In a year when US junk bond volumes dropped sharply and portfolio managers faced one refinancing trade after another, one bank stood out by doing things differently. For redefining how start-ups access capital, Morgan Stanley is IFR’s North America High-Yield Bond House of the Year.
US high-yield issuance fell by about a third this year as issuers turned to leveraged loans for more flexible financing. That left investors with slim pickings in junk bonds, where the majority of new issuance – around two-thirds – was from borrowers looking to refinance.
As a result, many technology companies got the attention of the buyside looking for deals to buy at attractive rates.
“The composition of the high-yield market is such that a lot of the technology companies are in late stage development,” said Mike Terwilliger, a portfolio manager at Resource Alts.
“There aren’t a lot of high-yield companies that have significant growth, so the idea that the market is now attracting some of those issuers is an interesting development.”
Morgan Stanley’s innovation in this area was singled out as more important than US high-yield league table rankings, where the bank holds the ninth spot with 5.7% market share over the awards period.
“We may be more like Four Seasons than Marriott but we like it that way,” said Andrew Earls, head of North America leveraged finance at Morgan Stanley.
One satisfied client is ride-hailing network Uber, which chose the bank as the left-lead placement agent for its inaugural junk bond issue that was structured as a Section 4 (a) (2) private placement. It is the largest ever of its kind to be priced and is IFR’s North America High-Yield Bond of the Year.
“They’ve done an incredible job,” said Sydney Meheula of Uber’s capital markets and special projects team. ”They got us comfortable with the capital structure, and I feel like they really understand our story.”
“I like their courage. When we said we wanted to do a private placement, they were supportive. Some other banks are more risk-averse.”
Investors compared Uber to streaming giant Netflix, another cash-burning business and one that has turned to Morgan Stanley to lead every single one of its eight high-yield bond issues since 2013 as it sought to fund its increase in original content.
The bank led two Netflix deals in 2018 including its largest ever trade – a US$1.9bn unsecured issue in April that was upsized. That deal attracted several top 10 blue-chip accounts that were previously underweight or uninvolved, and key investment-grade accounts for the first time.
LOFTY VALUATIONS
To be sure, there are risks involved with such high-growth businesses that are spending more than they earn. One of those is whether lofty equity valuations will stay high in competitive markets and provide a deep cushion for bondholders.
As it stands now, Netflix’s market capitalisation is around US$136bn, and its longer-term debt just US$11bn. Uber’s debt now stands at about US$7bn, but some bankers believe an IPO planned for next year could value it as high as US$120bn.
A crucial feature was the investment-grade covenants in both Netflix and Uber bonds.
“High-growth companies are in an environment where they’re changing their business models all the time,” said Earls. “If they can’t do that without worrying about the covenants, they’re not coming to high-yield. We have opened up a significant market.”
Not every start-up has been a good investment for bond buyers. Privately owned shared office space provider WeWork’s debut deal has not been a good performer in secondary trading.
Morgan Stanley was one of nine banks on the deal, but didn’t lead it. “We had a view that the deal should have been priced wider than it where it came,” said Earls.
And there is, of course, a lot more to Morgan Stanley’s leveraged finance business.
It has priced deals for tough stories, including Canadian miner Baffinland, whose bond issue was upsized to US$575m for a yield of 8.875%. The issuer’s prior deal, led by another bank, saw the yield hiked by over 350bp to 12.69%.
Morgan Stanley also sold an upsized US$1bn debut bond offering for The Stars Group to help finance its acquisition of Sky Betting and Gaming – one of the largest gaming leveraged financings in history, and a new story for investors to get to grips with.
As sole lead, Morgan Stanley decided the best option was to finance in US dollars (even though the company has no revenues there) and swaps back into euros and sterling as doing so was cheaper. The spread differential between the bond and concurrent loan was also very low at just 50bp.
“We were impressed with their execution capabilities,” said Divyesh Gadhia, chairman of The Stars Group. “The pricing and demand they had indicated was very attractive, and they lived up to it.”
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