The last year has been a strategic and tactical minefield for bank executives, under pressure from governments to step up for borrowers during the Covid-19 crisis, from regulators seeking to ensure they maintain strong capital buffers, and from shareholders needing to hear a reassuring story about future profits and distributions.
That played to the investment banking strengths of Morgan Stanley where the advisory DNA runs deep, says Alexander Menounos, head of EMEA DCM and global co-head of IG syndicate. “We work in partnership with the top-ranked financial institutions M&A advisory franchise for the EMEA region and the widely recognised leader in equity capital markets,” he says. “Fundamentally, we’re driven by a need to understand our clients’ needs and to advise holistically across products, markets, capital, ratings, liability management and increasingly ESG topics.”
The restrictions put on dividend distributions by regulators around the world to ensure banks maintain adequate capital to deal with the uncertain impact of the pandemic have been a crucial topic — and one that has been a C-suite focus for Morgan Stanley’s issuer clients.
“It’s not been a simple year of refinancing where focus is typically on innovating around markets and distribution. We’ve endured a complex and nuanced macro and regulatory backdrop, with thoughtful advisory on overall strategy and investor communication absolutely critical, as banks have sought to manage their way through the crisis and various speed bumps,” adds Menounos. “With the economy turning the corner, we now probably spend as much time with our ECM colleagues talking about share buybacks as we do talking about subordinated debt and hybrid capital.
“It was a year when clients needed us the most, and it was the year when as a franchise we were able to deliver the consistency of advice and coverage that clients needed,” he says. “We leveraged a true collaboration across capital markets and investment banking to offer holistic coverage, all the way up to board level.”
Menounos credits that consistency in the way Morgan Stanley “delivers the firm” for clients with its ability to provide advice in a way which is truly unbiased and product agnostic.
“We’ve often found ourselves in a position where we’re advising our clients not to proceed with a contemplated transaction due to residual regulatory uncertainty or a potential suboptimal outcome within the context of a broader strategy,” he notes. “Thoughtful, unbiased, and careful advice and communication to markets and investors has been the most important element of our value add.”
Being able to provide advice around regulatory change has been crucial during the pandemic as bank executives grapple with the fundamental challenges of managing during a crisis.
“When you’re fighting fires every single day and the world around you is shifting, it’s easy to lose sight of the bigger picture and that’s where we come and take a broader perspective,” says Charles-Antoine Dozin, head of capital, ratings and liability management advisory.
“The dialogue banks have with their supervisor doesn’t differentiate between equity and debt, it’s agnostic,” he adds. “Our ability to mobilise everyone across functions — fixed income, trading, asset solutions, equities, even M&A — to bring the whole firm consistently and coherently to clients in those regulatory dialogue situations sets us apart.”
He says that with investor sentiment around the banking sector predicated on the world returning to some kind of normal, bank supervisors will be making case by case assessments of each institution.
“In a world where your ability to make dividend distributions is restricted, which is the reality we’ve faced and will continue to face for next few quarters, you need to take a holistic view of your capital strategy.
“You just cannot make isolated decisions on each and every individual refinancing – there needs to be an overall perspective on where your capital base is going.”
Menounos points to Morgan Stanley’s work with issuers having to deal with the market and public reaction to the ECB decision to ban equity dividends early in the crisis, and investor concerns about the risk of contagion to other discretionary payments such as AT1 coupons.
“It was important as a firm to accompany clients through the different evolutions of the ECB recommendation, giving advice that allowed them to navigate the uncertainty, sharpen investor communication and minimise the risk of negative effect across asset classes,” says Dozin.
In a different way, Morgan Stanley was able to bring expertise to bear for Nykredit Realkredit in April when it wanted to bring to market its first euro, tier two bond in six years. Morgan Stanley had worked in a five-strong syndicate when the Danish mortgage lender raised €500m of AT1 in October 2020, but the issuer chose a smaller group for this year’s outing.
“Credit markets have been relatively benign in 2021, but surprisingly, issuers are still seeing a big delta in pricing shown by banks across asset classes,” says Howard Brocklehurst, head of UK/Ireland, Dutch and Nordic FIG DCM. “Nykredit mandated a much smaller group than usual, including Morgan Stanley, in part because there was significant disagreement on pricing and having a clear-eyed adviser was paramount.”
Brocklehurst continues: “It’s not just a case of showing ambitious pricing and hoping you’re right, it’s about having an open and honest debate with the issuer. Clients’ trust in the objectivity of our advice is the foundation of our long term, core relationships”.
Morgan Stanley brings the same ethos in its approach to deals both big and small. Over the last year, it has led many relatively compact transactions, including part of a wave of sub-benchmarks being printed, not just by small banks, but by larger institutions that had need for small top-ups to capital in order to optimise regulatory capital.
Bawag, the Austrian bank, for instance came in September 2020 with a €200m 10 year non-call five tier two bond, with Morgan Stanley as sole bookrunner; and Permanent TSB, the Irish group, raised €125m of AT1 capital with a perpetual non-call six year in November. Deals for smaller institutions included two Italian life insurers raising subordinated tier two capital, first with Credemvita in November 2020, a €107.5m bond; and then with Amissima Vita in February this year, an €80m issue, both sole-led by Morgan Stanley.
“These transactions are in many ways more difficult than a large, multi-handed execution for a frequent issuer in benchmark format,” says Matteo Benedetto, head of EMEA FIG syndicate.
“These deals would not have happened if we had just applied a standard approach where you win the mandate, structure the deal, announce it, see how marketing goes and then print it,” says Benedetto. “With these smaller deal sizes, the execution risk is several degrees higher than a standard benchmark, so there is daily discussion between capital advisory, syndicate, sales and trading as we work to find demand for that sort of transaction.”
“Being able to create market access and offer certainty of execution to smaller, less frequent financial issuers, allowing them to raise subordinated debt and capital at terms comparable to what their larger peers can achieve is a game changer for our clients,” adds Maxime Stevignon, head of France, BeLux and Switzerland fixed income capital markets.
The bank is also bringing its regulatory advisory expertise to the ESG debate where, for example, the step-up coupons featured in sustainability-linked bonds are not broadly compatible with MREL and capital instruments eligibility criteria.
“Ideally, the regulatory framework needs to evolve to facilitate the sustainable transition for the industry,” says Cristina Lacaci, global head of ESG structuring for global capital markets.
“We’re optimistic around green capital and green senior non-preferred which have been tested and work well, and where there’s clearly a lot of appetite. But, until there is more clarity and compatibility between the MREL rules and sustainability-linked bonds, that market is going to take time to develop and flourish.”