Structured Equity House
Going global: While maintaining dominance in Europe, Morgan Stanley grew its US and Asian output to make for the only globally balanced business in the industry. Structuring ideas, high-quality execution and a co-ordinated global approach combined to make Morgan Stanley IFR’s Structured Equity House of the Year.
Morgan Stanley secured top ranking in EMEA for the third consecutive year for structured equity issuance and maintained relevance across the other regions with a clutch of innovative and well executed deals. Notably, the bank also displayed a level of co-operation across regions that competitors often lack.
London-listed Indian firm Vedanta required teams in Asia and Europe to work together seamlessly to produce a successful visit to the CB market for the company as it raised US$883m, while the European team recognised that for South African miner AngloGold Ashanti the best structure was a mandatory convertible bond and the best place to sell it would be the US.
The sale of Allied Irish Banks’ 22.4% stake in US-based M&T Bank through an innovative short-dated exchangeable note illustrates teams working together across regions, but also a high level of structural ingenuity that dealt with regulatory issues and the obvious forced-seller status of AIB to raise nearly US$2bn for the client.
For AngloGold Ashanti the US$789m mandatory was a huge success after the company had to abandon plans for a rights issue earlier in the year when news of the deal leaked. With US investors expected to have more appetite for the bonds, the deal launched into the US first and demand was so strong that it closed before European sales teams had a chance to make calls the following morning.
“Selling into the US was in the interest of AngloGold, even if it did leave some South African investors upset,” said Antoine de Guillenchmidt, head of EMEA structured equity. “It would not have worked in Europe with the 6%–6.5% coupon. We had a list of five key European investors and they were saying fine at 7.5%. US investors focus on breakeven, while in Europe it is about cost of funding with prime brokers – selling the mandatory required global advice.”
Once again in 2010, Europe proved to be the core market for Morgan Stanley’s equity-linked team, with the bank securing the largest sole bookrunner deals to raise £497m for Autonomy in the UK and €500m for IndustriVarden in Sweden, while also bringing structural innovation to market.
Innovation was rife in the structured equity market during the previous decade as bankers competed to engineer the most esoteric structures. Today, innovation centres on practicalities of issuance. Morgan Stanley was therefore involved in the first true Russian convertible – for TMK – which had to deal with the challenges of simply issuing primary stock in the country.
It also developed the ORNANE into OCEANE structure that saw French real estate firm Gecina issue a net share-settled bond with the option to change it into a stock settled bond at any stage. The Gecina trade refined the structure used by Unibail-Rodamco in May 2009, where Morgan Stanley was sole global co-ordinator, by replacing the iTraxx trigger for switching to stock settlement with the ability to switch at will.
The right denomination
In the Asia-Pacific region, where CB issuance activity was higher than it has been in recent years, Morgan Stanley led a selection of interesting trades that reflected its strong structuring and origination skills.
In September, the bank sole-led the first ever Won-denominated, US dollar-settled convertible bond deal for LG Uplus. The US$300m transaction had a two-year, put 18-month tenor and paid a coupon of 2.5% per annum. Unusually, the interest for both years will be paid in the first year. The conversion price will also be adjusted for all dividends declared in the first year, while in the second year, conversion-price adjustments will occur only if dividends exceed 3% of the firm’s market capitalisation.
The idea behind front-loading the coupons was to make it more likely for investors to convert their bonds into shares on the put date. They are paid one 2.5% coupon after six months and another 2.5% at the end of 12 months, but there will then be no payment in the remaining 12 months.
In return, the BBB– company secured a 25% premium, one of the highest in Asia for a CB that could not be hedged, and issued bonds that carried South Korean Won liability thus avoiding any currency risk. The structuring worked, with a US$1bn book of demand generated from 150 investors that included straight equity funds, CB funds and South Korea-focused international investors.
The strength of the bank’s Chinese ECM franchise also helped it win mandates for a number of landmark equity-linked deals from China – in a year when issuers from the country dominated the market with a 46% share by volume.
