Thursday, 18 October 2018

US Equity House: Morgan Stanley

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  • Global savvy

From Hong Kong to London to New York, and all geographies in between, no investment bank had issuers’ ears quite like Morgan Stanley in 2014. Using its global footprint to boost its domestic business, Morgan Stanley is IFR’s US Equity House of the Year.

It takes a truly global effort to be the best in the US.

“The five of us probably spent more time outside the US this year than we have any time recently,” said Raj Dhanda, co-head of global capital markets, talking about himself and other US-based colleagues co-head Daniel Simkowitz, co-heads of ECM for the Americas Paul Donahue and John Moore, and global head of equity syndicate Evan Damast.

“This is one of those years where Europe and Asia really came back, but companies weren’t always going to do transactions locally. That’s different than if you go back, say, 10 years ago when you would originate locally and distribute locally. There’s a real change this year that really kicked in in size.”

There is no better example of the global reach of US markets than Alibaba. By virtue of advisory work provided to the e-commerce giant years ago, Morgan Stanley earned an out-sized fee on the US$25bn IPO and was mandated as one of two banks to control lock-up agreements. As further recognition of its contribution, the bank was mandated lead-left on Alibaba’s US$8bn bond sale just two months later.

Thomson Reuters estimates put Morgan Stanley equity underwriting fees across all products (follow-ons, IPOs, blocks, structured equity) at US$960m or a 10.3% market share, making it the only firm to achieve a double-digit level in percentage terms. The lead was even more commanding on IPO fees for US companies, which put the firm 120bp ahead of its nearest rival by market share.

Arguably, there is no firm where equity capital markets are so intertwined with senior management as Morgan Stanley. Global equity and research head Ted Pick, global investment banking co-head Franck Petitgas, institutional securities co-COO Mohit Assomull, and global wealth management head Eric Benedict all once occupied senior leadership positions in equity capital markets.

“There is a lot of continuity here at Morgan Stanley. The institutional camaraderie we share allows us to predict outcomes better than any other firm,” said Damast. “And that allows us to get the right price more often than not, to buy a given stock at the right price and at the right time.”

“This year has been about windows that have opened and closed with much more velocity,” said Moore. “There was a pull-back in spring, exhausting supply in June and July, the huge supply of Alibaba in September, and an October that was as difficult a time as we have seen recently.”

A wealth of information

The close relationship with Eric Benedict has been particularly valuable in getting the timing right. The full integration of Morgan Stanley Wealth Management, the former joint venture with Citigroup that Morgan Stanley took full ownership of in mid-2013, is a major differentiator. The unit counted more than 16,100 retail brokers that managed US$2trn of client assets as of September 30.

“To see the data aggregation of US$2trn of funds is highly interesting to our corporate clients, it’s often something they can act on,” said Donahue, noting that the unit is a top 10 holder of 75% of the names in the S&P 500.

On the Alibaba IPO, for example, Morgan Stanley was given a far larger retail allocation than any of the other underwriting banks. Wealth management was also prominent on yield-oriented products, with retail allocated 25% of both the US$575m IPO of midstream MLP Enable Midstream Partners in April and the US$385m carve-out IPO of Transocean Partners from Transocean in July.

On an important acquisition financing for insurance brokerage Arthur J Gallagher in April, the MSWM aggregate order was US$650m of a US$945m follow-on, with the unit ultimately allocated more than one-quarter of the total raising.

Getting results

Citizens Financial Group, the US commercial bank RBS purchased in 2007, and its US$3.5bn IPO was a clear example of equal titles but very different roles and fees. Morgan Stanley was mandated as one of two global co-ordinators, alongside eight bookrunners overall, to lead what was the largest US bank IPO in history and the biggest FIG IPO since 2007.

The extensive marketing effort focused investor attention around the issuer achieving a 10%-plus return on equity by 2016 – rather than the 4.95% earned in 2013 and failed CCAR stress test in early 2014.

In total, management met with more than 350 investors, including 68 one-on-one meetings, over 10 days of marketing.

Final pricing of 140m shares at US$21.50 was below the US$23–$25 and set the initial valuation at 0.94 times book value. Pricing was a discount to peers that provide a better ROE. Citizens’ shares closed first-day trading at US$23.08 and the consideration period at US$23.77. The full 21m greenshoe was exercised.

A syndicate of 21 banks meant there were plenty of mouths to feed yet Morgan Stanley took home 30% of the fees while the other global co-ordinator’s share was 22%.

Morgan Stanley exercises the greenshoe more often than other banks, at 73% on non-retail IPOs versus a Street average of 59%. In part it is thanks to a disciplined approach that does not involve battling to support an issue price. The US$1bn IPO of Catalent is typical of this disciplined approach.

Morgan Stanley, as stabilisation agent, over-sold the 42.5m-share IPO at US$20.50 (the upper-half of the US$19–$21 target), to boost its short position. The bank allowed Catalent to open at US$20.00 and drift to US$19.30 before stepping in to stabilise. The drug manufacturer recovered to close its first-day at US$19.99. The overallocation meant Morgan Stanley could still exercise the full 6.375m share greenshoe and deliver the additional proceeds to the company. The stock has since traded steadily upwards to end November at US$28.79.

“The ability to exercise a greenshoe, or manage the stabilisation process, is really about your institutional view on the buyer base,” said Donahue. “We manage the balance between fair value for buyers and sellers, needing to get things done, and having a stock trade up better than anyone else.”

Morgan Stanley adopted a similarly disciplined approach towards capital commitments. Following a treacherous period for investors in the autumn, characterised by volatility across equities, commodities, and currencies, the bank shied away from risk, avoiding several situations for established clients such as Quintiles Transnational and Voya Financial that appeared money-losers for rivals.

“The one key to blocks is that you don’t waver on discipline, particularly if you get on a winning streak,” noted Donahue.

But it was a truly bold move that led to one of the most profitable equity trades of the year. To the surprise of many, Morgan Stanley wrote a US$1.255bn cheque to Repsol in May representing the majority of its 12.4% stake in YPF SA acquired on the expropriation by the Argentine government that February. The sale occurred two days ahead of Repsol’s first quarterly earnings release shortly after the appointment of a new CEO.

Others advised caution. Morgan Stanley expressed conviction. The bank purchased the block of 46.65m YPF American Depositary Shares for US$26.91 and offloaded them to its clients under Rule 144A for US$27.80, earning US$41.5m in the process. No league table credit, but a well-earned profit.

To see the digital version of the IFR Americas Review of the Year, please click here.

To purchase printed copies or a PDF of this report, please email

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