In the News: Recent Developments

March 12, 2002

The Public Andrew Garvey: Morgan Stanley Exec Takes Tax-Exempt Lead

By Michael McDonald

When Andrew Garvey was hired as managing director and co-head of the capital markets group at Morgan Stanley & Co. in 1999, William O’Keefe, head of the tax-exempt securities division, said: “I think his strength is marketing. If you thought you were at full market potential you would not hire an Andrew Garvey.”

Three years later, O’Keefe has tapped the 44-year old Garvey to replace Andrew Rowley as head of the public finance division. As the on-the-scene executive overseeing public finance bankers, Garvey is now one of the tax-exempt securities division’s key people reporting to O’Keefe.

“I think it is a natural progression for him,” O’Keefe said recently. “He has done an excellent job expanding the breadth of penetration in the capital markets group. What we are trying to do now is apply those leadership qualities into a bigger role in the department.”

Garvey takes the reins after Morgan Stanley made a strong move up in the municipal underwriting rankings, taking advantage of changes at competitors Merrill Lynch & Co. and Goldman, Sachs & Co., both of whom slipped last year. His challenge is to keep up that momentum.

“As far as Morgan Stanley as one of the top global investment banks, I don’t think we are at full potential yet,” Garvey said in his corner office near Rockefeller Center in midtown Manhattan late last month. “We are already doing well in public finance, but I think our goal is to be even better.”

One of the goals Garvey has set is maintaining Morgan Stanley’s new position among the top five senior underwriters in the municipal bond business. Last year, the firm moved up to fourth from sixth, leading sales of $19.6 billion in bonds, a 6.7% market share, up from a 4.9% market share the year prior, according to Thomson Financial Securities Data.

The firm ranked third among co-managers, participating in the underwriting of $70.4 billion in bonds, a 25% market share. In contrast, Goldman fell to sixth from fourth in senior manager rankings, while Merrill barely held the third spot, its market share falling to 6.7% from 8.8% in 2000.

While the firm still lags behind the top two underwriters, the growth puts it a step closer in stature to UBS PaineWebber Inc. and Salomon Smith Barney, which both have large national networks for selling bonds to retail investors, much like Morgan Stanley.

“I think for a firm with a large retail distribution, public finance is always going to be a more attractive business than for a purely institutional firm,” said E. Reilly Tierney, senior vice president in equity research at Fox-Pitt, Kelton who covers publicly traded Morgan Stanley and other brokerages. “I think other firms look at the eroding margins and the politics in tax-exempt underwriting and see a business that they don’t want to invest in as much strategically.”

However, the existence of a retail network, which at Morgan Stanley consists of 13,000 brokers across the country, acquired when the firm merged with Dean Witter in 1997, is no guarantee of a firm’s commitment to the municipal business. For instance, more than a year ago Prudential Securities exited the business of underwriting municipal bonds despite a sizable retail business.

Indeed, Merrill Lynch, which also has one of the industry’s largest network of retail brokers, fired 30 of its public finance bankers last year, about a third of its banking team, in a cost-cutting effort. Morgan Stanley said that, despite the 1,000 jobs that were cut across the firm last year in a drive to reduce compensation costs by 20%, the number of employees in the municipal division was not reduced.

“At the margin, a retail network will help drive the focus, but it will not be the sole driving force of success,” said Joseph Fichera, chief executive officer of financial adviser Saber Partners and a former Prudential banker. “What will drive it is the quality of the ideas and the execution and where the profits can be made, which will help sustain the business. Otherwise, in tough times, munis usually feel the hit first.”

Garvey said Morgan Stanley is firmly committed to municipals.

“We’ve been in this business since the early 1980s, and we are going to stay in this business because it is key to our retail effort,” Garvey said. “It is a profitable business, and some ways countercyclical. In terms of reporting lines, it is part of the fixed-income business and fits nicely with all the other fixed-income businesses we do. It builds off and leverages what the firm does in other markets.”

In addition to its New York City headquarters, the firm has public finance offices in San Francisco; Orlando, Fla.; Chicago; Portland, Ore.; Philadelphia; Austin; and Houston. Its New York municipal retail group was based in the World Trade Center, where the firm was a major tenant. While Morgan Stanley lost seven employees in the Sept. 11 terrorist attacks, none was from the municipal group.

