Morgan Stanley brings surprise benchmark notes; bank supply expected; floaters disappear

By Cristal Cody

Tupelo, Miss., Oct. 14 – Morgan Stanley surprised the investment-grade bond market late Friday morning following the release of its third-quarter earnings report with an announced four-part offering – the week’s only deal.

The bank was targeting $5 billion to $6 billion of notes when the transaction was announced, a source said.

Morgan Stanley’s offering stood out considering the short week had been a deal wash-out with focus on September’s inflation data, the markets closed Monday and Morgan Stanley’s less-than-great earnings report, sources said.

About $10 billion to $15 billion of supply had been expected to print in the short window following the Columbus Day holiday and ahead of Thursday’s inflation data release.

Next week, market participants anticipate deal supply will pick up.

Morgan Stanley’s offering is serving as a bellwether of sorts for likely issuance from the other big banks in the week ahead, a source said.

JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. also reported third-quarter results on Friday. Bank of America Corp. will release quarterly earnings results on Monday.

“It’s get it while you can,” a source said. “It’s a tip-off the Fed could be thinking about a 100-bps hike at the next meeting.”

The Labor Department reported on Thursday that while the September Consumer Price Index gauge fell to 8.2% from 8.3% in the prior month, the September core CPI rose to 6.3% from 6.1%.

Early Friday, Morgan Stanley reported revenue declined $1.8 billion to $13 billion in the quarter, while income dropped to $2.6 billion from $3.7 billion.

Floating tranches dropped

In the offering, Morgan Stanley set aside one of the tranches as a floating-rate note, an issue that is increasingly being dropped in high-grade corporate bond deals in 2022.

“I don’t know of a floater that has got done in the last three weeks,” a sellside source said. “Anytime there was a matching floater, it got canceled.”

In fact, that’s what Morgan Stanley did with the company reporting late Friday afternoon that it priced $6.5 billion of fixed-to-floating rate notes due 2026, 2028 and 2033 and dropped the four-year floating-rate tranche.

Floating-rate notes float up and with interest rates increasing; the issues don’t make much sense, a source said.

“The short end of the curve is getting annihilated,” the source noted.

Several issuers have dropped floating-rate tranches from their offerings this year.

In September, Bank of Montreal dropped a floater from its final $2.5 billion two-part deal.

In August, Credit Suisse AG, New York Branch eliminated a tranche of floaters from its final $2.5 billion two-part senior note offering.

Back in March, Home Depot Inc. dropped a floating-rate tranche from its final $4 billion four-part bond offering.

Mitsubishi UFJ Financial Group, Inc. was one of the most recent high-grade issuers that priced a floater when the company sold $4.4 billion of senior callable notes (A1/A-/A-) in four tranches on Sept. 6, including $400 million of floating-rate notes due 2025.

The trickle effect on floaters is impacting the high-yield space as well. Junk-rated Shutterfly Inc. was downgraded in the prior week by S&P Global Ratings based in part on a higher interest on its floating-rate debt.

Outflows higher

In other high-grade market action, outflows climbed this week.

Investment-grade investment fund and ETF outflows jumped to $6.3 billion for the week ended Wednesday from $1.89 billion a week earlier, according to a BofA Securities note released Friday.

Outflows for investment-grade corporate funds also rose to $4.36 billion this week ended Wednesday from $3.54 billion in the prior week, according to Refinitiv Lipper US Fund Flows.

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