North America High-Yield Bond House: Morgan Stanley

IFR Review of the Year 2014
5 min read
Natalie Harrison

For leading complex acquisition financings, winning market share with innovative ideas and having the right read on conditions to guide clients through some of the toughest periods, Morgan Stanley is IFR’s North America High-Yield Bond House of the Year.

In a year that saw corporate M&A finally make a long-awaited comeback, Morgan Stanley shone. It was lead-left on six of the 25 largest event financings of 2014 and was a bookrunner on 16 of them – more than any other bank.

The firm built on that success with lead positions on large refinancings, grabbing a 4% market share and leaping five spots – up to third place – in IFR league tables ranked by lead-left positions.

Crucially, it got good results for some of its biggest clients in volatile periods following massive outflows from the high-yield asset class over the summer.

“We did three of the largest deals of the year in the toughest period, starting with Zebra Technologies, then with a first-time issue for Consolidated Energy and finishing with Dynegy,” said Jim Bonetti, Morgan Stanley’s head of US leveraged finance syndicate. “Those deals were a primary component of reopening the high-yield market.”

Consolidated Energy had been trying to take full ownership of Trinidad company Methanol Holdings for the past four years, and its US$1.25bn two-tranche bond financed the purchase of the 56.56% stake it didn’t already own.

It was a debut issue and spreads widened out as Morgan Stanley, as sole lead, was marketing the deal. Nevertheless the fixed-rate tranche was priced in line with 7% price talk.

Dynegy’s US$5.1bn deal – the largest domestic US dollar bond of the year – also hit markets as plunging oil prices were weighing heavily on energy-related bonds.

The transformational deal came in October and was priced wider than where the issuer had hoped in August – when it announced the purchase of assets from Duke and Energy Capital Partners – but the 6% and 7% handles across the three tranches impressed.

“Dynegy wanted to de-risk, so that all it needed to worry about was closing the deals and integrating the businesses,” said Dan Toscano, head of the leveraged and acquisition finance group at Morgan Stanley. “Failure wasn’t an option.”

Other banks were involved, but Morgan Stanley was the thought-leader on the transaction from start to finish. It also signed the biggest cheque of all five on the US$7.3bn underwriting commitment.

The major hurdle for the company, which had only emerged from bankruptcy two years ago, was how to finance not one, but two deals.

Morgan Stanley came up with the solution: placing the proceeds from the triple-tranche bond deal into two separate escrow accounts, allowing for every possible outcome on the M&A front and ensure the bonds did not trade differently.

Calpine was another previously bankrupt power company to turn to the firm, pricing a US$2.85bn issue deal in July – its first unsecured bond since emerging from bankruptcy in 2008.

Other highlights were a US$1.8bn unsecured deal for Forest Laboratories that financed the acquisition of Aptalis, for which Morgan Stanley provided a 100% bridge financing. The bond turned out to be one of the best buys of the year, and its price soared when investment-grade rated Actavis said it was buying the company.

In a market awash with refinancings, the firm created neat solutions.

It timed the market just right for TransDigm, leading a US$2.35bn senior subordinated bond issue in April that financed a US$1.6bn dividend to shareholders. The 6% eight-year and 6.5% 10-year were the lowest coupons on Triple C rated paper in those maturities since the credit crisis.

Morgan Stanley won the lead-left position on a US$1.5bn floating-rate note offering for natural gas giant Chesapeake – the largest of its kind since 2006. The FRN was priced cheaper than where a secured term loan would have come.

“People were asking if anyone would take a lower yield to be lower down the capital structure. It hadn’t been done,” said Toscano. “But this was a good proxy for the paper that short duration funds wanted to own.”

The bank also helped pull off a unique US$405m PIK toggle note issue for investment firm Fortress in June that financed a new Florida passenger railway service. The deal was priced in line with price talk at par, with a 12% coupon and 12.75% PIK – no mean feat for a payment-in-kind, project finance bond. The market had been waiting to see if such a deal could get done. Morgan Stanley made it happen.

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Leading position
North America High-Yield Bond House 2014