Don’t complain about the disco when the music stops

Judging extension risk is a key part of investing in bank capital. If investors call it wrong, it is hard to say they have been grossly mistreated.

  • By Jasper Cox
  • 06 Dec 2018
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GlobalCapital reported this week that the UK’s Financial Conduct Authority is looking into how transparent HSBC has been in its treatment of four discounted perpetual bonds (discos).

The bonds counted as grandfathered tier two capital until HSBC revised its opinion on their qualities and declared them to be fully eligible in May.

This reduced the incentive for the bank to call the notes and blindsided investors who had priced in a redemption. The price of the bonds suddenly dropped.

And the holders were not pleased, saying they did not receive adequate justification for the reclassification.

We don't know whether HSBC had been evasive — that is something the FCA will want to look into. And we do not know yet if the bank will be forced to retreat on its assessment of the capital qualities of the notes.

But it is hard to feel too sympathetic for the bondholders.

Investors in bank capital have to weigh up risk to the principal, risk to the coupon payments, and risk relating to the call date. The probabilities involved are inevitably bound up in the intricacies of capital regulations.

Many specialist investors market themselves on their understanding of the Byzantine rule book. And the other institutional buyers are at least aware of the complexity, even if they have not traipsed over every acre of regulatory quagmire themselves. So they know the dangers exist.

If HSBC’s legal judgement on the capital treatment was misguided after all, the chances of a call will rise again and the investors will be rewarded for their original judgement.

But if the bank played it by the book: well, that’s too bad.

  • By Jasper Cox
  • 06 Dec 2018

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 157,380.50 681 8.10%
2 Citi 153,197.61 617 7.89%
3 Bank of America Merrill Lynch 126,768.08 502 6.53%
4 Barclays 123,228.30 477 6.35%
5 HSBC 100,206.45 502 5.16%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Bank of America Merrill Lynch 12,891.73 34 6.66%
2 BNP Paribas 12,285.93 60 6.35%
3 UniCredit 11,196.47 58 5.79%
4 Citi 9,580.75 37 4.95%
5 Deutsche Bank 8,945.44 35 4.62%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Morgan Stanley 5,254.13 23 10.63%
2 JPMorgan 4,558.16 26 9.22%
3 Goldman Sachs 4,259.98 19 8.62%
4 Citi 3,649.88 23 7.38%
5 UBS 3,602.23 16 7.29%