It has been three years since Morgan Stanley won any of Euromoney’s global awards. That fallow period coincided with the end of the bull market in stocks and M&A that had made Morgan Stanley – and Goldman Sachs – such a force in the 1990s. In the new marquee businesses – debt markets – both found themselves slipping down the tables as US universal banks Citigroup, JPMorgan and to a lesser extent Bank of America rose to prominence. Morgan Stanley quietly chugged along, remaining a top player in a much depressed M&A market and continuing as a major player in emerging-market sovereign bond underwriting.
It has been quietly rebuilding its corporate bond franchise, where it had in any event slipped less than Merrill Lynch and Goldman Sachs. “We did a fair amount of restructuring in fixed income,” says Vikram Pandit, co-head of the institutional securities business. “We spent the last 18 months digesting it. We used to have eight or nine subsections, and have rationalized those to three: interest rates, credit and commodities. And we’ve also cranked up our investment in fixed-income research.”
As a result it has had a strong showing in high-grade corporate bonds in the past year, where in the US it has displaced Lehman Brothers as the highest-placed pure investment bank in the league tables. At the end of last month, for example, it was a lead bookrunners on General Motors’ record breaking $17 billion deal. That was only possible because Morgan Stanley had lent GM $250 million in its recent revolver. It’s the first time GM has opened up its revolver to investment banks.
Where Morgan Stanley has shone the most, though, is in equities, especially in the US. Pandit attributes much of the success to the firm’s decision last July to merge its debt and equity capital markets teams. “It created more of a focus on providing clients with solutions rather than trying to sell them a product,” he says.
The equities environment of the past three years should have suited the likes of Morgan Stanley better than most, even as all had to suffer as revenues from equity underwriting plummeted, because hedge funds have been the mainstay among active investors. As one of the top two prime brokers along with Goldman Sachs, that has been to Morgan’s advantage.
In the past year the bank has become one of the biggest convertible bond underwriters in the US and Europe, acting as bookrunner on this year’s four largest US deals. “Winning the mandate for convertibles for companies such as Tyco, Wells Fargo and Sallie Mae all act as examples of how the debt-equity merger is working,” says Pandit.
Morgan Stanley also underwrote the largest mandatory convertible ever issued either in the US or Europe, the e3.2 billion deal for Deutsche Telekom, and is the top underwriter in the region. Morgan Stanley is the winner of our convertible bond award this year.
The other area of equities where Morgan Stanley has done well is trading. It was the first investment bank, for example, to combine its NYSE and Nasdaq stock trading desks into sector trading desks. It refused to follow its peers Merrill Lynch and Goldman Sachs after they bought US market-makers in 2000, instead relying on the electronic trading platform that it had been developing in-house since 1994. Now, says Pandit, over 90% of stocks and options are traded electronically over the platform. In the past 24 months the firm has tripled the stocks it covers to 1,100 in the US at the same time as other firms, including Merrill Lynch, have cut back. Its platform is cheap and scalable, and has allowed the firm to become a market-maker on a floor-based options exchange.
In May it took on the equity options market-making responsibilities of TD Securities on the Pacific Exchange. Until then Morgan Stanley had been a market-maker on only one of the five US options exchanges, the all-electronic ISE. Having an efficient electronic platform in-house made taking on a floor-based exchange for no cost more palatable than it was for TD; and there is a good chance that the exchange will go electronic. If so the bank will simply plug it into its existing system.
Morgan Stanley has been improving resources in other areas, such as beefing up its mortgage-backed securities effort and its credit derivatives franchise. The former has been a major money-spinner in the past two years, but the bank was never as strong as the likes of UBS – through its acquisition of PaineWebber – or Bear Stearns.
The use of credit derivatives, meanwhile, has continued to expand rapidly, and beyond the traditional client base of banks to hedge funds and even previously long-only investment firms. Morgan Stanley, though never a small player, has invested a heavily in the product over the past two years. It has set up the benchmark high-grade tradable index in the US, Tracers, now rebranded Trac-X after Morgan Stanley doubled the number of names in the index to 100 and teamed up with JPMorgan to offer a similar product in high-yield default swaps and in Europe. So strong, in fact, has Morgan Stanley’s credit derivatives franchise become in the past 18 months that it was a contender for this year’s award for best credit derivatives house. Given its rise over the past 18 months, we awarded it most improved credit derivatives house.
