UK banking group HBOS has distinguished itself over the past year with a stream of deals in many different markets, combining innovation with sensitivity to meet demanding funding needs. Its activities in senior debt, bank capital and structured finance has allowed it to secure both the financial borrower and securitization borrower awards for western Europe.
David Marks, managing director in financial institutions origination at JPMorgan, says: “HBOS has managed to meet some fairly aggressive borrowing targets while maintaining very competitive levels. The funding team has extracted sizeable amounts from practically every market without paying a premium. They haven’t really put a foot wrong – I can’t think of a deal that wasn’t well executed.” Adds another b anker: “The old image of Halifax [which merged with Bank of Scotland to form HBOS] being dull as ditchwater is long gone. HBOS has impressed the market with a series of cutting-edge transactions.”
One deal Tony Main, head of funding and liquidity at HBOS, is particularly pleased with is a dual-tranche dollar transaction targeted at Asian accounts in October last year. This was the bank’s first serious attempt at targeting Asian investors, and was accompanied by a week’s roadshow in the region.
Another highlight was March’s $1 billion Asian retail-targeted tier 1 issue. This was an unusual choice of currency for the bank, but eventually emerged as the biggest deal of its kind from a UK issuer. Main says: “Usually we like our risk capital in sterling to match our assets, but this time we realized a lot of potential investors wouldn’t come in unless we issued in dollars. Somewhat fortuitously, the timing was superb – we managed to get the deal done just before the war started.”
Pricing was at competitive levels, around existing issues from such UK banking peers as Lloyds TSB and Royal Bank of Scotland.
The lower tier 2 deal the bank executed in November was its most challenging. But Main says the bank’s resolve in going ahead despite volatile markets earned it a lot of respect.
He explains: “The markets got very unmanageable between decision and execution, and several banks pulled deals. But we went ahead, and the comment we got was that we’d reopened the market – we priced the issue sensibly and gave the market some confidence back that it was possible to do new deals. Obviously we never like having to pay a wider spread, but we accept that as a regular issuer we have to live with the bad times as well as the good, and that investors need compensation too when the market gets difficult.”
In securitization, too, HBOS has consistently performed well with innovative transactions. The company’s first foray into the market in June last year using JPMorgan, Barclays Capital, and Citigroup as bookrunners turned out to be the largest mortgage-backed deal ever done – not bad for a debut issuer.
The £3.5 billion ($5.1 billion) equivalent deal from HBOS’s new master trust, Permanent Financing No 1, achieved particularly tight pricing for a new entrant, particularly the $1.1 billion 3.5-year tranche, which was priced at 12.5bp over three-month Libor, well within previous benchmarks in the market. There were no fewer than 13 tranches; nine in dollars, one in euros and three in sterling.
HBOS managed to top this with its second deal this February, Permanent Financing 2, lead managed by Lehman Brothers and JPMorgan. This was even bigger at £4.7 billion equivalent, with seven dollar tranches, five euro tranches and three sterling tranches. It still retains the record for the biggest-ever RMBS issue.
Despite the fact that spreads in this sector had widened considerably by February – because of the rush of supply from UK master trust issues in the period between the two issues – all the tranches of Permanent Financing 2 were oversubscribed and priced in line with or inside price guidance. The deal was even increased to accommodate demand from US investors for the dollar tranches.
“The MBS sector has been going from strength to strength in the last 12 months, and HBOS truly tested the depth of the market with record-breaking deals off its new programme,” says Colin Evans, co-head of the financial institutions group in JPMorgan’s debt capital markets team. “With large multi-currency fixed and floating rate tranches, HBOS created new benchmarks with investors around the globe.”
Many financials have been relying heavily on structured MTN business over the past two years. HBOS has not yet been a big presence in this market.
Main says: “Our treasury operation is a little less advanced than those of some of our peers. That’s good in some ways – we’re very safe because we’re quite conservative. But it also means we’re not in some markets that we could be in.”
He wants to increase HBOS’s ability to fund itself economically with these smaller deals, and is streamlining the treasury’s internal processes so the team can respond quickly to investor enquiries.
HBOS is likely to return to the securitization market when conditions allow. Intriguingly, though, Main reveals that the bank is also interested in the European covered bonds market – one that British issuers have so far neglected. The market could provide a very attractive way to finance the HBOS mortgage book, although in this respect it would compete with the existing securitization programme. Both instruments involve pros and cons. Covered bonds are cheaper by far to structure and issue than MBS, and so they would probably offer a considerably lower all-in cost of funds.
But they do not offer the transfer of risk-weighted assets off balance sheet that issuance through an SPV does, and so would not free up capital.
No clues Which of them looks more attractive will depend not just on conditions in both markets, but also on just how valuable capital relief starts to look after the implementation of Basle II. Main isn’t giving any clues beyond stating the bank’s interest in the new market.
One possible tactic would be to issue under the young Irish covered bond law – German bank DePfa only recently did its second successful deal in this market. Setting up a covered bonds programme and issuance vehicle takes time under any legal framework, though, and no issuance is likely in the immediate future.
Investment banks pitch hard for HBOS mandates, according to Main. He says: “Banks compete very strongly for our business – we’re a regular issuer but have no investment banking arm of our own, so people know they will be involved in most aspects of a deal. But we try to be fair in awarding mandates. It can still be very difficult to know whether we’ve made the right choice.”
Main is happy with progress so far in 2003, which has given the bank room for manoeuvre in case markets get difficult later on. He says: “We’ve probably exceeded our funding plans for this stage in the year, but we’re in the market so regularly that we can never take our foot off the pedal.”
