Latin America and Emerging Markets Bond House

IFR Review of the Year 2012
15 min read
Sudip Roy, Paul Kilby

Connecting the world: It was a year of record issuance volumes in the global emerging bond markets. But the pool of banks able to service borrowers across all regions is limited. One firm stands out for its ability to deliver the right service for clients, irrespective of currency, product or jurisdiction. HSBC is IFR’s Latin America Bond House and Emerging Markets Bond House of the Year.

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It has been a remarkable year for the emerging bond markets. Driven by huge inflows into investment funds and record low yields, global primary issuance is on course to break the US$400bn mark for the first time.

That issuance has been relatively well spread across all regions: Emerging Europe, the Middle East and Africa, Asia and Latin America. Each has seen well in excess of US$100bn of supply in external debt.

Huge volumes only tell part of the story, however. Product development, whether in Islamic finance, bank capital, high-yield, niche currencies or liability management, has also taken a big step forward.

“It’s been a transformational year for emerging markets in general,” said Bryan Pascoe, head of global debt capital markets at HSBC.

In the past year, HSBC has outshone its nearest rivals – Citigroup, Deutsche Bank and JP Morgan. “We’ve done more volume for more clients in more countries and currencies than our competitors,” added Pascoe.

HSBC has printed US$33.45bn from 214 transactions in the countries defined as emerging markets by IFR for this award. That is 64 deals more than its nearest competitor. The bank has executed the most FIG transactions, is the third-ranking underwriter of sovereign deals, and has brought the second-highest number of debut borrowers to the market in the period under review.

In local currency, the bank remains far and away the leader, printing more volume in non-US dollar, euro and sterling than the next three competitors in the Thomson Reuters league tables combined. HSBC has also executed deals in more jurisdictions, 30, than any of its competitors.

Distinguished role

As impressive as these statistics are, underlying them are high-quality transactions in every sub-sector of the asset class. Two of the big themes in emerging markets over the past year, for example, have been Islamic finance and bank capital. In each, HSBC has played a distinguished role.

In the former, HSBC has participated in almost every significant deal and is by far the most dominant arranger in a market that really kicked off last year, moving beyond the steady stream of five-year bank deals that has typified issuance in the past.

“We’ve done more volume for more clients in more countries and currencies than our competitors”

Its transactions include Turkey’s debut sukuk, which was the culmination of nearly a decade’s worth of work and required new legislation to be passed by parliament; Abu Dhabi Islamic Bank’s hybrid Tier 1 perpetual, which is potentially Basel III-compliant and the first such type of deal from the Middle East; Saudi Electricity’s US$1.75bn, five/10-year dual-tranche sukuk, which set a quasi-sovereign benchmark for a country without any externally traded government debt; Qatar’s US$4bn five/10-year dual tranche, which is the largest ever international sukuk; and Indonesia’s third global sukuk. In the local markets, the SR15bn (US$4bn) 10-year for Saudi Arabia’s General Authority of Civil Aviation is the biggest single sukuk tranche ever.

As for bank capital, in which annual issuance volumes from the emerging markets have outstripped Western Europe for the first time, HSBC has participated in some of the most innovative transactions. Banco do Brasil’s US$1bn Tier 1 perpetual non-call 11, for example, was the first transaction from Latin America to be structured to be compliant with Basel III regulations. The deal originated thanks to the lead arrangers’ (which also included BB Securities, BNP Paribas, Citigroup and Standard Chartered) discussions with the central bank, which wanted to put a marker down.

“The central bank was keen to look at structures that met domestic requirements but was forward looking too,” said Katia Bouazza, co-head of global capital markets, Latin America at the bank.

And although HSBC missed out on the VTB hybrid Tier 1, it was involved in the other two bank capital perpetual transactions from the global emerging markets over the past year. The ADIB deal, though a more simple structure, is designed to be, like Banco do Brasil, potentially compliant with the new Basel III regulations.

Meanwhile, Gazprombank’s US$1bn 7.875% perpetual non-call 5.5, the first Upper Tier 2 note from Russia, was designed in such a way that it will get regulatory capital treatment as well as credit for S&P’s risk-adjusted capital ratio.

Niche currencies

HSBC’s ability to take borrowers into niche currency markets is another of its strengths. Very few banks can take a Latin American borrower and help it raise money in the offshore renminbi market as it did for America Movil; or take a Middle East borrower to the Hong Kong dollar market as it did with National Bank of Abu Dhabi; or take a CEE borrower to the Malaysian ringgit sukuk market as it did with Development Bank of Kazakhstan.

Many banks say they are global; but only one or two really are. It is these types of transactions that demonstrate what being global means in practice. One of the reasons why HSBC can execute these deals is because it has offshore teams sitting in key hubs. In its global banking and markets division, HSBC has a Latin American team in Hong Kong tracking opportunities. A desk in the city-state only trades Latin American bonds, both local and hard currency, providing round-the-clock quotes. This insight into investor flows gives the bank a big advantage. So when Brazil came to the global Real market last April with an 8.50% R$3bn (US$1.6bn) due 2024 note, HSBC and co-lead Goldman Sachs were able to place a decent chunk of the bonds in Asia.

One investor base that has become a much more important buyer base in emerging markets deals is the Asian private banks. Although they are not new to the asset class, they are now a much more meaningful investor. “In the past they only bought credits they knew well with a high coupon. Now the work that private banks and family offices do is as sophisticated as that of institutional investors,” said Stephen Williams, head of global capital markets, Asia-Pacific at HSBC.

