Financial Issuer: HSBC

IFR Review of the Year 2016
7 min read
Alice Gledhill

While HSBC was no stranger to the public debt markets prior to 2016, historically it has had only limited wholesale funding needs. But regulatory requirements forcing banks to build up buffers of loss-absorbing debt left it staring down the barrel of an up to US$80bn funding target between 2016 and 2018.

“It was a truly transformational year for us,” said Bryan Pascoe, group treasurer at HSBC. “I don’t think any bank has ever had to undertake such a big change in its funding programme.”

The UK-headquartered bank soon quashed concerns that it would struggle to find investor appetite for such an onslaught of issuance, eventually pricing over US$34bn during IFR’s awards period, more than triple the previous period, according to HSBC’s calculations.

Its success was down to a meticulously planned and executed global issuance strategy. Despite its steep target, HSBC visited the market fewer times than most other top 10 issuers, resulting in some of the largest transactions ever priced in their sector.

“We wanted to use markets for size, diversification and pricing,” said Pascoe. “We also wanted to minimise visits to the market and to optimise access when markets have been strong.”

The HSBC Holdings US$8bn multi-tranche senior transaction in May was the largest-ever single financial bond transaction (excluding government-guaranteed debt), for example.

HSBC also sold the largest-ever Samurai bond eligible for total loss-absorbing capacity, the standard for the world’s largest banks, and the bond was also the largest bank Samurai since 2009. The multi-tranche ¥181.8bn deal in August was priced through US dollars and is also IFR’s Samurai Bond Deal of the Year.

A US$2bn 20-year senior Formosa issued the same month was the largest Formosa from a financial issuer (excluding government-guaranteed debt) and the second largest Formosa ever at the time of printing.

US dollars and yen were just two of the multiple currencies that HSBC dipped into as it worked through its funding spree. It also hit euros, sterling, Canadian dollars and Norwegian kroner in a clear demonstration of the breadth of its market access.

“That diversification strategy has achieved arbitrage versus major markets and helped reduce perceived supply, supporting post-trade performance and spread compression in benchmark markets,” said Pascoe.

Window shopping

Time and again the bank illustrated its ability to spot the best windows for deals.

It carved out almost US$11bn-equivalent in just two sessions in March, for example, taking the European senior funding market by storm as it priced a €3.25bn dual-tranche deal only a week after a US$7bn three-part trade in the US.

It went on to price two major subordinated bond deals in May, a US$2bn Additional Tier 1 and a €1bn Tier 2, despite coming just a month prior to the UK referendum on EU membership to take advantage of attractive conditions while they lasted.

A US$10bn order book allowed HSBC to price the year’s first Additional Tier 1 bond from a UK bank flat to its outstanding curve, and less than a week after it sold an US$8bn senior deal.

“[HSBC is] pursuing a strategy of just executing deals, regardless of market conditions,” said a banker at a rival institution at the time. “It’s admirable. Not all banks can do that.”

The AT1 was in some ways HSBC’s stand-out deal, Pascoe said. It was the largest AT1 of 2016 at the time and, despite coming only months after the worst sell-off in the asset class since its emergence in 2013, it exceeded the issuer’s size objectives against the yield it was targeting.

“The market had been slapped about and was only just finding its feet. We were speaking to top management and getting it right was very important,” said Pascoe. “Our peer group was asking, ‘when are you going to put this [market] back on an even keel?’.”

Striking a balance

Others might have paid smaller new issue premiums on their senior holdco transactions, but HSBC paid the levels demanded by the overall volume it needs to raise, Pascoe said.

“When you’re looking at an up to €80bn funding requirement, the last thing you want is to start with underperforming transactions.”

He pointed out that the bank’s new issue premia declined significantly after the debut senior holdco deals in the first quarter, helped by the growing confidence in investor appetite for UK holdco senior debt.

The bank also chose markets carefully to ensure it achieved the best possible pricing. In August, for example, the bank issued an inaugural sterling holdco senior bond, a £2bn 12-year that was priced through US dollars.

“We weren’t first, but we probably got the tightest level that the bank could have got,” said Pascoe. “We didn’t leave it too late, where you’re chasing the marginal investor.”

Making waves

It wasn’t all about TLAC. The bank also found time to issue an inaugural Green bond in November 2015, offering investors a rare opportunity to buy paper from an issuer class that had been slow to utilise the format.

HSBC local entities also maintained access to the market via private placements and structured notes to meet local funding or investor needs. Coordination with the group treasury ensured they did not cannibalise demand for holdco benchmark transactions.

In the second half of 2016 the bank announced a US$2.5bn share buyback programme, driven by the sale of its Brazil business and helping further optimise its capital position.

HSBC’s achievements not only paid dividends for the bank itself but also for the financial bond market more broadly in a difficult year for the sector, testing and proving the depth of investor demand for loss-absorbing European bank paper.

The bank’s milestone US dollar senior holdco bond in March is just one example that won plaudits from rival institutions.

“It’s a good sign for all Yankee FIG borrowers,” Jonny Fine, head of investment grade syndicate at Goldman Sachs, said at the time. “It shows there is a willingness for the US market to finance European TLAC.”

Massive demand for the bank’s €3.25bn holdco senior deal just a week later similarly gave a much-needed shot of confidence to the European market, where the depth of demand for loss-absorbing paper was still very much up in the air. The €10bn order book from some 540 accounts was by far the biggest for any European bank deal in any format for months, stunning market participants.

“We haven’t done a deal that hasn’t been beneficial for the sector,” said Pascoe.

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Financial Issuer: HSBC