HSBC seen passing Lloyds as biggest issuer of CoCos: UK Credit

[LONDON] HSBC Holdings Plc will surpass Lloyds Banking Group Plc this year as Europe's biggest issuer of the riskiest bank bonds, according to some of region's biggest debt investors.

HSBC will sell about US$4 billion of additional Tier 1 notes, a type of contingent capital bond designed to absorb losses, to bring its total of such securities to almost US$10 billion, said Laurent Frings at Aberdeen Asset Management Plc and Steve Hussey at AllianceBernstein Holding LP. Lloyds has about US$8.3 billion of the CoCo bonds outstanding, data compiled by Bloomberg show.

"We're likely to see another deal from HSBC with two or three tranches in different currencies some time this year," said Hussey, a London-based analyst who helps oversee about US$481 billion of assets worldwide, including additional Tier 1 debt.

"They should eventually be the biggest issuer." European lenders seeking to meet new capital rules without putting taxpayers at risk have made additional Tier 1 bonds the fastest-growing part of the region's debt market. The UK, which funded the largest bank bailout in history during the financial crisis, led issuance, which has climbed to more than US$65 billion since the market opened in 2013, data compiled by Bloomberg show.

"UK banks have been very active and that's likely to continue in 2015," said Mark Holman, chief executive officer of TwentyFour Asset Management LLP in London, which manages about US$6 billion including additional Tier 1 bonds. Issuance from the UK will account for at least 10 per cent of the about US$50 billion that will be sold in Europe this year, he said.

High Coupons Additional Tier 1 bonds, which allow issuers to suspend interest payments when they run into trouble, are either written off or convert to equity should a bank's capital ratio fall below a preset level. In exchange for the risk of holding the debt, investors receive coupons that average about 7.18 per cent, compared with 3.32 per cent on senior bank debt in euros, according to Bank of America Merrill Lynch index data.

HSBC has said it will require about US$20 billion of additional Tier 1 capital. Europe's biggest bank sold about US$5.5 billion of the securities in a debut deal in 2014, data compiled by Bloomberg show.

"HSBC will probably do a similar amount to last year," said Frings at Aberdeen, which oversees about US$525 billion. "They'll be careful about the timing to try and avoid hurting the performance of previous issues." Shani Halstead, a spokeswoman for HSBC in London, declined to comment on the bank's plans.

UK Issuers Barclays Plc may issue US$1.8 billion of the securities this year, said AllianceBernstein's Hussey. RBS said Dec 16 that it plans to sell about 2 billion pounds (US$3 billion) in its debut offer while Lloyds will not need to issue any more additional Tier 1 bonds, Citigroup analysts Lee Street and Claire McNicol wrote in a report yesterday.

Barclays spokesman Jon Laycock declined to comment on the lender's issuance plans. Lloyds spokesman Andrew Swailes referred to a statement saying it was "the first European bank to meet its AT1 requirement under the new capital framework."

Banks favour the bonds because they're cheaper than selling stock, the only alternative for boosting Tier 1 capital that regulators allow. Interest payments on the debt come out of pretax profit as opposed to dividends paid to shareholders, which are calculated after tax.

Credit Quality HSBC's new CoCos will help improve the credit quality of the market and attract a wider range of buyers, according to debt investors. Additional Tier 1 notes sold by HSBC, along with Nordea Bank AB, are the only ones to have obtained at least two investment-grade ratings so far, data compiled by Bloomberg show.

Rabobank Group, which has been meeting investors for its inaugural additional Tier 1 deal this week, is also likely to gain two investment-grade ratings, according to Simon Adamson, an analyst at CreditSights Inc. in London.

"It broadens the appeal of the asset class," said Paul Smillie, who helps oversee about US$150 billion as a Singapore- based analyst at Threadneedle Asset Management. "There's a part of the investor base that can only buy investment-grade bonds, so investment-grade issuance helps open things up." -With assistance from Charles Daly in Stockholm.

BLOOMBERG