Lighting the way
With bond markets in turmoil in 2022, issuers leaned towards the banks that could minimise the cost of funding and strengthen their balance sheets. For offering innovative ways to tap new investor pools and its breadth of coverage across financial institutions, Morgan Stanley is IFR’s North America Financial Bond House of the Year.
As one of the biggest investment banks in the world, Morgan Stanley’s bankers like to trumpet its ability to give leading advice. In 2022, they showed that in spades, bringing together expertise from different parts of the bank to assist with clients’ funding needs.
That expertise was on full display with the bank’s business in the so-called “baby bond” market, where bonds are bought in US$25 increments by retail investors, and an area where Morgan Stanley’s wealth management division gave the bank a deep understanding of the sector.
Institutional investors had historically eschewed the US$25 par market because the coupons are often fixed for life. But in a liquidity challenged year, deep-pocketed money managers found the market’s robustness attractive.
“We saw some of the biggest preferred investors actually change their buying preferences to this US$25 par market – that was completely different from past behaviour,” said Teddy Hodgson, Morgan Stanley’s co-head of global fixed-income syndicate.
In one impressive showing, Morgan Stanley led a two-part perpetual preferred stock offering for insurer Lincoln National in November. By splitting the US$1bn issuance into a resettable bond in the US$1,000 par format and a fixed-for-life instrument in a US$25 par bond, Lincoln managed to achieve strong execution. The insurance company only paid 25bp extra to issue the US$25 par bond, even though the call option was worth much more.
Prudential, Public Storage and Kemper were among the other issuers for which Morgan Stanley led baby bond offerings.
Morgan Stanley also had a strong showing in its work for banks as they piled into the US dollar market to enhance their balance sheets.
“It was a pretty outstanding year when you think about historically how much issuance has come from the financials,” said Tammy Serbee, Morgan Stanley’s co-head of fixed-income capital markets for the Americas.
Though many were well-capitalised already, banks were eager to raise US dollars amid strong consumer spending, continued loan growth and worries that depositors could turn flighty. Financial borrowers were responsible for around 48% of US high-grade bond issuance in 2022, according to IFR data.
“I don't think we've experienced a year like this in funding, advisory and balance-sheet management for banks since 08–09,” said Howard Brocklehurst, Morgan Stanley’s co-head of financial institutions fixed-income capital markets.
The bank’s business with the largest US regional banks, usually not a big source of issuance, was one of its major achievements.
In 2022, this cohort of borrowers hit the bond market multiple times. Regional lenders needed to gear up for the prospect of TLAC-like capital rules being extended beyond the handful of global systemically important banks in the US following the appointment of Michael Barr as the US Federal Reserve’s vice-chair of supervision in July.
For the year, Morgan Stanley led all three transactions for Citizens, three bonds for KeyBank and four of the five offerings for US Bancorp.
Morgan Stanley’s breadth of coverage across the financials space extended beyond traditional lenders. Underwriting activity encompassed private equity, and financing subsidiaries for automakers too.
Blackstone, KKR, EQT and Ares were among the alternative asset managers and PE firms that turned to Morgan Stanley for their issuance needs.
Morgan Stanley also had a hand in the US$6bn unsecured bond offering connected to the Corebridge spin-off. The largest debut offering by a financial services company, the notes booked an average cost of capital below 4% off an order book that was over four times covered.
That impressive pricing was achieved in a year where the Fed and other global central banks pulled back from their ultra-accommodative monetary policies, raising costs to issue all bank capital instruments whether they were senior or subordinated notes.
In the end, the innovation, breadth of coverage and strength of advice led to a strong year for Morgan Stanley’s FIG business, an area where underwriters could not lean on existing lending relationships to obtain mandates. “These are the issuers who get to choose who they want to work with,” said Serbee. “So we’re really proud of that.”
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