HSBC co-heads of debt capital markets Alexi Chan and Jean-Marc Mercier talk to Danielle Myles about successfully deepening the bank’s Asia presence, tapping into China’s panda market, and why the US is its next growth target. 

Alexi Chan

For a bank with a culture of longevity, Alexi Chan and Jean-Marc Mercier could be HSBC’s poster boys. They first worked together in the early 2000s as lead originator and lead syndicator, respectively, on a handful of deals including an inaugural issuance by the UK’s Network Rail. Fast-forward to 2015, and they found themselves jointly overseeing the bank’s world-class debt capital markets (DCM) business.

In recent months, DCM markets have hit HSBC’s sweet spot. Despite volatility caused by key elections, European issuance has marched on with trades regularly multiple times oversubscribed. Emerging markets – a pillar of HSBC’s group strategy – have produced watershed deals including Saudi Arabia’s $9bn debut international sukuk and Kuwait’s first Eurobond (both of which HSBC helped bring to market).

Asian commitment

In Asia, traditionally HSBC’s biggest profit generator, the first quarter of 2017 broke a string of records including for international DCM ($189.4bn), high-yield ($24.7bn) and Chinese offshore bonds ($58bn). HSBC regularly tops Asia’s DCM league tables and, having been on the ground for some 150 years, its unrivalled investment in the region makes it better positioned than any other bank to benefit from the markets’ maturation.

“HSBC’s commitment to deepening capital markets in Asia has been a force ever since the regional financial crisis 20 years ago,” says Mr Chan. “When you align that with our leading presence in Europe, the Middle East and the Americas, it’s a unique proposition and one we feel brings tremendous value to our clients.”

The bank’s Pivot to Asia strategy, announced in 2015, came shortly before some US and European investment banks decided to scale back in the region. But Mr Chan is not treating this as an opportunity to increase market share. “We want to be clear in our focus and adapt our strategy to what serves our clients best. We aren’t getting distracted by what other banks are doing,” he says.

Opening China

A key strategic priority for the DCM division is the liberalisation of China’s onshore bond market. At $9300bn it is the world’s third biggest, yet less than 2% is owned by foreign investors.

HSBC has been a trailblazer in its internationalisation, having done everything from educating investors on the nuances of Chinese risk and economics, to becoming the first foreign commercial financial institution to issue a panda bond. It also brought to market the first sovereign panda deals, and the first bond denominated in special drawing rights and settled in renminbi.

The bank continues to play a pivotal role in each stage of the evolution of Chinese DCM. “Many of our international clients were very keen to tap the dim sum [offshore renminbi] market when it opened, to gain access to the Chinese renminbi. But being able to tap the onshore renminbi market (for example, via panda bonds) – which is on a completely different scale – is even more interesting,” says Mr Chan. “We are working hard to support the opening up of the market in the most appropriate way, blending international best practice with existing Chinese characteristics.”

Jean-Marc Mercier

He regards the steps taken so far to open the market to international investors – namely the Qualified Foreign Institutional Investor (QFII) and renminbi QFII schemes, and as of 2016 China Interbank Bond Market Direct – as very helpful. The bank’s push into the Pearl River Delta makes it particularly well positioned to capitalise on foreign investors’ appetite for the companies that have made Shenzhen and its surrounding areas China’s tech hub.

Union beyond Europe

Another way the HSBC division is connecting clients with the best opportunities is via collaboration between global banking and markets (GBM) and commercial banking. This initiative allows the DCM team to introduce HSBC’s widespread commercial banking client base – particularly those in China, the UK and Germany – to public and private capital markets.

In Europe it has the added impetus of the European Commission’s capital markets union policy. High-yield has been a key tool for bringing growth companies to market, as reflected by first-quarter European issuance more than doubling first-quarter 2016 volumes.

Another instrument of note is schuldschein, which are German law private placements, which are becoming more pan-European. HSBC recently assisted Volkswagen on a €900m-equivalent schuldschein – more than half of which was denominated in dollars – and late in 2016 helped French small appliance maker SEB place an €800m schuldschein.

