HSBC tapped into its relationships as primary dealer with eurozone countries when it acted in Greece’s recent €5.5bn bond issue. Writer Edward Russell-Walling.

Although HSBC now prefers to be known as “the world’s local bank”, its old slogan – “think global, act local” – still describes the way the bank likes to do business. This is as true in the public debt markets as anywhere else, as underlined by the bank’s role in the Hellenic Republic’s recent €5.5bn five-year bond issue.

HSBC is a primary dealer in Greece’s sovereign debt, as it is for every other member of the eurozone. Over the past few years it has pursued a strategy of building on those primary dealer relationships in all those countries, across sales, trading, origination and, increasingly, advisory. It is, for example, the only non-French shareholder of the government-guaranteed bank funding agency Société de Financement de l’Economie Francaise (SFEF).

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Left to right: Spencer Lake, Ulrik Ross, PJ Bye, Frédéric Gabizon

Better loyalty

“This has included doing more than merely providing financing,” explains Spencer Lake, HSBC’s global head of debt capital markets. “Our services have been more holistic, including all the different components of what we do as a bank. In the crisis, we have demonstrated a better sense of loyalty than some others, and we hope this has stood us in good stead as markets have opened up a little,” he adds.

This strategy, Mr Lake says, should yield further benefits as governments have acquired private sector assets – stakes in troubled banks, for example – and now look for advice on how to manage them. But the state move into the private sector and the creation of a new market in government-guaranteed bank debt are also affecting the market for sovereign debt.

While the sovereign, supranational and agency (SSA) sector has traditionally been an entity unto itself (“a rates game instead of a credit game”, as one commentator puts it), these issuers now find themselves competing with government-guaranteed bank issuance, often AAA rated. While supply is growing, a distinct overlap in the separate investor bases is becoming apparent.

In January, euro capital markets activity in the unguaranteed bank sector halved to €24.2bn compared with the previous January, according to Dealogic. But this was more than made up for by a surge of deals in the public and corporate sectors, with front-loaded funding for the new year. Euro SSA issuance for the month totalled €70.2bn, a 68% rise, with another €38.3bn from the new government-guaranteed sector, according to Dealogic. HSBC reckons that the trend will continue.

“In 2008, supply from the traditional SSA sector was about $1000bn,” says Ulrik Ross, HSBC’s head of European public sector debt capital markets. “With governments’ new needs and the addition of sovereign government-guaranteed capacity, investor choice in 2009 will be 70% to 80% larger.”

Integration is happening

The bank concedes that this is not a completely unified world, and that the market remains very much aware of the differences between credits, but insists that a certain integration is taking place. And HSBC has been pooling the thoughts of its FIG and public sector bankers to see how it can best exploit the new environment, says Mr Lake.

The statistics suggest it has been having some success. Certainly, as the market came back to life in January, HSBC was the month’s number one bookrunner in euro-denominated public sector debt issuance, according to Dealogic, and in all international bonds, according to Bloomberg.

As international investors grow more cautious, and as sovereigns find themselves competing with new sources of supply, domestic markets are becoming more important to the success of sovereign issues.

“In this new world, where governments are competing against a host of new products, you have to stay closer to home,” says PJ Bye, HSBC’s head of public sector syndication. That’s where “acting local” comes in handy. HSBC is the number one international dealer in Greece, according to Mr Bye. “We are not a purely domestic player, but we have that franchise,” he adds.

The bank was a joint bookrunner on the Hellenic Republic’s last syndicated deal, a $1.5bn five-year issue transacted in June 2008. This latest five-year euro benchmark deal was led by Banca IMI, Barclays Capital, Citi, HSBC and National Bank of Greece, with HSBC as global co-ordinator.

Discussions over the January transaction began in mid-December last year. Spreads for peripheral eurozone sovereigns had been widening and news about the Greek public finances – with heavy debt and a widening budget deficit – was less than inspiring.

“We discussed the best way to tap the market,” says Frédéric Gabizon, HSBC head of eurozone public sector debt finance and advisory. “In the absence of syndicated transactions from any sovereigns, Greece was very keen to tap the market early. Success or failure can drive the funding year for a country, so it is very important to make a success of it.”

In the overall scheme of things, government bonds have tended to end up predominantly in the hands of non-domestic investors.

Domestic matters

“But you need the domestic bid, especially in times of turmoil,” says Mr Gabizon. “Because the name is best understood by domestic investors, they create momentum and provide stability.”

The first week of January was a busy one, including (mainly five-year) syndicated deals from SFEF, Austria, Ireland and the European Investment Bank. Greece also decided to go for a five-year deal; three years would have been less ambitious but could have been seen as a weak maturity. “Most government-guaranteed bank paper has been two to three years, so a sovereign needed to get outside that space,” says Mr Lake.

But then, disaster struck – or what seemed like it. Half way through January, rating agency Standard & Poor’s downgraded Greece from A to A- (Ireland, Spain and Portugal were soon to follow). But then, the deal was spared the only worse curse than a rating downgrade the week before a transaction, which is one the week afterwards.

It helped at this point that Greece was part of the eurozone, which gave international investors some comfort. Non-zone sovereigns such as Latvia and Hungary have found themselves unable to raise funds directly and have had to do it through supranationals. But the downgrade, added to the abundance of SSA supply, meant that the issuer was going to have to price the bonds even more generously if it was going to pull off that all-important success.

Job done

In the third week of January, the transaction was launched with a coupon of 5.5%, and a guide price of 260 to 270 basis points (bps) over mid-swaps. Including a new issue premium of 25bps to 30bps, the pricing had a whiff of emerging markets about it. But it did the job. Some €8bn of orders were logged, from nearly 160 accounts, and the deal was finally printed at 260bps over. That was the widest spread ever for a euro-denominated bond out of the eurozone. But it demonstrated a major virtue for Greece as a borrower, and one from which other peripheral eurozone sovereigns could take solace – continued access to the capital markets.

As the bankers had predicted, domestic demand played a vital role. Despite the flood of SSA euro issuance, Greek investors had known the transaction was coming and had kept space for it. They accounted for 54% of the allocation, much of that in the shape of bank treasuries. The UK took 17%, as did Germany and Austria combined.

Some central banks are no longer buying in size, leaving bank treasuries in general to exercise their appetite for the paper. They took 58% of the overall issue, with fund managers at 19% and insurance companies and pension funds taking 17.5%.

“Accessing liquidity is a key issue now for all borrowers, and this showed that, even in a difficult period, deals get done,” says Mr Gabizon. There was a time when minimising the price was the top priority. Price is now bending the knee to liquidity – finding it and tapping it.

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