At a time of economic uncertainty, rich Asians are allocating a greater percentage of their funds to bonds relative to equities as they increasingly favour steady income over potentially volatile assets. This is reflected in the fact that private banks are much less trading-orientated than they used to be. They are also branching out from traditional Hong Kong and Singapore names to other regions as the Brazil Real transaction showed.

Asian private banks have played a key role in the bank capital issuance spree too. For example, they bought about half of Sberbank’s US$2bn 5.125% 10-year Lower Tier 2 offering, which HSBC co-led with JP Morgan and with Sberbank CIB. They were also big buyers of the Gazprombank and ADIB perpetuals.

These are investors that HSBC knows well, partly because of its own private bank but also because of the firm’s dominant position as a bond house in Asia. “We understand their needs,” added Williams, and whether that be marketing a high-grade bond in Latin America, a Tier 2 deal from a Russian bank or a bog-standard Asian offering is immaterial to the firm. What matters is the best deal for both issuer and investors.

For a bank of its size, what is striking is HSBC’s ability to break down silos and fiefdoms. A US$152m Ex-Im-wrapped bond for Etihad Airways, for example, which was a refinancing of a loan facility, brought together debt capital markets, export finance, asset and structured finance, and global banking from the Middle East, Asia, London and New York.

Filling a hole

The one hole in HSBC’s business over the past couple of years has been Central and Eastern Europe, but this year the bank has taken big strides in that region. Its recent success in the Russian bank capital sector is one example but the firm has led good deals in other areas too.

In July, HSBC, together with Barclays and Kazkommerts Securities, helped KTZ, Kazakhstan’s state-owned railway company become the first CIS borrower to issue 30-year notes in bullet form when it printed a US$800m trade. In doing so, it also became the first Kazakh name in the international capital markets since May 2011.

HSBC was also one of the leads, with BNP Paribas and RBI, to facilitate Bulgaria’s return to the international capital markets after a decade-long absence with benchmark euro transaction.

The deal it worked on for Turkish brewer Efes was one of the standout transactions of the second half of the year, with the corporate pricing inside the sovereign’s curve with its debut transaction. Other notable borrowers it has brought to the capital markets this year include Romania, Latvia, Turkey, MOL and Eurasian Development Bank.

“We’re doing a lot of firsts and bringing new products,” said Danny Goldblum, head of the CEE solutions group at HSBC. “We’ve broadened our proposition and connected the region more to the rest of the globe, as we’ve done with Latin America and Asia.”

As for the other half of the CEEMEA region, HSBC remains the dominant financial institution in the Middle East, largely thanks to its sukuk business, though Africa remains a disappointment, albeit when deal flow from the continent is limited.

And in Latin America and Asia, the bank continues to win business from the biggest names to the niche with a geographical reach that arguably only Citigroup can match.

In the former, as well as the Banco do Brasil perp, HSBC has executed transactions for Petrobras (in euros and sterling), America Movil (in renminbi), for Mexichem (which issued a US$1.15bn dual-tranche 10 and 30-year trade with a concurrent tender offer) and Chile (whose US1.5bn dual-tranche trade carried the lowest coupon ever for a 10-year note issued by a Latin American sovereign), among others.

Pockets of opportunity

Unlike years past, HSBC is no longer considered by rivals as a lending shop that leverages its balance sheet to win bond business, but as a genuine competitor that has an ability to execute trades and offer clients a broad range of capital market options.

The debt capital markets team hasn’t been resting on its laurels and has been pushing the boundaries and seeking new ways to generate volumes and of course income. “We are always looking for the next pockets of opportunity,” said Bouazza. “Today the market is very different from what it was two or three years ago. You can’t live off one product.”

As much as the big blow-out transactions, what also stood out were the inaugural trades for companies such as Colombia Telecomunicaciones, and Banco de Bogota as well as Brazilian infrastructure play OAS and miner Samarco. The firm also tested the ground for new asset classes such as the region’s first ever cross-border covered bond – a US$200m 4.75% five-year from Panama’s Global Bank. It also worked on the first ever corporate global depositary notes from Pemex as it sought new ways to bring foreign investors into the local market. Such experiments showed the bank’s willingness to open new horizons.

In Asia, the story has been about the growth of the G3 currency market compared to last year, with volumes in the region ex-Japan and Australasia at twice 2011 levels. HSBC is at the top of that volume table, executing more than US$16bn of business.

Standout G3 currency transactions include Reliance’s US$1bn 10-year and US$500m tap (the first dollar bond from India in six months and the first of the year), Development Bank of Mongolia’s US$580m five-year note (which was the first sovereign-linked public bond offering from the country, setting a benchmark for future issuance), Indonesia’s US$1.75bn 30-year bond (the first new 30-year benchmark since January 2008) and Vietinbank’s US$250m five-year offering (the first public dollar bond from a Vietnamese issuer other than the sovereign).

Of those, DBM’s deal perhaps captures the advances that Asian borrowers are making more than any other. It was a debut deal for a policy bank in a country that historically investors have been wary of because of governance concerns. Yet DBM, which is integral to the Mongolian government’s plans to improve infrastructure, priced its US$580m five-year trade at 5.75%, the tightest ever level for a debut emerging markets sub-investment grade sovereign borrower, after generating US$5.7bn of orders.

The transaction opened the international bond markets for Mongolian borrowers and established an important benchmark for future issuances.

In Asia’s local markets too, HSBC continues to excel. The Ps80.025bn (US$1.9bn) perpetual preferred shares offering for San Miguel is the largest corporate issuance in both the debt and equity markets in the Philippines. It was testament to the scale and complexity of transactions that are now taking place in the local markets.

“We’re getting the best deals for our clients,” said Pascoe.

Connecting the world