Navigator for all seasons
In a year of blockbuster deals from exchanges, data providers, payments firms and lenders, one bank stood above the rest in providing trusted advice, offering liquidity and helping FIG clients navigate the pandemic. Morgan Stanley is IFR’s Bank of the Year for Financial Institutions.
Winning the role to advise on the complex, multi-year and politically charged restructuring and recapitalisation of US mortgage giant Fannie Mae may have added to the workload for bankers already in the middle of a pandemic, but it marked a high point for Morgan Stanley’s FIG team in 2020.
“One of the more interesting and hotly contested things that we won was the capital adviser to Fannie Mae … we competed against all our competitors and delivered the whole firm,” said John Esposito, head of financial institutions for Morgan Stanley.
The mandate will involve developing and implementing a plan to recapitalise the government-sponsored enterprise, including potentially raising US$50bn or more of common stock and US$30bn of preferred stock; navigating the impact on the housing and mortgage-backed securitisation markets; and unwinding more than a decade in conservatorship since Fannie was rescued in September 2008.
In short, the lead adviser will have to keep Wall Street, Capitol Hill, regulators and homeowners happy. And the Covid-19 crisis complicated the task by introducing a forbearance programme for borrowers and creating deep economic uncertainty.
“It's both equity and fixed income capital markets. And there are a lot of banking judgments around what are the appropriate returns and what should they target and how do they think about it,” Esposito said.
Fannie said Morgan Stanley was picked as sole underwriting financial adviser “for its demonstrable qualifications and expertise in managing such complex matters”.
That mandate will be a work in progress for years to come, but during a turbulent 2020 for markets and financial firms, Morgan Stanley was on a raft of landmark deals that delivered more immediate rewards.
Among banks and insurers, it advised PNC Financial on the US$13.3bn sale of its stake in BlackRock; Intesa Sanpaolo on its €4.2bn purchase of UBI Banca in Italy; Bangkok Bank on its US$3bn purchase of Permata Bank in Indonesia; and RenaissanceRe on its US$1bn capital raising in June.
There was even more action in the exchanges, market infrastructure and payments space, and the bank advised on the €2.8bn sale of Madrid stock market BME to Swiss rival SIX; Worldline’s €9.9bn purchase of payments provider Ingenico; the US$27bn purchase of Refinitiv (which owns IFR) by London Stock Exchange Group; and the US$44bn deal for IHS Markit by S&P Global.
Defence to attack
When Covid-19 spread rapidly in March, markets and financial firms were rattled. It stoked concerns about a repeat of the capital and liquidity crisis of 12 years earlier, especially after commercial clients drew heavily on lines of credit from banks.
“There was a several-week period where it was very unsettling for many of the clients and they wanted to talk,” Esposito said. He said Morgan Stanley stood out for clients in those early days, providing liquidity and working with many to raise debt and equity to shore up balance sheets.
But it was not all defensive work, and some clients wanted to take advantage at a time of uncertainty and dislocation. PNC decided to sell its stake in asset manager BlackRock in May and Morgan Stanley led one of the biggest share placements in recent years as lead-left bookrunner and stabilisation agent.
“They had a view at that point in time that the world was very uncertain, credit could get worse, and part of that was building a fortress balance sheet to then go and do an acquisition,” Esposito said. “It was sort of defensive upfront, but it was going to be used for offensive purposes once there was more clarity, which is exactly what they did.”
Shortly after, Bermuda-based reinsurance company RenaissanceRe also wanted to sidestep concerns about the impact of Covid-19 on the industry and take advantage of a repricing in the market. Morgan Stanley was lead-left bookrunner and stabilisation agent for its US$1bn fundraising at the start of June.
“We helped RenaissanceRe raise US$1bn, really for what I would I call the first offensive capital raising in the [insurance] marketplace. And that's a good example of finding the opportunity out of the pandemic,” said Eric Bischof, chairman of Morgan Stanley’s financial institutions group.
More stability allowed four insurance technology firms to come to market – Root, GoHealth, SelectQuote and Lemonade – and Morgan Stanley was involved on each deal.
SelectQuote started the ball rolling in April with a US$135m private placement, followed by a US$656m IPO a month later, the first IPO outside the biotech sector since the pandemic erupted. That lay a path, and in October Morgan Stanley was joint lead bookrunner and stabilisation agent for Root’s US$1.2bn IPO, which included a US$500m private placement.
“These IPOs effectively established the insuretech public marketplace in the US and created benchmarks for others to follow,” said Gavin McFarland, the bank’s head of FIG for North America.
Elsewhere, Brazilian financial services start-up XP’s US$2bn US IPO in December 2019 marked the biggest Brazilian listing since 2012. Morgan Stanley was a global coordinator, and the bank took on a bigger role with a pair of follow-ons, in July and December.
Remote due diligence
The crisis also forced a change in the way deals were conducted for Morgan Stanley’s team of about 160 dedicated FIG bankers, which includes about 70 in New York, 50 in London and most of the remaining 40 in Hong Kong and Tokyo.
Suddenly, travel was barred and deals had to be done remotely, often from kitchens or newly established remote offices. The new way of dealmaking changed quickly – roadshows were often shorter, but more intense – and bankers were learning as they went along.
“I have been amazed at how willing people are to do things virtually, whether that's a roadshow, or whether that's conducting M&A due diligence on a target entirely virtually. It has really been a massive change in the way things get done,” Esposito said.
It allowed deals to continue to flow. Morgan Stanley was sole financial adviser to Bangkok Bank on its purchase of Permata Bank in Indonesia in May, one of the biggest ever cross-border bank deals in Asia, and followed with roles advising BME on its takeover by European rival SIX and Worldline on its purchase of Ingenico in October, creating the world’s fourth biggest payments outfit.
There was also continuous work advising banks on the impact of low interest rates on profitability and the need for continuous restructuring – clients included NatWest, which needed help restructuring its investment bank.
The complex work of selling non-performing loans and other assets dragging on returns has long been an area of strength for Morgan Stanley and in 2020 it worked on big balance sheet clean-up deals from Bank of Cyprus, Allianz, Lone Star, Citizens Bank, First National Bank and others.
There were also a handful of deals that may have required less effort to win – but which possibly created extra internal pressure. Morgan Stanley itself made two of the biggest acquisitions of the year: the US$13bn takeover of E*Trade and the US$7bn purchase of asset manager Eaton Vance (which is still awaiting completion).
And it worked on a number of deals for its partner in Japan – Mitsubishi UFJ Financial Group. Those included a US$706m investment in South-East Asia ride hailing company Grab; a A$451m (US$335m) divestment of its stake in Australian investment manager AMP Capital; four issuances of TLAC-eligible bonds; and a green, social and sustainability bond in May.
But 2020 has not all been plain sailing. Morgan Stanley may have been sole financial adviser to First Horizon on its US$9bn merger with IberiaBank in July, but it missed out on a role advising PNC on a bigger US regional deal, the US$11.6bn purchase of BBVA’s US banking business.
And the dramatic cancellation of Ant Financial’s planned US$37bn IPO in November was a shock to investors, analysts and the many advisers on the deal – including Morgan Stanley, which has long been one of the closest advisers to the Chinese company.
Nonetheless, the bank’s FIG pipeline remains strong. Bank industry consolidation is expected to pick up pace in 2021, and in exchanges and market infrastructure, Morgan Stanley is advising LSEG and IHS Markit on their mega-deals expected to complete in 2021.
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