Americas Structured Equity House: Morgan Stanley

IFR Awards 2018
5 min read
Stephen Lacey

Americas Structured Equity House 2018

When David Oakes was shaken out of a deep sleep as others were disembarking from a New York to San Francisco flight, the experience was not a new one. As the head of tech convertible bond origination for Morgan Stanley, Oakes had grown accustomed to sleeping the five-hour transcontinental commute to the West Coast – and he deserved the rest.

Of the remarkable 32 US tech companies that sold convertible bonds during the consideration period, Morgan Stanley was a bookrunner for 19, giving it a 24.1% share of that business apportioned across all bookrunners and earning it US$75.8m of underwriting fees, according to Refinitiv data.

Splunk, the San Francisco-based data miner that Morgan Stanley helped take public in 2012, was among those clients that returned to the bank – with a mammoth US$2.1bn, two-part CB issue in September, the largest financing of the year on a combined basis and the biggest by a tech company since 2014.

The opportunistic financing was typical of tech deals through the year.

Splunk wound up paying a coupon of just 0.5% annually on the US$1.265bn five-year tranche and 1.125% on the US$862.5m seven-year, with conversion at a 27.5% premium. The advice to split maturities contributed to an upsize from US$1.7bn at launch to US$1.85bn, with greenshoes extending the offering size to US$2.1bn. Splunk spent a portion of the proceeds raised on a capped call to offset stock dilution to a 100% premium to the reference price.

“Technology companies are ideal candidates for convertibles,” said Serkan Savasoglu, head of equity solutions for the Americas. “Not very asset-heavy, volatile, good growth, investor familiarity, and there are a lot of comps that allow for efficient pricing. [They] look at converts as cheap debt.”

Of the 31 companies that issued vanilla CBs via Morgan Stanley during the consideration period, 20 incorporated a derivative to elevate dilution. And while Morgan Stanley was not counterparty on all – it was not on Splunk, for example – such derivatives are a significant source of revenue.

DocuSign benefited from that expertise on a two-part, US$1bn sale of stock and convertible debt in September, just five months after the e-signature pioneer’s IPO. Issuing a CB within lock-up had never been done before, given constraints on borrow from a limited free-float and lock-ups.

Morgan Stanley, lead-left on the IPO, worked to ease the situation, in part through allowing some shareholders to break the lock-up with a 8.06m share simultaneous secondary offering. A large chunk of stock would also be released from lock-up the following month.

Pricing on a US$575m five-year CB issue came at a 0.5% coupon and 30% conversion premium, with the capped call offsetting dilution to share prices above US$110, double the US$55 reference price from the secondary stock sale and US$29 of the IPO.

Mandatory convertibles were significant ballast to large acquisitions throughout the year as well as to accelerate exits.

In January, Sempra Energy secured US$4.6bn from the concurrent sale of an MCB (US$1.725bn) and common stock (US$2.875bn) offering to pre-fund its US$9.45bn purchase of Texas utility Oncor; in May, France’s Axa accelerated the disposal of Axa Equitable, its US annuities business, by adding a US$862.5m MCB issue to the unit’s US$2.7bn IPO; and, in September, International Flavors & Fragrances primed a broader M&A funding package with a US$2.45bn combo sale of equity (US$1.65bn) and MCB (US$825m) that helped fund a US$7bn acquisition.

Morgan Stanley not only advised Sempra and IFF on their acquisitions but was bookrunner on each piece of the financing used to fund the purchases. The bank was a bookrunner on seven of the nine MCBs completed by US companies during the year, according to IFR data.

While some see a need to sell stock, others want to buy it back. Union Pacific turned to the bank as one of two counterparties in June to execute a US$3.6bn accelerated share repurchase. Morgan Stanley was also one of three counterparties on Qualcomm’s US$16bn ASR in September, 15% of the chipmaker’s market cap at the time and the largest-ever ASR.

Morgan Stanley’s Americas equity-linked business saw it earn bookrunner credit of US$7.3bn for 41 companies, the highest of any bank by both volume and number. That was good for a 17.8% share, a 540bp gain year-on-year, and a US$161m haul of fees.

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Americas Structured Equity House: Morgan Stanley