable to Morgan Stanley’s common shareholders rose 42 percent, to $802 million, or 41 cents a share, compared with $564 million, or 29 cents a share, in the period a year earlier. Overall net income was $980 million, compared with $591 million in the period a year earlier.

The results, however, were affected by two big charges, one related to Morgan Stanley’s credit spreads and the other to its recent purchase of the remaining stake of the wealth management business. Stripping out those charges, the firm had a profit of $872 million, or 45 cents a share. That beat the estimates of analysts polled by Thomson Reuters, which had projected a profit of 43 cents a share.

Morgan Stanley’s revenue, excluding those charges, rose to $8.3 billion in the second quarter from $6.6 billion in the period a year earlier.

The results were driven by decent performances in most of its business units, notably wealth management and equity and debt trading. Morgan Stanley is coming off what was a weak second quarter of 2012 and is also enjoying what seems to be a better operating environment for all banks.

Morgan Stanley is the last big financial institution to report second-quarter earnings, and results have been generally strong as lenders seem to be benefiting from a pickup in the American economy. Goldman Sachs, for instance, reported that its net income doubled, beating analysts’ expectations handily.

At Morgan Stanley, wealth management, which is led by Gregory J. Fleming, was a big focus for analysts on the quarterly conference call.

That unit, with 16,321 financial advisers, posted net revenue of $3.5 billion, up more than 10 percent. Its pretax profit margin, a widely watched figure on Wall Street, came in at 18.5 percent. That margin, which previously had been around 17 percent, was higher than the firm’s expectations.

Institutional securities, which houses Morgan Stanley’s banking and trading operations, posted net revenue, excluding the debt charge, of about $4.2 billion, up about 40 percent from a year earlier.

The firm experienced a solid increase in revenue from various segments in this department, including debt and equity underwriting, investment banking, and currency and commodities trading.

The fixed-income sales and trading unit reported that adjusted revenue rose to $1.2 billion from $771 million in the period a year earlier. This year’s performance was slightly below what analysts were hoping for.

In the second quarter, there was a sudden and sharp rise in interest rates after the Federal Reserve indicated it might wind down its bond purchase program, which has helped the economy recover from the financial crisis.

Ruth Porat, the bank’s chief financial officer, told analysts that the firm reduced the risk it was taking trading interest rate products.

While the bank’s second-quarter results were a marked improvement over those in the period a year earlier, the firm is still producing a return on equity, excluding the two charges, of just 5.6 percent. This is up from 2.1 percent in the period a year earlier but still well below what it costs the bank to simply cover its debt expenses and other capital costs. To do that, it needs to achieve a return on equity, an important measure of profitability, of closer to 10 percent.

DealBook: Concerns Mount That Investors Might Balk at Debt Buyback in Greece

John Kolesidis/ReutersThe offices of Greece’s finance and development ministries in Athens.

LONDON — The hedge funds holding Greek bonds may have become too greedy for their own good.

It’s just two days before the books close on a plan to reduce Greece’s debt load by having the country purchase its deeply discounted bonds from banks and investors. But bankers close to the transaction are voicing concerns that hedge funds might “blow up the deal” by holding out for a higher price.

If the buyback fails, they say, the consequences would be severe. Not only could the International Monetary Fund refuse to lend more money to Greece, but wealthy European countries, already skeptical about extending yet another round of loans to Greece, could withdraw their support. In that case, the 40 billion euro-plus lifeline that the country needs to remain solvent would be in jeopardy.

“People have fallen in love with their profits, and they have lost touch with the downside,” said Petros Christodoulou, a top executive at the National Bank of Greece who presided over the 100 billion euro private sector debt restructuring earlier this year as head of Greece’s debt management agency. “If this thing fails, there is total collapse, and the price goes to 20 cents.”

On Monday, Greece surprised the market by offering, in effect, to repurchase as much as 30 billion euros worth of bonds at an average price of 32 to 34 cents on the euro. That represents a roughly 5 percent premium to where the bonds were trading at the end of the previous week.

Having borrowed 10 billion euros, the net debt relief would be around 20 billion euros. European officials feel that would be enough to satisfy the I.M.F.’s demand that Greece try to bring its debt level below 110 percent of its gross domestic product by 2022.

But numerous hedge funds — many of which scooped up Greek bonds in the mid-teens this summer and are now sitting on fat profits — are telling Greece that they may not participate in the buyback. Instead, they are betting that the participation of Greek banks and short-term investors looking for a quick profit will be enough to get the deal done. In theory, the strategy would allow the hedge funds to cash out at prices of 40 cents and beyond when bonds rally in the aftermath.

Buying Greek bonds on the cheap has become one of the more popular trades of late in Europe. Hedge funds like Third Point, Brevan Howard, Greylock and others have accumulated significant amounts of the debt.

With the voluntary buyback deal in question, bankers are contemplating the use of sophisticated legal stratagems that could force investors to sell out at much lower prices.

One possibility would be for the government to buy back as much debt as it can at current prices. Then Greece would come back with another lower offer; as long as two thirds of investors agree to the deal, collective action clauses would kick in, forcing reluctant investors to accept the government’s terms. Reaching that percentage would be easier, bankers say, as this time more of the bonds would be in friendly hands and would vote accept the offer.

Legal experts have also pointed out potential loopholes in the contracts of the restructured bonds that would — if push came to shove — allow Greece to keep current on its bond payments to European governments while forcing private sector creditors to take a loss.

In a further reminder of Greece’s tenuous financial position, Standard and Poor’s lowered its rating for Greek debt to selective default in a response to the buyback action. The rating agency said that when the buyback is finished, Greece’s rating would return to its higher CCC level. Any move, however, by the country to deploy more forceful measures l would most likely result in Greek bonds keeping a selective default rating.

“I am shocked that hedge funds are taking this so lightly,” said a person with knowledge of the buyback discussions who spoke on condition of anonymity. “There is an 80 percent chance that the I.M.F. will walk if this deal does not work — these guys have become their own worst enemy.”

In a deal this sensitive and crucial, there is always a fair amount of chest puffing as opposite sides push for the best possible outcome. The threat by hedge funds to not participate may well be a bluff to force Greece to up its price. Greece, on the other hand, has little to gain by forcing a bad deal on foreign investors at a time when it is relying on them to drive the privatization process.

But, as in all games of chicken, the risk of collision — or, in this case, a botched deal that results in Greece not getting its desperately needed money — is never all that far away.