With rivals feeling the heat from falling fees and local competition, one bank excelled at serving both global and local clients, delivering growth capital where it was most needed. For its read of shifting market dynamics and its dominance of equity underwriting, Morgan Stanley is IFR Asia’s Bank of the Year.
Morgan Stanley was the clear leader in Asian investment banking in 2016, increasing its market share at a time when others were scaling back.
The US bank dominated equity underwriting and chalked up its best performance across Asian investment banking for years, even in a period when overall volumes contracted and local competitors took a bigger slice of the pie.
It played a leading role on key deals out of China, including high-profile IPOs and outbound acquisitions – advising either the overseas target or mainland buyer. It led US equity placements, convertible bonds and major block trades, putting it streets ahead of other global arrangers on the China equity tables.
China was the undeniable focus, but Morgan Stanley also impressed across the region. It had a strong year in India, with mandates in all asset classes, and more than held its own in South-East Asia and Australia despite a relatively small team.
The bank’s haul of deals showed that the bulge-bracket model can still pay dividends even in a competitive Asian arena, but also required careful focus.
“2016 has been an extraordinary year for us. It’s the one region that has been dramatically up on last year,” said Dieter Turowski, co-head of investment banking for Asia Pacific. “It’s not that markets have been great here, but through increases in wallet share we’ve been able to produce a great result.”
Morgan Stanley’s share of equity underwriting was especially impressive. It topped the league tables for the 12 months under review, with a 6.7% share of equity and equity-related offerings in Asia Pacific, including Australia but not Japan.
Excluding A-shares, it handled 10.7% of all equity placements, more than five percentage points above its nearest competitor. Impressively, that was up from a 9.4% market share the previous year – in contrast to most other houses.
In many cases, it was longstanding relationships that made it Morgan Stanley’s year.
It handled two sole-led block trades in Hong Kong-listed WH Group, raising a combined HK$13bn (US$1.67bn) for Chinese private equity firm CDH and holding on to a relationship that pre-dated the pork producer’s 2014 IPO.
Two block trades in Nasdaq-listed China Biologic Products for Warburg Pincus followed a similar formula, fetching a total of US$785m.
It was one of only two bookrunners to help US insurer AIG raise HK$9.68bn from the sale of part of its stake in PICC Property & Casualty in April, and again one of two leads when Japan’s SoftBank monetised a US$10bn stake in Alibaba, split between a US$3.4bn block trade and a US$6.6bn mandatory exchangeable bond.
“We focused well on the big elephant block trades,” said Shane Zhang, co-head of investment banking for Asia Pacific. “The TMT sector has been a big success.”
Those relationships allowed Morgan Stanley to avoid competitive bidding situations and retain its pricing power. But Turowski rejects the suggestion the bank was lucky that its clients happened to be in the market in 2016.
“Success begets success,” he said. “Once you’re in the flow and blocks are doing well, it becomes a machine and that is hard to replicate.”
“It’s not just us being lucky that our big clients are doing things; it’s also being very agile.”
The ECM year was not just about blocks. Major new issuers also trusted Morgan Stanley with their IPOs, including Postal Savings Bank of China, Bank of China Aviation and ZTO Express, and it had a strong year on follow-on offerings for the likes of US-listed Ctrip.
Rivals carped that it was too focused on China, but it was clear that the strategy paid off as Chinese capital flows dominated the Asian capital markets.
“We reoriented people on the deals where there was greater money, and focused on the themes where we thought we were likely to make more money, like China outbound M&A and the revenue associated with that,” said Turowski.
Beyond China
The criticism is not entirely fair, either. Morgan Stanley stayed active in South-East Asia, underwriting a critical rights issue for Singapore-listed Noble Group when other banks were retreating and leading the S$902m (US$669m) IPO of Frasers Logistics Trust, the region’s biggest listing of the year.
It also continued its climb up the Australian IPO tables, making the most of a retail presence it acquired with the purchase of Smith Barney in two stages in 2009 and 2013. Morgan Stanley worked on the Australian IPO of software firm Atlassian and the A$1bn rights issue for highway operator Transurban early in the review period, as well as the IPO of private equity-backed Inghams in November.
In India, it scooped a high-profile government mandate as the only foreign bank chosen to help place US$8bn–$9bn of shares for the Specified Undertaking of the Unit Trust of India.
India yielded some lucrative debt deals, too, such as a pair of US dollar high-yield bonds for the Birla group’s Novelis unit, and the bank’s first mandate from renewable power producer Greenko.
Morgan Stanley’s lean debt capital markets team continued to pick its spots carefully, focusing on big, international deals for its key clients – the “truffles” of the fixed-income market, in Turowski’s words – rather than fighting for a share of the crowded offshore Chinese market. It finished the review period a respectable fifth in the Asia Pacific G3 tables.
It had an especially strong year in Australia, running senior debt offerings for all four major banks, including Westpac’s US$5bn benchmark, the largest from the country since 2006. It also arranged ANZ’s US$1.3bn Additional Tier 1 capital raising, the first offshore AT1 issue from an Australian major under Basel III rules.
Its list of bond mandates included trades for the likes of CK Hutchison, Export-Import Bank of Korea, China Orient Asset Management and Shinhan Bank. Morgan Stanley also led the way among foreign banks in Taiwan’s US dollar Formosa market.
The bank’s partnership with Mitsubishi UFJ Financial Group, its biggest shareholder with a 23% stake, helped drive business in markets such as India and Australia, where the Japanese lender was able to introduce potential capital markets clients to the US firm.
M&A, lending
Morgan Stanley has benefited from a stable team of senior bankers in recent years. It took some difficult decisions in the wake of the financial crisis, and last reshaped its Asian management in 2013, installing Turowski and Zhang as co-heads of investment banking. Gokul Laroia, a former head of the division, is now regional co-CEO alongside Wei Christianson.
Since 2013, the bank has streamlined its coverage teams and shifted most of its China bankers to a sector approach, where they are incentivised for their work on global deals as well as for their work with local clients. That was especially useful in 2016, a record year for outbound Chinese investments.
“We saw this coming two or three years ago,” said Zhang. “We really leverage our capabilities here and feed that into our global network.”
Morgan Stanley, for instance, was able to target Chinese buyers as sellside adviser on the sale of Energy from Waste (EEW), which was eventually sold to Beijing Enterprises. It also positioned itself on the sellside for US tech firm Ingram Micro on its US$6bn sale to Chinese conglomerate HNA Group in February, and represented Finland’s Supercell on its acquisition by Tencent in June.
“China M&A and the financing associated with that has become a much bigger part of our revenue stream. Having that alignment was really helpful, in terms of talking to both global colleagues and to Chinese buyers,” said Zhang.
It was also sole financial adviser to home appliance maker Midea Group on its offer for German factory robot maker Kuka in May, providing a commitment for €4bn of bridge debt to support Midea’s bid. That loan was quickly replaced with a facility from a Chinese bank.
While it did not compete with Chinese lenders, the bank’s experience in Chinese dealmaking yielded some exciting financing opportunities. In October, Morgan Stanley and one other bank wrote a US$8.5bn loan for another unit of China’s HNA, funding the US$10bn acquisition of CIT Group’s aircraft leasing business.
That deal turned heads as other lenders were becoming wary over exposure to the rapidly expanding HNA, but was structured through Irish subsidiary Avolon Holdings and with recourse to the US target to provide comfort.
In a year when other investment banks were forced to rethink their business, Morgan Stanley reaffirmed the value of a successful Asian franchise.
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