HSBC Holdings PLC's ice-breaking $1.65bn bond issue this week failed to lift the gloom bankers in the US feel about the prospects for European banks in the Yankee bond market.
Although HSBC's offering of 10- and 30-year bonds - the first European bank Yankee deal since July - performed strongly, financial institution group (FIG) bankers say that the UK-domiciled bank is among just a handful of European bank names left that can issue unsecured debt in the US.
Most other European FIG issuers would need to have a governmental body, like the EFSF, guarantee their senior debt in order to get US investors on board.
"There is a long list of European financial credits that may continue to struggle to have access to the US dollar market unless a guaranteed format emerges," said Bryan Jennings, managing director and co-head of fixed income capital markets at Morgan Stanley. "Such a program would allow investors to get comfortable supporting their balance sheets in size."
JP Morgan credit strategist Roberto Henriques and team agreed: "In our opinion the implementation of a guarantee scheme will be crucial in achieving some type of market normalization," in all term debt markets, they said in a recent report.
The US investor base has been badly burned by the disastrous performance of the roughly $67bn worth of Yankee bonds European banks issued in the first half of the year.
Some fund managers, like Artio Global Investors, dumped all of their US and European FIG investments in the summer and have no intention of returning any time soon.
"We felt the UK banks were exposed to the risk of Europe getting worse," said Donald Quigley, Artio senior portfolio manager when explaining why he took his FIG exposure in UK and US banks down to zero in mid-July.
"We decided that if there was to be a sovereign debt crisis then it would manifest itself in the finance sector. We've seen UK bank spreads widen out as much as 200bp since (mid-July)," he said.
HSBC's current five year CDS of 150/162 is much tighter than the 200bp peak at the beginning of October, but still
50bp wider than where it was in January. Societe Generale's five year CDS has gapped out from 150bp at the beginning of the year to 373bp bid, 394bp offered earlier this week.
Lloyds TSB's CDS is now at 322bp/333bp from around 197bp at the beginning of the year.
A source with knowledge of the HSBC deal said some US investors did not want to get involved with the transaction, based on general concerns about Europe and fears about the direction of regulation, especially in the UK where there are proposals to attach bail-in language to UK bank senior debt by 2019.
At least three FIG syndicate heads away from HSBC's sole-lead deal said they had heard the UK-based bank's target size was $2bn.
HSBC has often issued odd amounts, so it's hard to read into why it decided to issue a $900m 4.875% January 2022 rather than a round $1bn when it was said to have built a $1.5bn order book for that tranche. It had a $1.1bn book for its $750m 6.1% January 2042.
The 2022s tightened in 10bp and the 2042s tightened by 20bp a day after issue, impressing an investor base increasingly embittered by a new issue market littered with badly performing deals this month.