For Garvey, the ascension to head of public finance bankers at Morgan Stanley is something he described as a bit of a homecoming, bringing his career full circle. He started as a summer associate in public finance at PaineWebber in 1985 and joined the firm as an associate public finance banker the next year.

From his early banking experience, he branched out into the new field of derivatives. In 1992, Garvey left banking and PaineWebber for Lehman Brothers, where he joined a fixed- income derivatives group that was pitching and pricing emerging exotic instruments to the bond market – interest rate swaps, tender option bonds, and reinvestment products.

His new job at Lehman was to pitch those products specifically to the municipal market. He was the salesman trying to convince issuers to use Lehman as counterparty in off- balance sheet deals designed to alter the interest rate exposure on their bonds, as well as to invest their traditional bond proceeds in Lehman’s tailored investment contracts.

As the volume of the business grew, Garvey was appointed co-head of a new municipal capital markets group in 1994, with Gary Killian, who has since become head of public finance at Lehman, as his counterpart. Garvey was the pitchman, while Killian served as the technician in charge of pricing the deals.

When Garvey was lured away from Lehman in 1999, it was seen by the industry as a move by Morgan Stanley to bolster its municipal derivatives business. Under Killian and Garvey, Lehman became a leader. Morgan was admittedly weak, particularly in reinvestment products.

While this is difficult to measure in the secretive world of derivatives, Morgan has developed a fairly high profile in the business in the last couple of years, and Garvey has continued to be a fixture. He has worked on industry issues with The Bond Market Association, as in a futile battle last year with the Financial Securities Rulemaking Board over the corporate accounting treatment of the association’s municipal swap index.

“He’s been an active participant in industry initiatives,” said Lynnette K. Hotchkiss, senior vice president and associate general counsel at TBMA. “He is a highly regarded member of our industry.”

More importantly, he and the firm have done deals. For instance, Morgan Stanley last year won a unique $1.85 billion, floating- to fixed-rate revenue anticipation note swap bid out by California.

Garvey’s promotion has been greeted with a thumbs-up by many in the industry, where he is liked for his affability and respected for his intelligence. It has also been characterized as good business, where derivatives have become a staple in bond deals, a way for investment banks to make a larger margin by adding more services to otherwise plain-vanilla sales.

“It’s nice to see that kind of recognition, and an obvious sign that Morgan Stanley wants to push to integrate derivative products into all of their municipal financings where it is suitable,” said Peter Shapiro, managing partner at financial adviser Swap Financial Group.

The challenge for Garvey is to motivate his troops to keep bringing in the big deals. Under Rowley, who at 55 retired at the end of last year, Morgan Stanley was lead banker on some of the market’s largest sales in 2001.

It led the sale of $1.1 billion in Puerto Rico Public Finance Corp. appropriation bonds in December, and co-managed a $356.7 million sale by the issuer in July. It was the lead on a $904.6 million combined general obligation sale in June by Connecticut.

While it ranked fourth overall for senior managers, Morgan Stanley was also fourth in the rankings for negotiated sales, with $15.5 billion, after being eighth in 2000, and was fifth in competitive sales, winning $3.6 billion.

Not surprisingly, given its emphasis on large and medium-sized deals, it ranked 20th in small issues, bringing issues under $10 million to market, and was ranked sixth as a short-term bond underwriter.

One deal that Garvey points to as exemplifying the strength of a global bank like Morgan Stanley was a $900 million mandatory put completed by TXU Electric Co. in Texas through three conduits, including Brazos River Authority. The deal was large and complicated, Garvey said, and represented the firm’s strength working in the municipal market with corporate clients.

One sector where Morgan Stanley stood out last year in the ranking was environment facilities, selling pollution control bonds for issuers like Brazos River. It topped that relatively small category as lead banker with $1.9 billion in deals, out of a total of $6.1 billion.

The firm did not stand out in any other municipal bond category. In the largest – general purpose – where there were $72.4 billion in sales, it was fifth among senior managers, selling $6.5 billion. Instead of dominating sectors, the firm was for the most part consistently in the top five.

“I think we are and want to be a major player of significant market share,” Garvey said. “Where we rank in a particular category is not as important as being significant enough and a major participant in all markets so that the client feels comfortable picking us and knowing we are competitive with all of the top players.”

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