Increasing Diversity in Corporate Bond Issuances

As Wall Street seeks to improve its diversity and inclusion efforts, one approach is advocacy for the growth of minority-owned broker dealers offering investment banking and brokerage services. Morgan Stanley champions these firms to help elevate their role in capital markets and economic payouts—and to highlight the differentiated services they provide to companies and investors.

Morgan Stanley has partnered with a growing number of diversity firms to increase their involvement in underwriting corporate investment grade bonds. The firm is helping these companies—owned by Black or Hispanic people, women, and veterans—as active syndicate members in a co-manager role. (Active syndicate members gauge investors’ interest in companies’ debt offerings to price the securities in public markets.) For both the companies issuing bonds and the investors purchasing the debt, these firms offer a broad and diverse roster of investors, unique insights from their networks and a way for buyers and sellers to participate in diversity-focused transactions.

“We view the increased partnership with diversity firms in capital markets as an extension of the firm’s core value, commit to diversity and inclusion,” says Betanya Aklilu, Head of Diversity and Inclusion Relationships and Initiatives in the Fixed Income Capital Markets group at Morgan Stanley.

In Morgan Stanley’s role as diversity and inclusion (D&I) coordinator for corporate bond issuances, the firm aims to create greater access for minority-owned broker dealers. Since 2021, Morgan Stanley has served as D&I coordinator on 37 investment-grade bond deals totaling $137 billion, including Verizon’s $25 billion issuance in March 2021, Amazon’s $18.5 billion deal in May 2021 as well as $12.75 billion deal in April 2022 and American Express’s $3.5 billion issuance in April 2022 featuring their inaugural sustainability bonds.

“Diversity firms often have not been able to access important information in a timely manner that the broader investor community receives, and that is one of the gaps we are trying to bridge,” Aklilu says. “We have also developed a thoughtful approach to make sure the investors covered by diversity firms have an opportunity to receive fair and meaningful allocations by incorporating their views along with the issuer's perspectives.”

Specifically, says Aklilu, on Morgan Stanley’s self issuance, the firm has facilitated better access for diversity firms in four key ways:

• Increasing the aggregate number of diversity firms participating on MS debt transactions employing a tiered approach for titles and economics acknowledging long-standing relationships while creating opportunities for new ones.
• Creating a new elevated role as an active joint lead manager which grants access to how the Morgan Stanley investment grade syndicate desk advises Morgan Stanley’s Treasury group as a client.
• Proactively offering a capital backstop so diversity-owned broker dealers can serve on corporate bond transactions in case of potential capital constraints. (A broker-dealer must have sufficient capital to participate on a corporate bond deal.)
• Working closely with minority-owned broker dealers to ensure their investor’s orders are evaluated thoughtfully ahead of making allocation recommendations.

Bigger Roles, Rising Fees

Issuers are increasingly realizing the value of working with diversity firms—not to tick the box on diversity, equity and inclusion (DEI) efforts but because they receive access to a wide breadth of small, medium and large asset managers, as well as differentiated relationships and insights.

“These firms are adding value to traditional deals, bringing capabilities to issuers beyond the rewarding diversity angle,” says Teddy Hodgson, Co-Head of Global Investment-Grade Syndicate at Morgan Stanley. “For instance, veteran-owned firms have facilitated access to retired military professionals with views on geopolitics.” Though some issuers are starting to pay minority-owned broker dealers higher fees, many are still evaluating how diversity firms will contribute to their transactions, he says.

Companies are increasingly choosing minority-owned brokers for their business needs, which has resulted in improved economics and responsibilities for these firms. Historically, diversity firms earned small fees as passive co-managers on bond issuances compared to big banks. That has changed in recent years: Fees paid by debt issuers to diversity firms quadrupled from 2019 to 2021, rising to $137 million from $30 million.¹ In the same period, average fees paid to them as a percentage of total fees doubled to 8%.²

In Morgan Stanley’s own bond issuances, the firm has increased the number of minority-owned broker dealers it has hired and their payouts, which helps lend first-hand credibility when engaging issuers about working with these firms, Aklilu says. “While Morgan Stanley has worked with minority-owned broker dealers for over a decade, we revised our syndicate structure in 2020 to give additional opportunities and access to them in our own bond issuances,” says Kevin Sheehan, a Managing Director in Morgan Stanley’s Corporate Treasury Division. “By increasing access for diversity firms in our own offerings, we set a precedent for clients considering them in their issuances.”

Having had many long-established relationships with diversity firms over the years, since 2020 Morgan Stanley has grown that number to more than 25 and continuously looks to engage a growing number of new minority-owned broker dealers.