HSBC SFH priced a Eu1.25bn 10.5 year euro benchmark covered bond yesterday (Tuesday) that helped meet its parent’s modest public term funding needs for 2013, an HSBC funding official told The CBR, also explaining the thinking behind an eight-strong lead manager line-up.

HSBC France headquarters, Paris

The deal is only the second euro benchmark covered bond for the issuer, despite it having made its debut more than three years ago, in January 2010, with HSBC France, its parent, having only modest funding needs.

This goes for 2013, too, according to Neil Sankoff, head of senior funding at HSBC, who said that HSBC France at the beginning of the year set out a plan to raise about Eu2bn in public term debt this year. It made inroads into this in January with a Eu1bn seven year senior unsecured issue, and had been monitoring the market for the right opportunity for a benchmark covered bond, said Sankoff.

“After the senior unsecured issue it was a question of finding the right time for a covered bond,” he said. “Markets have been very choppy this year. The OAT rally was definitely helpful and yesterday we decided to go ahead.”

Leads Commerzbank, Crédit Agricole, Danske, HSBC, ING, Natixis, Santander, and UniCredit announced the mandate early yesterday morning and began marketing the October 2023 issue with initial price thoughts of the 40bp over mid-swaps area.

Mark Pearce, covered bond syndicate at HSBC, said that the leads opted for intra-day execution to avoid overnight risk given recent volatility and global news, and went out with the 40bp over area to give the investor base clear direction on spread and outcome targets rather than more ambiguous ranges that can be more vague.

Throughout yesterday morning the deal was on the cusp of coming with a 2% coupon, he added, with an increase in swap rates during deal execution ultimately allowing this to be achieved with a spread of 35bp over mid-swaps, a good outcome for all parties. This is where the deal ended up being priced, after the leads built an order book of Eu4bn based on guidance of 35bp-38bp over.

One hundred and sixty accounts participated in the deal, which Pearce said made the order book the largest for a 10 year-plus benchmark this year.

A syndicate banker away from the leads had yesterday said that IPTs of the 40bp over area were too generous a starting point, and another banker said that tightening by 10bp in the secondary market could suggest the deal was cheap, but “that’s what happens when investors go mad and the market turns one way”.

Pearce said that the level made “absolute sense” relative to comparables and bearing in mind HSBC SFH’s infrequent issuance.

“At 35bp over, the deal came 5.7bp over October 2023 OATs, which is a very good level for the issuer with the recent tightening seen on the French sovereign curve,” he said. “It’s a small differential but justified given the undersupplied nature of the market, particularly in France, alongside the rarity and quality of the name.”

Syndicate bankers away from the deal cited a premium of around 10bp versus French government bonds.

“HSBC did fantastically well yesterday,” said one.

OATs had tightened by more than 20bp versus swaps in the five trading days leading up to HSBC’s deal, with another lead syndicate official noting that their outperformance of covered bonds helped establish relative value for new long-dated supply.

Sankoff said that the issuer went into the deal with positive expectations about the level of demand given that it has a strong investor following and is an infrequent covered bond issuer, and that the market has been undersupplied in general, but that the outcome was “outstanding”.

“The bookbuild was fantastic,” he said. “I don’t think I’ve ever seen a book build so quickly. Given there was no pre-announcement the first the market knew of the deal was when it hit the screens yesterday morning, and within 65 minutes we had a Eu4bn book.”

The eight-strong lead manager line-up is unusual in the benchmark covered bond market, and syndicate bankers away from the deal had commented on the large syndicate group mandated to execute the deal.

Sankoff said that the line-up was a function of HSBC SFH being a very infrequent covered bond issuer.

“We get covered by a lot of good banks and we don’t get many chances to recognise them,” he said.

The issuer had been targeting a Eu1bn deal, but the size and quality of the order book moved it to increase the deal to Eu1.25bn, he added.

The 2023 maturity was chosen to fulfil the covered bond programme’s purpose of providing extra duration, said Sankoff, with a 2017 covered bond benchmark already outstanding and January’s senior unsecured deal having been a seven year.

“We opted for a 10.5 year instead of a straight 10 year because it provided around six extra basis points of yield from the swap curve and helped us get to a 2% coupon,” he said.

Based on balance sheet expectations for the rest of the year, yesterday’s deal is likely to be HSBC SFH’s last benchmark covered bond for the year, according to Sankoff.

“We like to maintain a pretty conservative level of overcollateralisation in the programme, which is also a factor,” he said.

France took 32%, Germany and Austria 27%, the UK and Ireland 13%, the Benelux 12%, Nordics 8%, southern Europe 4%, Asia 2%, and others 2%. Insurance companies and pension funds were allocated 34%, fund managers 32%, banks 26%, central banks and official institutions 7%, and private banks 1%.

Photo: Nicolas Souyris/HSBC