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By Will Caiger-Smith and Alice Gledhill
LONDON, May 24 (IFR) - Strong demand allowed HSBC to launchits US$2bn Additional Tier 1 deal well inside initial pricethoughts on Tuesday.
The perpetual non-call five deal, rated Baa3/BBB byMoody's/Fitch, is the first AT1 in dollars from a UK bank so farthis year.
Buyers placed over US$10bn of orders, according to twoinvestors.
The UK's impending referendum on EU membership, which isless than a month away, appeared to have little effect on demandand HSBC was able to ratchet launch pricing in to 6.875%, insideIPTs of 7.25%.
"The UK is only one part of their operations," said SimonAdamson, a senior analyst at CreditSights. "The risks aroundBrexit are probably diluted compared with other UK banks."
While Brexit remains a concern, much of its impact has beenpriced in, said one banker, and recent polls have been in favourof a vote to remain.
HSBC's launch level was right around fair value, based onthe bank's existing 6.375% perp non-call 10s, trading at a yieldto call of 7.2%, and 5.625% perp non-call 5s at 6.5%, said threebuyside sources.
BROADER CONCERNS
But while the deal's success is encouraging for the AT1market, which suffered a brutal sell-off in February, marketparticipants warned that not all issuers could access theproduct, considered the riskiest type of bank debt.
"[HSBC is] pursuing a strategy of just executing deals,regardless of market conditions. It's admirable, not all bankscan do that," said one banker.
HSBC has said it will be busy with capital and fundingissuance every quarter for the next three years, as it seeks toraise US$70bn by 2019 to refinance maturing debt and meetregulatory requirements.
But not all banks enjoy HSBC's high credit ratings in AT1,and investors are still wary of restrictions around couponpayments that torpedoed the asset class in February, said PhilJacoby, chief investment officer at Spectrum Asset Management.
Suggestions that European legislators will loosen thoserestrictions have buoyed AT1 investors, but more clarity isneeded before lower-quality issuers will be able to access themarket, said Jacoby.
"Lesser names will need to come and find liquidity, so theseMDA [Maximum Distributable Amount] rules are needed," he said.
Even HSBC has not been completely immune to investors'repricing of the AT1 asset class.
Its US dollar perp callable 2020s and perp callable 2024sissued in September 2014 carry much lower coupons of 5.625% and6.375%.
"The premium comes from the product," said a bank capitalstructurer in London. "It still hasn't recovered from investors'first quarter worries."
"Investors just realised the product is risky." (Reporting by Alice Gledhill and Will Caiger-Smith, editing byJulian Baker and Shankar Ramakrishnan)
