HSBC, just fresh from its Additional Tier 1 and senior US dollar transactions last week, was back in the primary market on Monday, marketing a dual-tranche euro senior holdco deal, while Lloyds Banking Group picked up where HSBC had left off in dollars, bringing its own AT1 trade.
The deals emerged amid a slew of mandates from a wide range of issuers as they looked to get ahead of potential volatility later in the week as the focus turns to Fed chair Powell's semi-annual testimony on Tuesday and Wednesday and nonfarm payrolls on Friday. The two events will be carefully scrutinised by investors as they look for clues in the direction of future rates.
"The market feels okay, deals are generally working, but as we're seeing in FIG and corporates, they're also not racing out of the door," a senior syndicate banker said. "The urgency to put cash to work has passed and investors feel that they have a bit more leverage, so they can be more disciplined. We've seen it in order book sizes and price revisions which haven't been as big as they were earlier in the year. But inflows are going to continue."
Investors have been drawn to fixed income by higher yields, with expectations of higher rates globally as central banks grapple with stubbornly elevated inflation figures, although some of that exuberance has waned as a result of the sharp tightening in credit spreads seen since the beginning of the year.
Against this backdrop, HSBC started marketing a 5NC4 at 145bp area over mid-swaps via HSBC, ABN AMRO, BBVA, Credit Agricole, Swedbank and UniCredit, while a 9NC8 was marketed at 175bp over via HSBC, Erste Group, Lloyds, IMI-Intesa Sanpaolo, Nordea and Santander.
The senior syndicate banker saw the starting concession at around 40bp, adding that he thought the trade, expected to be rated A3/A–/A+, would land around 20bp back of fair value.
The landing levels ended up slightly tighter, with a 25bp revision on both tranches, with books peaking over €3.7bn on the €1.5bn shorter leg and €3.25bn-plus on the €1.25bn longer one.
A banker familiar with the deal spotted the final concession at around 10bp-12bp for the shorter tranche, adding that the transactions had landed around 30bp inside where the dollar deals had come last week.
Books closed at €3.1bn-plus and €3bn-plus.
"HSBC will have issued more than US$10bn-equivalent of paper in less than a week: US$2bn of AT1, US$7bn holdco and now euros," another FIG syndicate banker said. "For those issuers looking to time their deals later as opposed to earlier [in the year], HSBC is telling you how large frequent issuers involved in the capital markets view the current opportunities; it might be a bit of a wake-up call for some."
He added that, while there was not really complacency on the part of most borrowers right now, there was a risk it could happen.
"Markets are changing with the rates repricing, so I think the uncertainty is increasing in the short term, and in the long term, higher rates mean that we could be delaying a bigger correction," he said.
The new deal, added to the dollar activity, takes out a large chunk of the US$17bn-$20bn senior holdco target HSBC has for 2023.
"A lot of HSBC's competitors have done a material amount of funding since the start of the year but this opportunity doesn't exist for HSBC for various reasons," the banker familiar with the deal said. "It's a narrower window to get deals done but while we're off the tights of the year, we're still over 100bp tighter than where we were when HSBC did a deal in October."
Taking a leaf out of HSBC's book
In US dollars, Lloyds Banking Group is looking to emulate HSBC's AT1 success of last week and is marketing a perpetual NC7 benchmark. Leads Bank of America, Lloyds, Morgan Stanley, RBC and TD went out with IPTs of 8.25%–8.375% for the deal, expected to be rated Baa3/BB–/BBB–.
"I expect this will go very well," the first banker said, pointing to the strong performance of HSBC's US$2bn Additional Tier 1 priced last week, which was quoted at 101.375. "It's a perfect springboard for Lloyds."
Analysts at CreditSights said they would see a coupon of over 8% as offering fair value.
The second banker said that conditions for AT1 issuance were still good despite spreads nearing their historical tights.
"Clearly, there's some momentum in the AT1 space, though I would say US dollar and sterling are slightly better for choice than euros," he said. "AT1 have outperformed the moving rates. Spreads for the good-quality issuers are around the 400bp mark, and as you approach the 300bp–400bp area, you're getting close to the tights. At 400bp-plus, people get more comfortable, and 500bp-plus is definitely a buy. For those who look through the nice enticing high coupons, you will get more price sensitivity given the good run the product has had."
The yield versus spread dynamic is stark to see in the Bank of America CoCo index. It closed at 403bp over asset swaps last week, well inside the 556bp and 562bp historical peaks it hit in March 2020 and February 2016. The yield, however, was 7.92% at the end of last week, higher than the 7.4% it hit in March 2020 and the 7.25% in February 2016.
The second banker added that AT1 specialist funds typically looked at the spread on AT1, whereas total return funds were focused on the yield.