HSBC Holdings Plc. (HSBA) will surpass Lloyds Banking Group Plc. this year as Europe’s biggest issuer of the riskiest bank bonds, according to some of region’s biggest debt investors.
HSBC will sell about $4 billion of additional Tier-1 (AT1) notes, a type of contingent capital bond designed to absorb losses, to bring its total of such securities to almost $10 billion, Laurent Frings at Aberdeen Asset Management Plc., and Steve Hussey at AllianceBernstein Holding LP said. Lloyds has about $8.3 billion of the CoCo, or contingent convertible bonds outstanding, data compiled by Bloomberg show.
“We’re likely to see another deal from HSBC with two or three tranches in different currencies some time this year,” Hussey, a London-based analyst who helps oversee about $481 billion of assets worldwide, including additional Tier-1 debt, said. “They should eventually be the biggest issuer.”
European lenders seeking to meet new capital rules without putting taxpayers at risk have made AT1 bonds the fastest-growing part of the region’s debt market. The United Kingdom, which funded the largest bank bailout in history during the financial crisis, led issuance, which has climbed to more than $65 billion since the market opened in 2013, data compiled by Bloomberg show.
“UK banks have been very active and that’s likely to continue in 2015,” said Mark Holman, CEO of TwentyFour Asset Management Llp. in London, which manages about $6 billion, including additional Tier-1 bonds. Issuance from the UK will account for at least 10 percent of the about $50 billion that will be sold in Europe this year, he said.
AT1 bonds, which allow issuers to suspend interest payments when they run into trouble, are either written off or convert to equity should a bank’s capital ratio fall below a preset level. In exchange for the risk of holding the debt, investors receive coupons that average about 7.18 percent, compared with 3.32 percent on senior bank debt in euros, according to Bank of America Merrill Lynch index data.
HSBC has said it will require about $20 billion of AT1 capital. Europe’s biggest bank sold about $5.5 billion of the securities in a debut deal in 2014, data compiled by Bloomberg show.
“HSBC will probably do a similar amount to last year,” said Frings at Aberdeen, which oversees about $525 billion. “They’ll be careful about the timing to try and avoid hurting the performance of previous issues.”
Shani Halstead, a spokesman for HSBC in London, declined to comment on the bank’s plans.
Barclays Plc. may issue $1.8 billion of the securities this year, AllianceBernstein’s Hussey, said. RBS said on December 16, 2014, that it plans to sell about £2 billion ($3 billion) in its debut offer, while Lloyds will not need to issue any more AT1 bonds, Citigroup analysts Lee Street and Claire McNicol wrote in a report on Thursday.
Barclays Spokesman Jon Laycock declined to comment on the lender’s issuance plans. Lloyds Spokesman Andrew Swailes referred to a statement saying it was “the first European bank to meet its AT1 requirement under the new capital framework.”
Banks favor the bonds because they’re cheaper than selling stock, the only alternative for boosting Tier-1 capital that regulators allow. Interest payments on the debt come out of pretax profit as opposed to dividends paid to shareholders, which are calculated after tax.