North America Financial Bond House: Morgan Stanley

IFR Awards 2019
4 min read
William Hoffman

Regional road trip

In a year where FIG issuance was down, Morgan Stanley adapted to broaden its efforts among regional banks and insurance companies while also emerging as one of the leaders in the transition away from Libor. For these efforts, Morgan Stanley is IFR’s North America Financial Bond House of the Year.

Knowing that US financial bond supply was bound to decline in 2019, Morgan Stanley sought out corners of the market where it could dominate and found a home in regional banks.

US dollar financial bond supply is down 13.4% in 2019 to US$528bn, according to IFR data, in large part because global systemically important banks had less of a need to issue total loss-absorbing capacity bonds.

But Morgan Stanley was ahead of the game, so much so that it was number one bookrunner for regional banks, capturing 21% of the market in a banner year for the sector.

Consolidation looms heavy over US regionals as SunTrust and BB&T are set to complete the largest US bank tie-up since the financial crisis in a deal valued at US$28bn in stock.

Morgan Stanley led four of BB&T’s five deals this year, including a US$1.7bn perpetual fixed-reset bond is IFR’s North America Financial Bond of the Year.

The transaction uses a Treasury back-end and BB&T was the first regional to issue in such a format, proving that it was a viable alternative for other banks that are still skittish about switching to the secured overnight financing rate but seeking an alternative to Libor.

Elsewhere in the regional bank space, Morgan Stanley led on four transactions for KeyBank, two for PNC, three for Citizens, three for Fifth Third Bank and all three of Capital One’s US dollar deals.

“We’re not a one-trick pony,” said Scott Ashby, co-head of US DCM at Morgan Stanley. “The magic of regional banks is it’s the one place you’re not competing on capital … it’s purely competition.”

Among those Capital One deals was a US$1.5bn perpetual non-call five US$25 par-preferred stock issuance that was a key transaction for this small sliver of the market.

It was the largest regional bank offering in this niche market and the fourth largest ever. By achieving a 5% dividend, it’s the lowest payment rate for a FIG issuer in the fixed-for-life preferred dividend space since the financial crisis.

In fact, Morgan Stanley also ranked number one among preferred stock underwriters and held a 45% market share in the US$25 par retail market.

The preferred space is often overlooked but it was particularly active this year as investors clamoured for higher yielding, safe bank paper amid negative interest rates and fears of industrial corporate downgrades.

It is the bank’s dominance in the retail preferred market that helped it place a private placement deal for Ford Motor Credit a day after the issuer was downgraded into high-yield territory by Moody’s. The bank also led five other senior note deals for the embattled auto lender.

As an issuer, Morgan Stanley proved a leader in the transition away from Libor by pricing a US$750m three-year non-call two floater in June referenced the secured overnight financing rate at the largest size in the longest tenor banks were willing to issue this year.

The bond adopted a compounding interest rate and introduced a format for calculating dividend payments that has quickly become the standard among other SOFR-linked notes.

It is the same format Morgan Stanley used to price a July US$2bn six-year non-call five, which was the first to reference SOFR in the backend of a fixed-to-floating bond.

State Street also adopted the format when Morgan Stanley helped it to issue the first fixed-to-floating subordinated note linked to SOFR – a 3.031% US$500m 15-year non-call 10 that priced at 70bp over Treasuries with a SOFR plus 149bp floating backend spread.

The lack of issuance from banks brought the insurance sector into greater focus, where Morgan Stanley led deals for Prudential, AIA, The Hartford, MetLife, New York Life, Principal, Guardian and Jackson.

Most impressively, the bank helped Northwestern Mutual upsize its 40-year note to US$600m while achieving a 3.625% coupon.

Other banks held higher positions in the league tables, but Morgan Stanley stood out as an innovator in the sectors that mattered most to the financial space this year.

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