North America Financial Bond House: Morgan Stanley

IFR Review of the Year 2016
5 min read

When bankers all across Wall Street were preparing for their August holidays, Leo Civitillo sat his team down at Morgan Stanley and delivered the news: no beach time for them.

“I told them August was not a month to take off,” said Civitillo, the bank’s global co-head of fixed income capital markets. “I said this year is going to be different. We are going to run through August – and we are going to print deals.”

A sharp rise in Libor rates due to money market reforms was making short-term commercial paper funding more expensive for many foreign banks. Yet at the same time, a rally in 3/5 year spreads and a negative basis swap between US dollars and most major currencies meant banks could extend that short-term debt at cheaper rates.

“It was this perfect storm,” said US syndicate head Teddy Hodgson. “The term markets were open in big size with great pricing, while the front end was constrained in size with relatively crummy pricing.”

Hodgson and US FIG DCM head Scott Ashby visited issuers in North America, Europe and Asia to alert them of the opportunity, while warning investors back home of the incoming supply.

“We started to get some mandates and it built upon itself to the point where we had so many deals we knew were coming in September,” said Hodgson. “Our pitch to issuers became: ‘you need us to help guide you through this market’.”

After kicking off with a US$1.5bn five-year deal from Santander on August 2, Morgan Stanley led eight senior Yankee bank trades over the month, mostly in tenors of two to five years.

“It was about having the confidence that … when banks were seeing real pressure in one and two-year funding, a three-year was going to be a home run,” said Ashby.

The pricing benefits were substantial. A US$1bn two-year issued by Bank of Montreal, for example, was priced at Treasuries plus 60bp. That was swapped to 36bp over Libor, or 14bp inside the Libor spread the bank would have paid for one-year CP funding.

The summer Yankee spree was just one example of Morgan Stanley’s leadership in FIG throughout the year.

Over the awards period, Morgan Stanley was on 191 US dollar-denominated FIG deals totaling US$62.7bn, giving it a market share of 7.4%, according to Thomson Reuters data.

It sourced two large reverse inquiries for Lloyds Banking Group’s debut holding company bond, driving the US$1bn deal, which was priced the week after the Brexit vote on June 23.

It was the first transaction from a European lender after the vote and helped reopen the capital markets following a post-referendum sell-off.

The bank also led MUFG’s US$5bn senior deal in February, the largest-ever US dollar debt offering from a Japanese issuer, as well as Australia & New Zealand Bank’s US$1bn Additional Tier 1 in June – the first Basel III-compliant AT1 from the region.

But while Yankee issuers seemed to have Morgan Stanley on speed dial this year, that doesn’t mean the bank neglected its domestic clients.

The team’s dedication to long-standing business within the US showed in preferred securities, where it rode a wave of demand from both retail and institutional investors.

“We go into every preferreds trade debating whether to do retail or institutional,” said Ashby. “We run parallel paths on the documentation to put ourselves in a position to take the right path on the right day.”

The bank led two out of the three tightest-pricing preferred stock deals ever, for Bank of New York Mellon in July (a coupon of 4.625%) and Northern Trust Corp in August (a 4.6% coupon).

Morgan Stanley was also the only US bond house to price a US dollar callable senior bond for another US bank.

It led a US$1.25bn seven-year non-call six trade for Bank of New York Mellon in late October, alongside Barclays, Deutsche Bank, UBS and BNY Mellon’s own syndicate.

The bank’s strength in distribution often meant it could punch above its weight for clients across the globe, even against competitors with bigger balance sheets, said Ashby.

“We’re as proud of our domestic franchise as we are of our Yankee franchise,” he said. “They way we look at this space, it is less balance sheet-intensive. This is a space where distribution matters.”

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North America Financial Bond House: Morgan Stanley