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 The bank has started circulating preliminary information about the
assets it could sell, which include the general partner of master
limited partnership (MLP) TransMontaigne Partners LP <TLP.N>, the
sources said. One source said the offer also included a handful of
assets outside the MLP.
The sale process appears to be Morgan Stanley's first definitive
step toward disassembling its vast energy trading group, after a
more than year-long informal effort failed to find a buyer or
partner for the whole operation.
The move comes amid intensified regulatory pressure to dump
contentious commodity investments, particularly those that pose a
liability risk. Morgan Stanley and Goldman Sachs <GS.N> have argued,
seemingly in vain, that a 1999 legal exemption allows them to
continue owning oil tankers and pipelines.
They "see the handwriting on the wall", said Craig Pirrong, a
finance professor at the University of Houston.
"And oil logistics is something that gives the Fed major concern.
'What if there's an oil spill at a bank-owned storage facility or
from a bank-chartered tanker?' is the favorite doomsday scenario
used to suggest that banks shouldn't be in physical commodities," he
said.
Morgan Stanley declined to comment on the sale process. Financial
details about the deal were not available, and the bank provided no
estimate on a value or timeline.
While the eventual sale of TransMontaigne had been widely expected
by many industry executives given mounting regulatory pressure on
Wall Street's commodity traders, the abrupt shift to a formal
process was unexpected.
"Internally it has been very clear that they didn't want to sell,"
said one person familiar with discussions related to the business.
"The attitude was 'We'll only sell once the Fed forces us to sell,
why would we do it any earlier?' Something has happened in the past
few months to change that."
The Fed's tougher stance has been apparent elsewhere. Goldman Sachs
<GS.N>, whose executives have proudly defended the bank's J. Aron
commodity division, has recently renewed talks to sell its metals
warehouses and uranium desk.
One senior executive at a rival firm suggested that Morgan Stanley
may now be planning to cut out the physical trading operations of
its commodity desk — the largest liquid oil trading team on Wall
Street — while retaining the derivatives business, as JPMorgan
Chase & Co <JPM.N> is doing.
In addition to the general partner, Morgan Stanley owns around 19
percent of the TransMontaigne MLP's units. It is unclear what the
bank plans to do with this holding. The bank's trading division also
accounts for about 60 percent of the MLP's revenues due to long-term
contracts to use its terminals. The teaser suggested some of these
contracts could also be sold as part of the package, one source
said.
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LONG TIME COMING
Although Morgan Stanley is renowned as one of the first and biggest
banks to enter physical energy trading decades ago, its investment
in Denver-based TransMontaigne is far more recent.
It bought the firm for $630 million in 2006, using it to extend the
bank's trading options that also included millions of barrels of
fuel storage in New York Harbor and a deal to supply jet fuel to a
major U.S. airline.
The TransMontaigne MLP includes some 48 fuel terminals with nearly
24 million barrels of storage capacity on the Gulf Coast, in
Florida, the Midwest and across the Southeast, including along the
strategically important Colonial Pipeline that ships gasoline and
diesel from the Gulf to the East Coast.
With the U.S. oil market in upheaval due to the shale oil production
boom, TransMontaigne is the bank's "crown jewel", said Pirrong.
Morgan Stanley executives have said since last year that they are
exploring "different structures" for the commodity trading business,
which has recently suffered some of its worst quarters in decades.
Rising capital requirements and falling market volatility have cut
earnings across Wall Street.
Chief Financial Officer Ruth Porat said in October the bank wanted
"to be smart about what we do" regarding commodities, a division
that brought in an estimated $3 billion at its peak in 2008. That
fell to around $1 billion last year, according to Reuters estimates
based on filings.
Although a number of potential buyers including Qatar, a Chinese oil
major and Russia's Rosneft have been mooted over the past year,
until now it had been unclear whether Morgan Stanley would strike a
deal or wait for the Federal Reserve to publish new rules that could
force it out of the business.
The Federal Reserve is expected next year to make clear the results
of a sweeping review of regulations governing how banks can trade in
physical commodity markets. While most observes now believe that the
Fed will make it all but impossible to continue owning
infrastructure assets, many do not expect major new limits on
trading raw materials.
Potential buyers are likely to include the MLP subsidiaries of major
refiners or midstream companies.
(Reporting by Jonathan Leff and Michael
Erman; editing by Nick Zieminski, Marguerita Choy and Andrew Hay)
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