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HSBC: The bank has rapidly built momentum in its global franchise as debt capital markets boom

For many years the puzzle as to why HSBC was not a top-10 player in the global debt markets remained unsolvable. It has always been one of the world’s biggest banks and yet its big expectations of achievement in the capital markets struggled to match ambition with deeds. Finally, this year it has managed to move beyond its regional dominance of the Hong Kong merchant banking sphere. It can now boast a set of clients in the sovereign, corporate, financial institutions and emerging markets space through which it has achieved substantial feats globally and in all the key asset classes.

“We have tried to be the catalyst for opening up the markets globally for all types of issuers” Spencer Lake, HSBC

“We have tried to be the catalyst for opening up the markets globally for all types of issuers,” says Spencer Lake, global head of debt capital markets at HSBC. HSBC responded rapidly to the various shifts in mainstream DCM activity, particularly after the default of Lehman Brothers. Its rapid trajectory was especially notable in the trend towards greater public-sector borrowing and the emergence of government-guaranteed bonds. Its bankers modestly admit to being fortunate in having recently established strong relationships with sovereigns. As part of the build-out of its debt business, the bank became a primary dealer to most of Europe’s debt management offices.

It is perhaps in the government-guaranteed sector that HSBC showed the credit crunch was helping its debt business. But much of the foundation had already been laid down before.

“We did six of the first government-guaranteed bonds,” says Bryan Pascoe, global head of debt syndicate, HSBC. “We have spoken to more than 800 investor accounts across the credit and rates spectrum.” The birth of the GGB sector was characterized by confusion over where bonds would be placed or priced. Was it an expensive bank credit product or cheap sovereign sector? The underwriters that won the most business were the ones that got to grips with this conundrum. Competitors were quick to point out that, because of its extremely strong liquidity, HSBC’s treasury was a big lead order on GGBs. Even if this did help drive HSBC to the top of the league table – so what? Other banks have investment banking advisory franchises, or huge loan books to help them win FIG, or corporate M&A deals.

The fact that HSBC ranked eighth in the global debt league table for the 12-month period that ended in the first quarter of 2009 might surprise observers. For the first six months of 2009, however, the bank showed its impressive momentum, moving up to sixth in the year-to-date league table. By comparison, it did not even rank in the top 10 at the start of 2008.

Many banks are still willing to buy market share via subsidizing issuers’ cost of financing. Before the credit crunch the so-called league table trade was predominantly a floating-rate note sold on behalf of a bank. Of course these no longer occur. But relevant measures of market share remain difficult since the US agencies skew the results because of their non-benchmark business (largely callable notes) through which dealers seek to win mandates for benchmark bonds. Strip out the sole-led issues, self-led and ABS deals (which are not sold to third-party investors but simply used for repo with the European Central Bank for liquidity purposes) and HSBC ranks fourth.

Highly notable is the acceleration in the scale and depth of its business since the default of Lehman Brothers. It dominates public sector issuance (excluding GSEs), is near the top of the GGB rankings (excluding self-led) and has won more than its fair share of liability management/capital transactions for financials.

“Where we stand apart is in our ability to deliver in a range of currencies – sterling, dollars, Hong Kong dollars or euros,” says Jean Marc Mercier, head of European syndicate. Being able to source capital worldwide is one of the key strengths of this institution. In the emerging markets, it has proved that it is now to be reckoned with across all regions – not just Asia. In Latin America, it has become the bank to beat, with a market share of 17.5%. No other bank can match its portfolio over the past 12 months, lead-managing deals for such blue-chip borrowers as Brazil, Mexico, Pemex, Petrobras and Gerdau.

In Asia, a region that it dominates when local-currency transactions are added to international bonds, perhaps the best illustration of its abilities is Kookmin Bank’s $1 billion, five-year covered bond, which priced in May. The pioneering transaction – Asia’s first covered bond – was six times oversubscribed.

HSBC has excelled in the Middle East too, leading the debt restructuring for Kuwait’s Global Investment House and dominating the sukuk market. It perhaps lags in central and eastern Europe. Although it won mandates from borrowers such as Turkey and Russian telecom VimpelCom, it is outside the top five in the tables. But it’s only a matter of time before it breaks through.