Cleaning up
Only one bank can boast of having been the key adviser on the year’s biggest transactions from European banks, US insurers and Asian fintech firms. For its range of work on complex deals across all products and regions, Morgan Stanley is IFR’s Bank of the Year for Financial Institutions.
2017 will go down as the year when European banks finally cleaned up. Multi-billion euro rights issues from UniCredit, Deutsche Bank, Credit Suisse and Santander helped finance the rehabilitation, and sales of bad loan portfolios and non-core assets helped. And Morgan Stanley played a role in each of the deals.
Italy’s UniCredit set the tone for the year with a multi-headed strategic plan that included a €13bn rights issue, the disposal of €18bn of non-performing loans and the sale of its holdings in Polish bank Pekao, online unit Fineco and asset manager Pioneer.
Each component was crucial to the clean-up – and Morgan Stanley was there from the outset, with Jean Pierre Mustier tasking the bank with putting together a turnaround plan for UniCredit within hours of him taking the reins at Italy’s largest bank.
The plan to sell the bad loans, dubbed FINO – or failure is not an option – was a key part of the plan. Many banks had tried and failed to sell large bad loan portfolios before, and UniCredit’s deal was sealed just hours before the clean-up plan was unveiled. The shares jumped 16% after the announcement.
“The idea of a holistic solution whereby you raise equity, you cleanse the balance sheet and potentially get rid of any non-core operations is a very appealing combination,” said William Chalmers, global co-head of the financial institutions group at Morgan Stanley in London.
“We like to think we’re engaged in some of the most complex transactions in our sector, and that’s a hallmark.”
The subsequent capital raising paved the way for other big European banks to address shortfalls. Rights issues followed at Deutsche Bank, Credit Suisse and Santander, and Morgan Stanley was involved on each deal. The four deals raised a combined €32bn in equity.
“It’s a point of pride for us that nothing major has happened in European bank ECM this year without us being a big part of it,” said Chalmers.
European tour
When Santander rescued Banco Popular for a token €1 in June, its biggest worry was Popular’s book of bad loans. The Spanish bank quickly turned to Morgan Stanley and the template it had set for NPL sales with the UniCredit deal.
Two months later, Santander agreed the disposal of €30bn of Popular’s bad loans. Like the UniCredit deal, it involved a complex structure. Santander sold 51% of the loans to Blackstone and was able to deconsolidate the regulatory capital and keep skin in the game alongside its new private equity partner.
NPL sales have traditionally proven problematic – there are reams of data on thousands of loans, collateral issues, servicing agreements and complexities around pricing. Morgan Stanley had an edge thanks to a team that emerged out of the financial crisis.
Like many banks, its mortgage origination capacity became largely redundant, so the bank morphed it into a loans solutions group, ready for the deleveraging coming down the tracks. “They are pre-crisis ABS specialists who have translated their skills to capital markets and deleveraging,” Chalmers said.
Dribble out
Morgan Stanley was also central to the sale of the UK’s stake in Lloyds Banking Group, which was wrapped up in May – eight years after the bank was rescued by the government. After two placements with institutions, the UK switched to Morgan Stanley in December 2014 to dribble out the remaining 25%.
Having done a similar dribble-out for the US government in the past, it knew the drill. Shares were sold on a daily basis over the next two-and-a-bit years; the plan was praised as cheaper, smoother and avoiding political issues. Indeed, it’s potentially one to repeat for the government’s sale of £15bn of its stake in RBS.
Other smaller but significant ECM mandates for the bank in the past year have included Allied Irish Bank’s €3bn re-IPO in June and Austrian bank Bawag’s €1.7bn IPO in November, the biggest listing ever done in Austria.
Big debt deals it was involved in last year included Brighthouse Financial’s US$3bn debt offering and the landmark US$7.25bn offer from Postal Savings Bank of China. It was also lead-left bookrunner on a pair of TLAC-eligible senior note offerings from MUFG – the Japanese bank it has a partnership with.
The US insurance sector has also been lively in the past year and when MetLife spun off Brighthouse Financial in August its financial adviser was Morgan Stanley.
It was a complex US$7.5bn deal, involving the separation of Brighthouse and distribution of 80% of the new firm to MetLife shareholders. It allowed MetLife to present a cleaner picture to the market and change its risk profile, and continued a trend where insurers have spun off lower-growth business focused on US life insurance and retirement annuities.
That is set to continue in 2018, when France’s AXA plans to bring an IPO of AXA Equitable. Morgan Stanley and JP Morgan are leading that deal.
In Asia, GE Capital continued to use Morgan Stanley to sell assets. The bank advised on the US$560m sale of GE’s stake in South Korea’s Hyundai Card and on the sale of SBI Card in India. GE Capital has sold numerous assets in Asia in the last decade, and Morgan Stanley has led every transaction.
IN WITH THE NEW
Younger financial firms also stepped up their capital markets activity in 2017, and Morgan Stanley reckons it is also at the forefront of that wave, leveraging its leading technology franchise.
“We like to think we’re with the traditional bastions of the financial institutions spectrum, but also right at the vanguard of the fintech sector,” said Chalmers. He said fintech “is on the brink of enormous change”.
The HK$11.9bn (US$1.5bn) Hong Kong IPO of ZhongAn Online P&C Insurance was the first offering for a pure online Asian insurer and the first major China fintech IPO. Morgan Stanley was joint bookrunner on the deal, after previously acting as sole private placement adviser on a pre-IPO fundraising in 2015.
“We are developing a certain capability and a reputation around the fintech area in China, which is evolving faster than any of us could have imagined,” Chalmers said.
The bank has also been on several of the big payments deals. It advised Vantiv on its US$12bn takeover of Worldpay and was lead-left arranger on a US$9.3bn financing. It also advised Hellman & Friedman on its US$6.7bn purchase of Denmark’s Nets and was lead arranger on €3bn of acquisition financing.
As any advisory banker will recognise, it’s a clear dual-track strategy: helping clean up old banks while working with the new wave of fintech firms hoping to replace them.
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