Morgan Stanley eschews call option for 5-year senior deal

NEW YORK: Morgan Stanley sold a US$3.75bn five-year bullet senior bond on Monday, surprising market participants who had grown accustomed to banks including call options in recent senior deals.

The deal went well, attracting US$6bn of investor orders and pricing with a new issue premium of around 5bp. Morgan Stanley issued a US$2.5bn 7-year non-call six senior floating rate deal in October, contributing to a wave of around US$28bn equivalent in similar deals issued since JP Morgan debuted the structure in August.

Morgan Stanley's decision to stick to a bullet structure for Monday's fixed-rate deal is likely to have been driven by the difficulty of swapping fixed-rate callable funding back to floating rate, said Wells Fargo analyst James Strecker in a note to clients.

"It is unclear how swapping only to the call date will be treated from a hedge effectiveness perspective," he wrote. "It's possible certain auditors may be raising hedge effectiveness concerns.

PWC is comfortable with fixed rate [TLAC deals] while KPMG and Deloitte do not seem to have gotten there yet." PWC audits Bank of America Merrill Lynch, JP Morgan and Goldman Sachs - all of whom have issued fixed rate callable TLAC securities as well as floating, the analyst's note said. Morgan Stanley is audited by Deloitte, while Citigroup, Wells Fargo and Bank of New York Mellon are audited by KPMG.

All of those banks have issued callable FRNs but are yet to issue them in fixed rate format. Lower demand for FRNs of late, and the poor performance of floating rate TLAC callables relative to fixed over recent days may also have been a factor, said others.

"The FRNs are really the dog of the day," said a FIG banker on Monday. "There was one really big buyer who was half the deals when they were coming and other people piled in."

"Then there was a little volatility and all the floaters underperformed." Morgan Stanley's US$2.5bn 7NC6 was bid 1bp wider than reoffer on Monday. Fixed rate callable deals from JP Morgan, Goldman Sachs and BAML, by contrast, were trading between 13bp-29bp inside reoffer on Monday.