Fig juice
In a relatively calm year for banks and insurers, a handful of landmark deals, the continued sale of unwanted assets by European banks, and the evolution of technology for financial firms provided highlights. One bank played a significant role across those trends, making Morgan Stanley IFR's Bank of the Year for Financial Institutions.
FIG bankers may not have been as busy in the past year with the urgent, lucrative rescue work for financial firms that had long made them the envy of peers, but there has still been significant deal flow among payments and data firms, a complex fintech landscape to navigate, and frequent asset sales by banks.
The first two of those trends came together with the biggest completed financial deal of the past year – FIS's US$43bn purchase of payments firm Worldpay.
The third trend continued to play out mostly in Europe, where banks sold billions of euros of non-performing loans. Those sales may not have been as trailblazing as the massive sales by UniCredit and Santander in 2017, but they have been more frequent and new barriers have been broken, including in Greece, Portugal and Ireland.
Morgan Stanley has been active across all three of those trends in the past year: as well as helping Worldpay, it advised First Horizon on its US$9bn merger with Iberiabank; in fintech, its deal-making clients have included eFront, Tradeweb Markets and Virtus Partners; and it has led on bank asset sales in Europe.
"Europe is having its own challenges around the banking industry and economic growth, and US valuations have been low, but we do expect consolidation to pick up," said John Esposito, Morgan Stanley's global head of the financial institutions group. “In the interim, we've tried to identify pools of wallet to go after and capture.”
DISRUPTION
Technology continues to disrupt finance, and Morgan Stanley is benefiting from the pre-eminent position it holds in the tech sector and its ties with venture capital and private equity firms.
That has played out in private placement, IPO and M&A deals for fintech firms in all regions in the past year, often with repeat work.
The bank joined Credit Suisse in advising Worldpay on its sale to FIS thanks to its previous relationship with Vantiv, which it advised on its sale to Worldpay in 2017.
Morgan Stanley exclusively advised eFront on the sale of the French investment management software provider to BlackRock for US$1.3bn in March, and a month later was active bookrunner on Tradeweb's US$1.08bn IPO.
It was joint placement agent on a US$1.4bn equity financing round by Chinese online wealth management outfit Lufax, and in October it was sole financial adviser to Virtus on its sale to FIS.
The pipeline looks decent too: the bank is advising London Stock Exchange Group on its planned US$27bn takeover of Refinitiv, owner of IFR, that is due to complete in 2020.
MUMSS THE WORD
Morgan Stanley has about 150 people globally in its FIG team, including 70 in New York and 50 in Europe, mostly London. There are about 20 in Asia, mostly in Hong Kong.
There are another 15 in Tokyo as part of its decade-long relationship with Mitsubishi UFJ Financial Group. Their joint venture in Japan – Mitsubishi UFJ Morgan Stanley Securities (MUMSS) – is bearing fruit.
With that (and MUFG's 24% stake in Morgan Stanley), it's hardly a surprise to see the US bank advising MUFG on the purchase of asset manager Colonial First State, a European aviation business and an issue of TLAC-eligible US dollar senior notes.
But the Japan JV runs deeper. Morgan Stanley was joint global coordinator on Japan Post Insurance's US$3.2bn follow-on share sale, the biggest financial ECM deal of the past year outside of China, and is exclusive adviser to Tokio Marine on its US$3.1bn purchase of Privilege Underwriters, owner of US high-net-worth insurance group Pure.
On home turf, another deal in the pipeline but not due to complete until next year is the First Horizon/Iberiabank merger to create the 25th biggest bank in the US by deposits. Morgan Stanley was sole financial adviser to First Horizon.
Other notable advisory or bookrunning roles for Morgan Stanley in the past year ranged from MetLife's ¥152bn (US$1.38bn) senior debt issuance, ING's sell-down of its stake in India's Kotak, to a US$2.3bn accelerated bookbuild by Adyen. It advised Credit Agricole on its deal with Santander combining their custody and asset servicing operations.
BALANCE SHEET VELOCITY
Advising European banks on pruning their balance sheet could be regarded as a gift that keeps on giving, although many of the deals are getting commoditised and handled internally by the deleveraging banks.
Investment bankers can still get an edge, however, on complex deals and new structures in countries trying to catch up and with new ideas in mature markets.
"Ten years into the crises we are still managing hundreds of billions of NPLs. We are still doing very large clean-ups in countries where the market was not ready to do them," said Guillaume Gabaix, head of FIG in EMEA.
Deals can take years due to the reams of data on thousands of loans; collateral, regulatory and technology issues; servicing agreements; and pricing and financing.
Morgan Stanley was financial adviser to Novo Banco on its sale of €2.1bn of NPLs to KKR, the largest secured NPL transaction to date in Portugal.
In Greece, Eurobank's €2bn sale to Pimco was the first big residential NPL securitisation deal in the country, while NBG's sale of €900m of loans to CarVal marked a more granular secured NPL transaction.
More mature markets are shifting from selling NPLs to disposing of “reperforming” loans. Gabaix said that represents attempts to improve "balance sheet velocity" by banks struggling to lift returns.
"This is a continuation of the themes of our last 10 years, except the market is getting increasingly sophisticated," Gabaix said. "We are trying to break new ground over time."
An example was a Bank of Ireland €268m portfolio sale that kept the servicing of the loans within the bank, allowing it to get assets off balance sheet but keep a relationship with the thousands of customers. Morgan Stanley advised BoI.
And while the European clean-up is well advanced, it could continue for years. Banks have almost halved their NPL mountain in the last four years, but still had €636bn of NPLs at the end of June, according to the European Banking Authority. Within that, NPLs in Greece still represented 39% of loans, in Cyprus it was 22% and the figure was almost 10% in Italy and Portugal.
It's a good job, therefore, that the pool of potential private equity and specialist fund buyers has grown. Morgan Stanley has played its part in that, developing financing tools and using its own funds.
"We put our balance sheet behind a lot of these dispositions," Esposito said. "We will lend to a lot of the private equity firms that are buying assets."
FIG BANKER TO CFO
It has not all been smooth sailing for Morgan Stanley in 2019, however. The bank lost William Chalmers, co-head of its FIG group alongside Esposito, to become chief financial officer at a client – Lloyds Banking Group.
Esposito said the departure of Chalmers is a loss – but the bank has a deep FIG bench and his move sends a good message.
Indeed, he said 14 former Morgan Stanley FIG sector bankers have become finance chiefs at major firms in the last decade. They include Ruth Porat at Google, Gary Shedlin at BlackRock, James von Moltke at Deutsche Bank and Jonathan Pruzan at Morgan Stanley itself.
"There is no other financial institutions group that comes close to that ... it's quite a prestigious list of people," Esposito said.
"Any time one of us goes off and becomes CFO of a major institution, I view that as a win," he said. For one thing, it can open up or cement a client relationship.
"And it continues to show our junior people and the rest of the team that this is a really good career track. It shows there are many things you can do after your life in investment banking," Esposito said.
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