The bank was sole bookrunner on Singapore-listed Chinese waste water treatment company Sound Global’s US$130m five-year put-two renminbi-denominated and US dollar-settled CB in August. At launch the deal was sized at Rmb475m (US$70m) with an option to be increased by another US$30m, but strong demand pushed the deal size to US$130m with pricing still within initial guidance for a coupon of 6% and conversion premium of 20%.
The joint-led US$700m equity-raising for China Agri-Industries Holdings comprised a US$200m accelerated top-up placement and a concurrent US$500m upsized five-year CB. It illustrated the bank’s ability to find demand at a difficult time and price deals for a positive aftermarket that stood out against the poor trading of many CBs during the year.
The leads unearthed an investor base that was surprisingly price insensitive given market volatility at the time. China Agri went to the market hoping to raise HK$2.3bn (US$296m) in a five-year put-three CB that could be increased in size by a further HK$775m. It offered to pay a coupon of 1% and a yield-to-put of 2%. The conversion premium was marketed at a range of 25%–30% over a reference price to be fixed through a concurrent top-up placement.
The top-up placement comprised an offer of 178m shares from vendor Wide Smart Holdings that priced at a 7.9% discount to the July 21 close following a 6.5% gain in the previous two days.
The response to the CB was overwhelming with the book quickly building to more than US$1bn. The conversion premium was set at 30% over the price of the top-up placement. The bonds also traded easily above par in the grey, reaching about 102 in a market where most recent new CBs have traded under water after pricing.
Holding its own
As was the case across the industry, Morgan Stanley’s structured equity team struggled to maintain relevance amid historically low interest rates that were a hallmark of the year in the US. Large corporate issuers frequently turned to fixed-income solutions to meet their financing needs rather than seek to reduce an already low coupon by offering up their equity.
“Interest rates were so low for investment grade companies,” said Rizvan Dhalla, head of convertible bond origination for the Americas. “Even most sub-investment grade companies were able to achieve attractive terms in the high-yield market, and many didn’t like their stock price.”
Through the year ended November 15, overall equity-linked volumes in the US came in at just US$32bn, which, while up from US$28.6bn the previous year is far below the US$94.6bn issued in 2007. US investment-grade and high-yield issuance, by way of comparison, totalled US$736.1bn and US$252.7bn, respectively. With investment grade companies unlikely to turn to the convertible bond market to reduce funding costs, non-rated high-growth companies such as Cubist Pharmaceuticals and Ciena illustrated alternative benefits of the CB market.
In the case of Cubist, the pharmaceuticals company was able to take advantage of volatility stemming from a patent infringement case on one of its lead drugs to raise US$400m from the sale of a seven-year CB in October. Morgan Stanley, which was joined on the deal by Goldman Sachs, was able to increase the deal size to US$400m from US$250m at launch, by convincing some holders of Cubist’s 2.25% 2013 CB to switch into the new longer-dated, more equity-sensitive CB.
The growing influence of technical, arbitrage investors late in the year was evident in the pricing of Cubist’s CB at a 2.5% coupon and 25% conversion premium, the mid-point of guidance. Timing during uncertainty over the patent case allowed the company to price with an implied vol of 27, the top end of historic levels, thanks to listed options at the time implying a mid-30s vol level.
The ability to term out borrowings by buying in near-term obligations through the sale of a longer-dated CB was a common theme. Telecoms-equipment provider Ciena, a serial issuer, used a portion of the proceeds from its upsized sale of a US$320m eight-year CBs in October to repurchase US$76.4m of its outstanding bonds at 93% of par, extending those maturities by five years and booking a small profit.
SanDisk was among the first companies to refinance an existing bond in conjunction with a new issue as it brought its US$500m, seven-year CB in August. The offer priced with a 1.5% coupon and 25% conversion premium, the mid-point of price talk.
In addition to repurchasing its existing 1% CB due 2013, the flash-memory manufacturer used additional proceeds to enter into a call-spread overlay to offset economic dilution to a 75% conversion premium, engineering high-yield like economics through the CB structure.
Stephen Lacey, Shankar Ramakrishnan, Owen Wild
