Silly point

IFR 2484 - 20 May 2023 - 26 May 2023
9 min read

Morgan Stanley CEO James Gorman explicitly told everyone in 2014 that he would be leaving in mid-2024. So why didn’t anyone listen? And why did Morgan Stanley shares fall on Friday when he said he’ll be leaving in the next year? Because investors and analysts don’t follow cricket, and didn’t understand.

Here’s what happened. And OK, maybe it wasn’t “explicit”.

In October 2014, an analyst asked Gorman to estimate, using sports terms, where Morgan Stanley was in executing its strategy, and how long he was likely to stay? So Gorman, who can be blunt and also mischievous – he is after all an Australian – said the bank was "at the afternoon tea session on day two of a five-day test match" in executing strategy.

That flummoxed US reporters and bank analysts. A lot of the analysts thought he meant they were half-way through. But as all cricket experts know, Gorman estimated the bank was one-third through. A five-day cricket match has 15 sessions, and tea on day two is taken after five. Simple.

Given Gorman started in January 2010, if October 2014 was the one-third point, he was expecting the strategy to be executed – and time for him to go – halfway through 2024.

That’s what looks like happening. IFR always knew it was coming. Investors, analysts and reporters could have saved themselves a lot of speculation by following the glorious game just a bit more closely.

Absent members

There is rarely a dull moment in the credit default swap market.

That truism has certainly been proved emphatically over the past week as the Credit Derivatives Determinations Committee has convened several times to discuss two separate queries on whether or not Credit Suisse CDS have triggered.

New and controversial CDS questions will always be worth following – that’s part of the reason why the US$10trn credit derivatives market is such fun to write about. But while most traders have considered these particular CDS trigger questions as long shots at best, they would do well to pay close attention to important shifts in how the committee that decides these matters is operating.

The 11 votes cast against the first Credit Suisse CDS trigger question on Wednesday set a new low for the number of committee members ruling on a major credit event – and was a far cry from the 15 votes for which the mechanism was originally designed.

The truth is the committee’s membership has been on a downward trajectory for some time now. Societe Generale’s departure in 2019 left it one short of the 10 dealer members it is supposed to have, and with Cyrus Capital Partners leaving last year and AllianceBernstein dropping out in April, the number of investment firms fell from the mandated five to just three.

There’s good reason to believe Credit Suisse will follow them out the door despite the Swiss lender recently signing up for another term. UBS left the committee a number of years ago after scaling back in CDS trading and it's hard to see why it would rejoin after acquiring Credit Suisse, especially considering that it also hacked back its credit trading division last year.

The committee’s design aims to prevent market manipulation, while forging a broad consensus among its members. The number of firms on the committee, the balance between banks and investors, as well as the threshold needed for decisions to carry, are all important safeguards. Change the make-up of the panel and the rules must also change if these mechanisms are to remain effective.

The CDS market has no shortage of critics. If it wants to keep them at bay, the committee needs to attract new members or adjust the rules to reflect the new reality – and it needs to do so quickly.

Squabbling over SLBs

The green bond market took about seven years to travel from inception to a codified set of principles. Its sustainability-linked cousin made the same journey in 10 months.

Moreover, it did so not as a comprehensible label grafted on to a functioning bond market, but as a novel instrument ported over from the loan sector.

So it’s hardly surprising that criticism is rife in SLB land – both of the product and of individual issuers’ approaches.

Campaigners point to issues around materiality and the ambition of deals’ sustainability performance targets. Another area of friction is the suitability of the standard 25bp step-up and whether issuers are seeking to avoid step-ups by arbitraging different ways of measuring their carbon footprints.

Now companies are starting to push back against the critics. They’re right to do so. Not because the campaigners are necessarily wrong (though some NGOs clearly understand financial, operational and economic realities better than others) but because the product is still so immature.

This leaves many questions open to interpretation and means that reasonable people can disagree about contentious and still unanswerable questions around the future emissions impact of developing technologies – carbon capture and storage or sustainable aviation fuel, say. As a result, companies and critics may both be wholly sincere in their differing stances.

Ultimately, it’s up to investors to kick the tyres on the arguments and the structures – and to deploy capital in the most robust and credible way possible.

The result can only be to support the strongest version (one that incorporates science-based targets, for example) of an instrument that will surely play a pivotal role in financing transition.

Marriage of convenience

Companies in Asia struggling to launch IPOs in weak markets are pairing up with blank-cheque companies facing tight deadlines to complete mergers. But it’s not clear that the deals are creating much value.

Vietnamese electric car maker VinFast will merge with Black Spade Acquisition Co, an NYSE-listed SPAC created by Lawrence Ho’s private investment arm. Ho heads casino operator Melco, which has resorts in Macau and the Philippines, and the SPAC had indicated before its IPO that it intended to make acquisitions in the entertainment industry.

Meanwhile, Chinese podcast and online radio company Ximalaya will combine with Hong Kong-listed Vision Deal HK Acquisition Corp, which raised money on the premise that it would target companies engaged in smart car technologies or cross-border e-commerce.

The companies seem to have little connection with the industries the two SPACs intended to target – in fact, it would have been more logical for Black Spade to combine with Ximalaya and Vision Deal to merge with VinFast – suggesting that the two companies weren’t attracted by the SPAC managers’ specific industry expertise.

Key to the two deals is the ability to achieve combinations at the companies’ target valuations and to list on their preferred venues.

As for the SPACs, they need to complete a deal by a set deadline or return investors’ cash. Black Spade was listed in July 2021, giving it until July this year to identify a suitable business combination or wind up.

Vision Deal is weighing up a US$100m PIPE for the Ximalaya merger, but notably Black Spade has not mentioned any fundraising plan for the VinFast transaction, even though the EV maker had been hoping to raise US$1bn from an IPO this year. In the short term, VinFast is drawing on funds from its parent company to fund its growth plans.

While the SPAC transaction will help get VinFast listed, the test will come when it launches a primary equity offering. At that point, it will find out whether its US$23bn valuation – in a market in which plenty of EV makers are seeing their stocks plunge – is realistic. It will face the same challenge winning over investors as it would have done through an IPO.

The difficulty in bringing IPOs at companies’ desired valuations, coupled with the huge number of SPACs that hit the US market in 2021 and need to merge with something to justify their existence, means that there are likely to be more marriages of convenience this year – in Asia and further afield. But listing alone shouldn’t be the end goal.

If companies can’t raise equity and no one is trading their stock, what’s the point of being listed?