HSBC shakes up European holdco market

[LONDON] Massive demand for HSBC's 3.25 billion senior deal has given a welcome shot of confidence to the European market for loss-absorbing senior unsecured debt, which has struggled to find its feet.

HSBC, like other UK and Swiss banks, is having to ramp up issuance out of its holding company to help meet Total Loss Absorbing Capacity (TLAC) requirements, laid down last October by the Financial Stability Board.

It priced six and 11-year bonds roughly 20bp inside initial price thoughts on combined books north of 10 bilion from 540 accounts, by far the biggest order book for months for any European bank deal in any format.

The result stunned the European market, where issuance at the holding company level is a much less familiar concept than in the US. The growth of the asset class has so far proved tentative and depth of demand has been questionable.

UBS delivered a strong 1.25 billion inaugural deal last year but a second 750 million deal in February underwhelmed on size, while peer Credit Suisse was forced to pull a 10-year note in tough conditions last summer. KBC Group has not yet managed to issue the bond it mandated in January.

The response to HSBC's deal was therefore encouraging, particularly given it has the highest TLAC target of any European bank, at US$60 billion to US$80 billion by 2018.

The bank had already priced a US$7 billion three-part trade the previous week, enabling it to carve out almost US$11 billion-equivalent in just two sessions.

Sole bookrunner HSBC set initial price talk for the six-year at mid-swaps plus 170bp area and for the 11-year at mid-swaps plus 205bp area. The size of the book was boosted by several large triple-digit anchor orders.

Very few orders fell away when guidance was ratcheted tighter by some 15bp-20bp, to plus 150-155bp (wpir) for the 6s and to plus 190bp area (+/-3, wpir) for the 11s, moves more akin to the US market. Both priced at the tight end.

SOME WAY TO GO

But bankers warn that the European market still has some way to go to catch up with the US.

"The HSBC trade is a positive step and I think the market has come a long way in terms of understanding, but we started from a lower level of familiarity and understanding than US investors, who have been buying for many years," said a DCM FIG banker. "There is still further work to be done."

More supply should give the market another boost, he added, while clarity on whether other jurisdictions will opt for structural or contractual subordination of senior debt should also give investors a better idea of prospective volumes.

Bankers also warned against expecting similar results for other banks.

"Clearly people have overcome some of the more academic concerns about holdco. But you have to be careful extrapolating too far - HSBC has a very highly rated holdco, and the spread wasn't that much of a discount to Tier 2," the banker added.

HSBC is rated A1/A/AA- at the holdco compared with UBS at BBB+/A, for example.

The fact that HSBC has very little euro paper outstanding in both opco and holdco senior formats helped drive demand, but also made it tricky to establish fair value.

Bankers away from the deal pegged the final new issue concession around 10bp/15bp, in addition to a rough 75bp/80bp spread over its opco curve. Both tranches had tightened by 30bp to 40bp by Thursday afternoon.

REUTERS