Few Europe banks have HSBC's nerve on hybrids
LONDON (Reuters) - HSBC (HSBA.L) has braved the regulatory uncertainty over bank capital with a massive $3.4 billion Tier 1 bond sale in the United States with few other European banks likely to follow its bold move.
Rather than wait for more clarity on new rules, which might raise the cost of selling hybrid bank securities in the future, HSBC has seized an opportunity to tap into U.S. investor demand for higher yielding assets.
HSBC's deal last week was only the second international hybrid Tier 1 transaction so far this year, highlighting how the lack of clarity has kept the market in limbo.
"HSBC's deal is a very elegant solution, but I don't think we feel the need to be to heroic or pioneers," Sanjay Sofat, head of capital issuance and structuring at Lloyds Banking Group (LLOY.L) said at a conference.
Hybrid Tier 1 bonds are securities that bridge the divide between equity and debt. They have some equity-like features but are a cheaper form of Tier 1 capital than true equity because interest payments are tax-deductible.
Hybrids played a big role in providing banks cheap capital for 10 years before the credit crunch.
However, regulators want to improve their ability to absorb losses in times of stress and have argued that hybrids did not do this adequately during the credit crisis.
Some regulators are pushing for a role for new-style Tier 1 capital instruments -- such as contingent and convertible securities -- and most banks are waiting to see what new forms of Tier 1 bonds regulators favor, which has created a new issue drought.
HSBC's gamble on regulation is hedged because it has the right to redeem the securities if future rules stop them counting as Tier 1 capital. It can also exchange the bonds for perpetual non-cumulative preference shares at any time.
"It provides a neat solution for the uncertain situation we are in," said Maurice Raichelson, head of capital and funding strategy at Royal Bank of Scotland (RBS.L).
But other European banks could find it tough to follow as they do not have HSBC's strong credit rating (Aa2/AA/AA) and the international standing to tap into pent-up demand from U.S. retail investors.
Question marks over whether banks have sufficient stores of capital to withstand tough times remains a key concern for policymakers and they have decided to publish stress tests on European bank solvency in July.
It is uncertain whether banks can obtain all their capital requirements from just equity markets.
"The HSBC... T1 deal has, in a sense, validated old style Tier 1, and we expect others might be encouraged to follow suit," said Prasad Gollakota, head of capital solutions and liability management at UBS.
Hybrid Tier 1 bonds helped shore up banks during the crisis, with about 27 billion euros ($36.23 billion) of core Tier 1 capital created via hybrid bond exchanges and buy-backs by European banks since the crisis.
Regulators seem to be moving toward a new type of Tier 1 hybrid instrument that would see bond investors formally bearing losses as well as equity investors.
"We believe there is new standard instrument for Tier 1, but what it looks like is not clear," said the bank credit analyst.
(Editing by Karen Foster)