Haitong Securities, the lead underwriter and bookrunner , and Bank of Communications and Guotai Junan Securities, the joint lead underwriters, opened the order book for the Rmb3bn ($473.6m) transaction at 9am and aim to the price the deal later today, according to the prospectus filed with China Central Depository and Clearing (CCDC) on May 10. The bond will settle on May 17.
The lender is returning to onshore DCM for the first time in eight months following a Rmb2bn transaction in September 2017, the first time a foreign issuer had tapped offshore investments through Bond Connect. HSBC has since been waiting for the right window to hit the market again, said a banker on the deal.
“We believe the central bank has a more balanced monetary policy compared to earlier this year, when it was still tightening liquidity and pushing hard on deleveraging,” he said. “Perhaps more importantly, markets now think the worst of the liquidity squeeze is now over as the wealth management product rules have already come out. It is that expectation which makes it a good time to issue now.”
The banker was referring to the new regulations on wealth management products issued in late April. The new rules are expected to shrink shadow banking and drain liquidity in China.
In line with its last transaction, the bank is opening the sale to Bond Connect investors. But it has been rather low-key in promoting the deal, said a second source close to the transaction.
“As far as I know, they haven’t done a roadshow,” he said. “But then again, their reputation, both onshore and offshore, is good enough that they don’t need to try too hard. It is also not the first time they opened a bond to Bond Connect investors, so there was not really a need to publicise the deal the way they did in September.”
The UK lender is not the only international bank hoping to take advantage of market optimism through their onshore arm. United Overseas Bank (UOB) sealed a Rmb1bn deal just a month ago, which was also available to Bond Connect investors. More foreign lenders will likely follow the two banks’ footstep as regulators make it easier for them to do business in China, said the first source.
“If these banks are to expand in this market, they need to borrow more,” he said. “They can do that by lending from other banks or raising more capital from deposits. Given these banks want to be here for the long run, they would want to diversify their funding options and use the bond market as well.”
The China Banking and Regulatory Commission announced on April 27 that it will allow foreign banks to underwrite Chinese government bonds and grant them more flexibility in trading derivatives and accepting deposits. The move came after the Ministry of Finance said last November that it will lift the foreign ownership cap on Chinese banks to 51%, and abolish the limit after three years.
Beyond compare
The leads have put the price guidance for HSBC’s bond at 4%-5%, a May 14 filing with CCDC shows. But investors have few reference points to look to when trying to figure out if this is a fair price, said the second source.
“There aren’t many foreign banks which have issued through their China subsidiaries,” he said. “UOB is one exception, and it issued very recently. But it is not as strong as HSBC, both in terms of the scale of its onshore business and its brand name in China and internationally. They are just not the same.”
Unlike UOB and HSBC’s transactions, most of the debt issued by the onshore arms of foreign banks has been short-term paper.
Against this backdrop, and amid the difference in market conditions between now and last September, the first source added that investors may refer to the spread between HSBC’s last bond and the China Development Bank’s bonds of the same tenor when making their bids. HSBC paid 4.68% for its September bond, 46bp over three year CDB bonds on the day of pricing, according to CCDC data.
Three year CDB bonds were trading at around 4.29% on Tuesday afternoon, according to Wind data. That means HSBC is aiming to price its deal anywhere from 29bp inside CDB’s bonds to 71bp over.
HSBC will use the proceeds to develop its onshore business, according to the prospectus. The issuance will help the bank to diversify its funding channels and improve its asset-liability mismatch. HSBC and the bond are rated AAA by China Chengxin International Credit Rating.