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By Alice Gledhill
LONDON, March 10 (IFR) - Massive demand for HSBC's 3.25bnsenior deal has given a welcome shot of confidence to theEuropean market for loss-absorbing senior unsecured debt, whichhas struggled to find its feet.
HSBC, like other UK and Swiss banks, is having to ramp upissuance out of its holding company to help meet Total LossAbsorbing Capacity (TLAC) requirements, laid down last Octoberby the Financial Stability Board.
It priced six and 11-year bonds roughly 20bp inside initialprice thoughts on combined books north of 10bn from 540accounts, by far the biggest order book for months for anyEuropean bank deal in any format.
The result stunned the European market, where issuance atthe holding company level is a much less familiar concept thanin the US. The growth of the asset class has so far provedtentative and depth of demand has been questionable.
UBS delivered a strong 1.25bn inaugural deal last year buta second 750m deal in February underwhelmed on size, while peerCredit Suisse was forced to pull a 10-year note in toughconditions last summer. KBC Group has not yet managed to issuethe bond it mandated in January.
The response to HSBC's deal was therefore encouraging,particularly given it has the highest TLAC target of anyEuropean bank, at US$60bn-$80bn by 2018.
The bank had already priced a US$7bn three-part trade theprevious week, enabling it to carve out almostUS$11bn-equivalent in just two sessions.
Sole bookrunner HSBC set initial price talk for the six-yearat mid-swaps plus 170bp area and for the 11-year at mid-swapsplus 205bp area. The size of the book was boosted by severallarge triple-digit anchor orders.
Very few orders fell away when guidance was ratchetedtighter by some 15bp-20bp, to plus 150-155bp (wpir) for the 6sand to plus 190bp area (+/-3, wpir) for the 11s, moves more akinto the US market. Both priced at the tight end.
SOME WAY TO GO
But bankers warn that the European market still has some wayto go to catch up with the US.
"The HSBC trade is a positive step and I think the markethas come a long way in terms of understanding, but we startedfrom a lower level of familiarity and understanding than USinvestors, who have been buying for many years," said a DCM FIGbanker. "There is still further work to be done."
More supply should give the market another boost, he added,while clarity on whether other jurisdictions will opt forstructural or contractual subordination of senior debt shouldalso give investors a better idea of prospective volumes.
Bankers also warned against expecting similar results forother banks.
"Clearly people have overcome some of the more academicconcerns about holdco. But you have to be careful extrapolatingtoo far - HSBC has a very highly rated holdco, and the spreadwasn't that much of a discount to Tier 2," the banker added.
HSBC is rated A1/A/AA- at the holdco compared with UBS atBBB+/A, for example.
The fact that HSBC has very little euro paper outstanding inboth opco and holdco senior formats helped drive demand, butalso made it tricky to establish fair value.
Bankers away from the deal pegged the final new issueconcession around 10bp/15bp, in addition to a rough 75bp/80bpspread over its opco curve. Both tranches had tightened by 30bpto 40bp by Thursday afternoon. (Reporting by Alice Gledhill, editing by Helene Durand, IanEdmondson)
