HSBC builds up converts into success story
HSBC entered Europe’s top three in the equity-linked league tables in 2019, capping a multi-year rise with a series of firsts and eye-catching deals.
Using a combination of HSBC’s balance sheet heft, and structuring and distribution expertise, the bank won a role on the region’s most important mandates in 2019, securing 12 deals with a combined value of $2.1bn and climbing five places in the league tables in a year.
The bank has gone from being a relative outsider to top three in EMEA following a concerted push that began three years ago with the arrival of Nick Bevan from Deutsche Bank and Martin Zoll from Goldman Sachs as co-heads of strategic equity and financing.
The bank’s strategic push in equity-linked began shortly before the duo’s arrival when HSBC moved to combine its equity-linked and corporate equity derivatives businesses.
“This was driven by what we were seeing from our clients,” says Ilyas Amlani, head of EMEA equity-linked at HSBC. “There has been more demand for structured products involving derivatives. We saw investment grade corporates wanting to use non-dilutive convertibles and looking to hedge out equity risk through buying a call option. We were increasingly working together on these transactions so it made sense to combine.”
The bank’s integrated solution struck a chord with Bevan. “I was very keen to join a team that was already working in an integrated way because I saw this was the way the business was going,” he says.
The integrated approach was instrumental in HSBC’s lead role in structuring a deal for Vodafone — its stand-out mandate.
The £3.4bn mandatorily convertible bond was the biggest ever of its kind in sterling. Vodafone has used the structure before, but this time it included a dash of innovation by including a commitment to buy back the shares to prevent shareholders from being diluted.
HSBC’s success went beyond the UK though as it led 11 deals as global co-ordinator or bookrunner across the region. In 2019, HSBC led seven of nine French equity-linked transactions, making it the top non-French bank in that market as it worked on deals for Air France and a debut transaction for Edenred.
It was also the only bank to be active for six consecutive weeks throughout September and October 2019, after reopening the equity-linked market following the summer lull.
The UK, France and Germany accounted for more than half of total equity-linked issuance volumes last year and HSBC was well positioned, having bolstered its team in each of those countries. “One of the drivers for our success in 2019 was our strength in these core geographies,” says Bevan. “We’ve shown consistency through the year and have been active in all pockets of issuance.”
The bank also focused on repeat issuers, leading four liability management exercises, often in tandem with new issuance.
With global markets grappling with the effects of the coronavirus pandemic, in particular, with companies looking to survive what many think looks like a global recession on the way, Amlani believes the convertible market will have an important role to play as they look to bolster liquidity.
In particular it could throw a lifeline to mid-cap companies, which are expected to tap the convertible markets in increasing numbers over the next 12 to 18 months, following a trend seen in the 2008 financial crisis. “Converts can help reduce equity dilution compared with straight equity and it will be attractive to mid-cap or unrated companies because documentation is usually light and execution quick,” Amlani says.
That will be especially true as other sources of liquidity dry up. “Over the past few years, mid-cap issuers had a choice of multiple capital markets,” he adds. “With some of these markets becoming more challenged, I think we are going to see a reversion of the CB market that was dominated by IG companies. I think you will see it shifting back to a position where 60%-70% of it comprises mid-cap companies.”
HSBC is in the middle of a restructuring of its global banking and markets operations. The bank is slashing jobs and risk-weighted assets in its trading operations and has reduced headcount in its European equities research team.
But it regards equity-linked as an important, high-margin relationship business that plays to its strengths as a financing house. “The equity-linked market will continue to be a source of liquidity and those firms that are established players should be in pole position to dominate. Those banks that are already having financing conversations with companies will be well placed,” said Bevan.