HSBC capitalises on hybrid instrument resurgence

From left: Adam Bothamley, Jean-Marc Mercier, Nik Dhanani, Farnam Bidgoli

In 2018, issuance of capital securities by corporates and financial institution groups (FIG) worldwide fell 18%, from the previous year's $404bn to $330bn, according to Dealogic.

Towards the end of the year, investors felt increasingly negative about the immediate future, including the likelihood of the Federal Reserve tightening rates and the prospect of a US-China trade war. "The market was difficult in the fourth quarter," acknowledges Jean-Marc Mercier, HSBC's global co-head of debt capital markets (DCM). "Investors were more risk-off. They were going to covered bonds and high-grade bonds, not hybrids."

Hybrid attraction

Clients want hybrid instruments in the capital stack, Mr Mercier insists, but they need to find the right moment to issue. Finally, in the first few days of January, that moment seemed to arrive.

"The back end of 2018 was challenging, with spreads widening and risk appetite weak," says Adam Bothamley, HSBC's global head of debt syndicate. "The conditions were not in place for an efficient corporate hybrid market. Then, in the first week of this year, the Fed turned. Yields were lower and spreads tightened."

Suddenly, the Fed seemed less hawkish. There were indications of a trade truce, and noises from the European Central Bank suggested it would keep rates lower for longer. "We saw a window, and we said to our clients that if they wanted to do capital securities, now was the time," says Mr Mercier.

Engie leads the way

The first corporate hybrid of the year, reopening the euro market, came from French utility Engie. Engie issued its first green hybrid back in January 2018 and this, with HSBC as joint bookrunner, was its second.

It was a highly successful €1bn green perpetual non-call six-year bond, more than six times oversubscribed, with 15 three-digit orders, including one for €250m. "Engie is already an established issuer in the green space, having introduced a green bond framework and reported on its impact," says Farnam Bidgoli, HSBC's head of sustainable bonds for Europe, the Middle East and Africa.

With a coupon of 3.25% and a reoffer yield of 3.5%, the company paid no new issue premium. The proceeds were destined for 'eligible' green projects, as defined in the framework.

"The corporate hybrid market has continued to evolve," says Nik Dhanani, global head of HSBC's financing solutions group. "It has mainstream acceptance, and there is now a crossover between green and hybrid."

Engie was followed by the first high-yield capital trade of the year, an inaugural €1bn green hybrid from utility Energias de Portugal (EDP). This was a deeply subordinated 60.25 year, non-call 5.25-year bond, with a 4.5% coupon and a 'dynamic' step up facility. Based on its in-house assessment, joint bookrunner HSBC said 51% of the allocation went to "dark green" and 15% to "light green" investors, measured by their sustainable appetite.

"There have been only five corporate issuers of green hybrids, and we have worked with all of them," says Ms Bidgoli. They are TenneT, Iberdrola, Energie, EDP and Wuhan Metro. Overall, HSBC was the only bookrunner consistently in the top five for all capital issuance (including FIG) in each of the past three years, according to Dealogic.

Asian appetite

These instruments have really taken off in Asia. The region has seen more than 165 internationally distributed corporate hybrid transactions since 2010, mainly in US and Singapore dollars, according to Sean McNelis, HSBC's co-head of DCM for the Asia-Pacific region. He says that while the drivers are not dissimilar to those in Europe – supporting credit ratings, getting equity onto the balance sheet, acquisition – there is one notable difference.

"A lot of Asian corporates are largely owned by family," says Mr McNelis. "So the fact that corporate hybrid is non-dilutive is a massive positive."

The types of trade vary, he continues, and some are unrated. "But the issuers are so well known that they can raise Hong Kong, Singapore or US dollars without a rating," he says.

New World's order book

One such issuer is New World Service (NWS), a Hong Kong family-owned vehicle with interests across infrastructure, leasing and property. With HSBC as joint bookrunner, it came to market in January with an unrated perpetual non-call five-year deal.

This was the first unrated US dollar perpetual bond since May 2018 and the first US dollar perpetual capital securities offering of 2019. Like some other hybrid issues, it was acquisition driven. NWS had just spent HK$21.5bn ($2.74bn) on acquiring FTLife Insurance, in Hong Kong's largest ever insurance deal.

With an order book of more than $4bn from 130 accounts, the reoffer yield was tightened by 55 basis points (bps) from guidance to 5.75% and the size set at $800m. Since the bond was unrated, NWS was able to offer a larger than usual step-up of 500bps, should the first call date be missed.

The following week, HSBC helped NWS to tap a further $200m on a sole basis. As joint global coordinator, lead manager and bookrunner, it also helped Greentown China Holdings reopen the high-yield perpetual bond market.

Greentown is a mainland China property developer, a sector for which 2018 was challenging. However, its credit profile is supported by the fact that state-owned China Communications Construction Group is a 28.8% shareholder.

"Because the deal was only for accounting equity, Greentown could use a non-call three-year structure, the sweet spot for investors," says Mr McNelis.

Announced with initial price guidance in the area of of 8.625%, the transaction attracted more than $5.6bn in orders from over 200 accounts. The $400m perpetual Reg S deal was finally priced to yield 8.125%.

Eastern promise

Bank capital securities have enjoyed growing Asian demand, in both primary and secondary markets. Early in January, Hong Kong's Dah Sing Bank kicked off what HSBC describes as "a critical refinancing year" for Asian bank capital with a $225m 10-year non-call five-year subordinated tier-two bond. It drew more than $1.4bn in orders and had a reoffer yield of 5.1%. HSBC has been on all Dah Sing's capital transactions to date.

The following day, Shanghai Commercial Bank attracted orders of more than $1.45bn for a similarly structured tier-two bond, sized at $300m and priced to yield 5.04%.

HSBC was also joint lead and bookrunner, as well as sustainability structuring adviser, on the first subordinated bond from an Asian bank, from Kookmin Bank. This $450m 10-year bullet transaction with its 4.5% coupon drew $2.7bn of orders before reoffer. "There is a much stronger order book for bonds that are green," says Mr McNelis.

Dubai Islamic Bank added to its outstanding issues of additional tier-one sukuks with an unrated $750m perpetual non-call six-year mudaraba. With a profit rate of 6.25%, it was five times covered with a book of about $4bn.

Meanwhile in Europe...

As banks return to the capital securities market, European deals led by HSBC in 2019 have included Rabobank and UniCredit. Responding to the advent of a new resolution regime for banks, Rabobank issued €1.25bn of five-year non-preferred senior debt. This was its second such transaction. The coupon of 0.625% and reoffer spread of mid-swaps plus 55bps represented no new issue premium.

After an absence of two years from the euro subordinated market, UniCredit took advantage of strong liquidity to issue €1bn of 10-year non-call five-year tier-two notes. The coupon was 4.875%, tightened from initial price thoughts of 5.125% area.

So far, 2019 is outstripping 2018, with year-to-date issuance on March 5 of $49.2bn, compared with $38.4bn in 2018 and $48.9bn in 2017, according to Dealogic. In corporate hybrid, which began to take off in 2013 and 2014, typically with non-call five-year deals, refinancing is expected to support volumes in this and subsequent years. HSBC estimates that refinancing will aggregate to about €12bn this year, rising to more than €25bn in 2023.

"It's going to be another exciting year for hybrids," says Mr Mercier. "And issuers' ability to undertake transactions successfully will largely be down to the bookrunner and its ability to navigate the markets while meeting issuer objectives."