Fitch Ratings has placed the long- and short-term debt ratings of both at Wall Street firm Morgan Stanley and its Discover Bank unit on Rating Watch Negative, due to the recent management turmoil at the firm, and its spin-off plans.

A number of events surrounding Morgan Stanley serve to pressure its credit ratings and those of its subsidiaries, Fitch says. “Management changes accompanied by senior executive departures, changes in board composition, litigation and shareholder pressures have culminated in an announced spin-off of its Credit Services business,” it says, noting that Fitch anticipates the spin-off to be 100%, a move that will eliminate approximately 17% of stable revenues.

The remaining business lines of institutional, retail brokerage and asset management are expected to maintain current quality and profitability, Fitch adds. “Profit margins in Institutional Services have historically been strong due to material market share in high profit margin businesses of prime brokerage, commodities sales and trading and mergers and acquisitions,” but it cautions, “Recent executive departures may harm these businesses in the intermediate term. Managerial efforts at maintaining clients are expected to be needed.”

“The variability of earnings from these businesses is material,” it notes. “The profits generated by private client and asset management businesses while more stable face challenges; the private client business in particular is currently underperforming peers. Resolution of the long-term ratings will be dependent upon the capital and funding profile following the divestiture of Credit Services, the demonstrated retention of clients and market share in institutional markets and the impact of potential litigation and current management changes.”

Discover’s long-term rating was linked to the support provided by Morgan Stanley, Fitch explains. Morgan Stanley’s stated intention is to structure the divested company to be strong enough to issue debt on a standalone basis. So, Discover’s standalone financial profile would warrant the assignment of a lower, albeit investment grade, long-term debt rating. Fitch says it believes capital and funding will be sufficient, and asset quality and operations are not expected to be negatively impacted by the divestiture. Future rating actions for Discover will depend on the funding and equity structure of the company. Fitch will also consider challenges such as scale, growth and product.