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REFILE-HSBC blazes trail for stateside TLAC issuance
March 4, 2016 / 2:05 PM / in 2 years

REFILE-HSBC blazes trail for stateside TLAC issuance

(Refiles for wider distribution)

By Will Caiger-Smith

NEW YORK, March 3 (IFR) - A strong response to HSBC’s US$7bn senior holding company bond earlier this week is expected to encourage other foreign banks to tap the US market to meet new regulatory requirements.

HSBC’s deal, its largest ever in dollars, will count towards its Total Loss Absorbing Capacity (TLAC) requirements, which were laid down by the Financial Stability Board last October.

The bank announced the self-led transaction just a few days after it said it needed to raise US$60bn-80bn of TLAC debt by 2018, well in excess of its US$51bn maturities over the same period.

The bank’s decision to move fast however was welcomed by buyers, who put in US$19bn of orders. The three-part trade comprised of five-year and 10-year fixed rate notes and five-year floating rate bonds.

All three tranches were tightened by 22.5bp-25bp from initial price talk and at final pricing had just 7bp of new issue concession, a strong result in a week flooded by mostly US financial paper.

“It’s a good sign for all yankee FIG borrowers,” said Jonny Fine, head of investment grade syndicate at Goldman Sachs.

“It shows there is a willingness for the US market to finance European TLAC,” said Fine. “The familiarity with the product among US investors will be helpful.”

US banks often issue holding company debt, whereas European banks tend to print through their bank-level subsidiaries.

The bonds were trading more than 20bp inside reoffer on Thursday, another encouraging sign for the bank and other FIG issuers looking at the market, bankers told IFR.

“HSBC has a lot more to do so the fact they could tighten (that much) is definitely a good sign - investors seem to have the appetite,” said a DCM banker.

CHANGED PLANS

TLAC debt, intended to avoid a repeat of the taxpayer bailouts after the 2008 financial crisis, can be written down if regulators deem a bank to be failing.

HSBC had initially hoped to meet its TLAC requirements by issuing through local subsidiaries, but the US Federal Reserve’s insistence on resolving failing banks at holding company level forced it to rethink its strategy.

It will issue all its external TLAC debt through HSBC Holdings and downstream the funding to its various subsidiaries in forms compliant with local regulation.

Given it can be bailed in, holding company debt generally trades wider than bank-level debt.

But one banker said that differential on the HSBC deal was around 65bp, much tighter than the 120bp premium that UBS paid on its 750m (US$821.7m) holdco deal last week.

TLAC debt is expected to boost issuance of unsecured bank debt across the globe after a 12% year-on-year decline in 2015, according to a Moody’s report published on Thursday.

“As a result of the guidelines set forth on capital and debt required to meet bank recapitalization needs in a resolution, we expect banks to issue sizeable amounts of unsecured debt,” said the ratings agency.

Wells Fargo and JP Morgan have communicated TLAC shortfalls of US$44bn and US$20bn respectively, while in Europe BNP Paribas is estimated to need to issue 49.5bn (US$54.2bn) of TLAC debt.

EXPECTING A RUSH

Bankers expect to see more European banks issue in dollars in the coming weeks.

UK and Swiss banks have active holding company issuance programs and are expected to ramp up issuance through those entities as they build their TLAC buffers.

Other countries are yet to specify what form TLAC debt will take, but banks in those jurisdictions will still benefit from the success of HSBC’s deal, said Fine.

“People will want to have a look at the US market,” he said. “We’ll see others, whether in TLAC form or just normal senior debt.”

It has already started to happen. On Thursday, Swedbank priced a US$1.25bn five-year senior deal at 135bp over Treasuries, around 20bp inside IPTs.

Bankers said investors were returning to bank debt after a sharp sell-off in February amid concerns over coupon payments on AT1 debt and the effect of low rates on bank earnings.

“People feel like the valuation move has happened and now there is an appropriate concession and people are willing to commit capital,” said Fine. (Reporting by Will Caiger-Smith; editing by Shankar Ramakrishnan)

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