“We’ve helped develop this Germanic-based instrument into a very international initiative,” says Mr Mercier. “Alongside the high-yield market, it’s proving very helpful in delivering the bond market to the whole of the European corporate base, not just the big ones.”

The GBM-commercial banking initiative ensures these efforts stretch well beyond Europe. Mr Chan describes it as one of the unique ways HSBC can bring a wider range of companies to the capital markets.

“It’s about ensuring that alongside the services traditionally provided to commercial banking clients, such as bilateral lending and trade finance, we also introduce them to a range of capital markets, be it schuldschein in Europe, private placements in Asia or the high-yield market,” he says. “It’s been pretty successful so far, and it has a long way to run.”

Improving synergies

At the other end of the spectrum, HSBC has become synonymous with the world’s landmark DCM transactions. In 2016 alone it was joint global coordinator and bookrunner on Saudi Arabia’s $17.5bn debut Eurobond; global coordinator on Argentina’s $16.5bn return to global bond markets; and one of the few banks to work on all three tranches of Teva’s $20.4bn-equivalent bond.

Last year’s integration of HSBC’s capital financing unit (including DCM) into global banking has helped in this regard. Mr Mercier and Mr Chan believe the combination has increased collaboration and improved client coverage.

“Our aim is to continue leading these large strategic transactions for our clients, and that requires us to be very joined up,” says Mr Chan. “Integrating products with the relationship teams and sector bankers has led to greater collaboration than when we were spread across a greater number of divisions. So I think the strategy is yielding results pretty quickly.”

A green future

Looking ahead, some of the key themes Mr Chan and Mr Mercier see driving primary issuance – particularly in Asia and Europe – are infrastructure’s emergence as an asset class, insurance regulatory capital and green bonds. Regarding the latter, in 2016 more than $80bn-worth of green bonds were issued worldwide, and some analysts expect this year’s volumes to reach $150bn.

It has become a big focus for HSBC, which issued its first green bond in November 2015 and has led on 50 sustainable bond debuts over the past two years (for 37 of which it was structuring adviser). Testament to its green capabilities is the fact Swedish bank SEB, one of the architects of the first ever green bond in 2007, mandated HSBC as joint lead manager for its inaugural deal in February this year.

Mr Mercier sees huge value in the rise of green finance, not just in terms of achieving development and environmental objectives, but also in its power to change the culture within issuers. “As a management team you need to report and be transparent about what you do with the money, which changes the information flow and focus internally,” he says. “Also, investors are absolutely focused on it. On a recent roadshow in New York, one of the first questions in a one to one with an insurance company was about environmental impact.”

Mr Mercier also expects the reverse Yankee trend of 2015 and 2016 to continue, fuelled by the European Central Bank’s record-low interest rates. “It’s a theme that people are still looking at,” he says. “The difference in yield and some volatility on foreign exchange continues to be an attraction, especially to US corporates as it means they are hitting a different investor base, too.” It is luring issuers from other countries to the euro-denominated markets, too. HSBC was a bookrunner on perhaps the best example: a €4.25bn bond sale in February by Pemex, Mexico’s state oil company – the biggest ever from an emerging market corporate.  

Linking East to West

The Pemex deal epitomises HSBC’s penchant for connecting DCM investors, products and issuers across developed and developing markets. Few banks have contributed more to establishing a truly global bond market, an achievement made easier for HSBC by having DCM chiefs in Asia and London. “Our clients have a global head in Asia time, Europe time and US time,” says Mr Mercier. “It’s a big team and a big bank, but there’s always someone ready to take a decision.”

As with its European peers, HSBC’s US DCM platform has not reached the scale of its two major regions. But Mr Mercier says it continues to be a good opportunity for the bank, not just for Yankee issuance but also for domestic deals, as demonstrated by its lead role on Microsoft’s $17bn bond in January.

“When you are the number one in Asia and a top house in Europe, the growth must be in the US,” says Mr Mercier. “It is a very tough market for sure – but we have what it takes to expand.”

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