Hitting its stride
In a year that saw loan financing lose its lustre and bonds come back into vogue, one bank stood out for bringing the right deals at the right time and boasting a string of successes against an uncertain backdrop. Morgan Stanley is IFR’s North America High-Yield Bond House of the Year.
The US high-yield bond market sprang back to life in 2019 as the Federal Reserve made a U-turn on rates. But while appetite was strong for higher quality names, credits on the lower rungs of the ratings ladder struggled to gain traction among investors preparing for a potential downturn in the economy.
It was in this environment that Morgan Stanley hit its stride, spotting such trends early on as the market emerged from a rough fourth quarter of 2018.
Such was the case on a US$3.8bn M&A financing package in early February for aerospace components maker TransDigm, which had agreed to acquire Esterline Technologies for about US$4bn.
Lead-left on the deal, Morgan Stanley advised pivoting from a US$3.7bn term loan into a bond deal, comprising US$2.7bn of senior secured notes and US$1bn of senior subordinated notes, at a time when the loan market was under stress and bonds were enjoying tailwinds from declining interest rates and inflows.
The advice proved to be spot on as the deal took off, allowing the company to drop the subordinated tranche altogether and print an upsized US$3.8bn senior secured deal – the largest of its kind ever seen in the US high-yield market.
“It was a massive raise,” said Andrew Earls, head of North America leveraged finance at Morgan Stanley. “It emphasised the theme of the technical strength of the bond market offsetting the technical weakness of the loan market. [TransDigm] was the landing lights … for later in the year.”
Indeed, the upsizing of bond tranches, particularly secured ones, and the downsizing of loans became the norm on a string deals throughout a year that proved volatile but not so volatile to prevent corporates from seizing opportunities when they could.
That sort of environment played to Morgan Stanley’s strengths: solid and trusted advice, idea generation and strong deal execution against an uncertain backdrop.
“2019 was a year when the market was volatile but manageable – right in our sweet spot,” said Dan Toscano, global head of leveraged and acquisition finance at Morgan Stanley. “You see it in our volume and in the larger deals we have done.”
Morgan Stanley has steadily moved up the league table, jumping to the number six position for the IFR awards period, up from nine a year earlier.
Long known for its prowess in the tech space, the bank continues to win mandates and repeat business among the likes of Netflix and Uber Technologies, but its reach went far beyond that sector to encompass trades from a wide variety of companies.
It won lead-left mandates for United Rentals, which brought the longest dated bond since January 2018, and Burger King’s owner Restaurant Brands International, which priced an upsized US$750m 8.25-year non-call three at a super tight 3.875% during issuers’ headline rush to market in September.
And in a year that saw considerable push back on lower rated names, Morgan Stanley won several key mandates in this space, and did it right, underscoring its ability to successfully execute difficult transactions.
It was lead-left on a US$905m senior secured note for the parent company of in-flight broadband provider GoGo, rated B2/CCC+, a rare PIK toggle for Global Aircraft Leasing, and an upsized a senior unsecured deal for Alliant Holding, Caa2/CCC+, which came at a tight 6.75%.
And while some of these came at the wide end of talk, Morgan Stanley avoided printing at the steep discounts seen on a string of deals led by several banks that ranked higher in the league tables.
The bank put this down to a scrupulous assessment of the credits and willingness to say no to deal-related business that it thinks will fail.
“We have avoided taking losses on anything we have committed to,” said Clark Adams, head of US leveraged finance syndicate. “We have a rigorous credit selection process and have a reputation for that. We tend not to be on the edgiest of deals.”
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