HSBC Holdings’ ¥181.8bn (US$1.8bn) triple-tranche TLAC Samurai debut overcame British political turbulence and investor uncertainty about the paper’s regulatory treatment in Japan to smash a European record for financial issuers.
Following the introduction of negative interest rates for short-term deposits with the Bank of Japan, Double A bonds lost their appeal for Japanese investors.
Bankers and issuers responded by bringing higher-yielding issuers and instruments to market, as investors showed they were willing to move selectively down the credit curve.
That meant high-rated issuers could consider marketing Tier 2 bonds or instruments eligible towards total loss absorbing capacity, balancing higher yields with additional risk, and tempting HSBC to explore issuing its first holdco deal in the Samurai market.
That trend was under way when HSBC held a non-deal roadshow in Japan in late May but it probably had little idea that Britain would vote the following month to leave the European Union, potentially slashing demand for regulatory capital from British banks.
But a ¥45bn five-year deal by Standard Chartered on September 8 showed that Japanese investors were still open to buying British bank paper, and HSBC pounced a week later, having soft-sounded from the day of StanChart’s pricing, to seize on that demand with a senior unsecured trade from its holding entity. The deal was the largest ever Samurai bond by a European financial institution.
Japan’s Financial Services Authority has yet to rule on the risk-weighting treatment of TLAC bonds, which means many bank treasuries have been reluctant to invest in the instruments until they know how much capital they will need to set against them.
That did not hurt demand for HSBC’s Samurai, which tailored its tenors to suit different types of investors. Life insurers liked the 10-year, while asset managers and city banks showed more interest in the shorter tranches.
Large and small investors alike, including Shinkins, regional banks and other investors, rushed into the deal, resulting in a size that beat expectations.
Unusually, all three tranches had a similar size, showing that demand did not drop for the longer tenors. A ¥58.1bn five-year fixed tranche was priced at 49bp over yen offer-side swaps, a ¥59.3bn seven-year was priced at 82bp and a ¥64.4bn 10-year was priced at 107bp. Guidance had been 45bp–49bp, 79bp–84bp and 102bp–108bp, respectively.
In comparison with some other foreign issuers who had to pay a double-digit premium over their US dollar curves to issue in yen, HSBC managed to print virtually flat to its dollar curve, achieving the rare combination of size, tight pricing and investor diversification.
HSBC, Mizuho, Nomura and SMBC Nikko were joint bookrunners for the A1/A (Moody’s/S&P) rated deal.