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Standard Chartered sold a $2 billion perpetual note that is callable in year five on Friday, replicating a structure already used by HSBC, albeit with some tweaking of the share conversion criteria.
Rated Ba1/BB/BBB by Moody’s, Standard & Poor’s and Fitch, respectively, the 144A/Reg S securities was priced to yield 6.5%, lower than anticipated, according to a term sheet seen by FinanceAsia.
StanChart's offering obtained a whopping orderbook size in excess of $22 billion from over 550 global accounts, with Asian investors grabbing 35% of the pie, Europe 30% and the US 35%, according to a source close to the deal.
Upcoming Basel III rules that are expected to come into force in 2019 have spurred financial institutions across the globe to shore up capital or replace outstanding non-qualifying additional tier-1 capital in order to meet the requirements.
With StanChart, the new instruments will be used for the latter purpose, meaning that the issuance will not materially change the group’s total regulatory capital position, credit analysts said. As of end-2014, the bank had total non-qualifying AT1 capital of $2.8 billion.
Structurally, these AT1 bank capital securities — which are senior to ordinary shareholders but subordinated to any senior creditors, including tier-2 bondholders — are more often than not replicas of one another.
And while fixed income experts comment that StanChart’s instrument is the same as HSBC’s debut AT1 back in September — when it raised a $1.5 billion perpetual note callable in year five — the former bank has tweaked the share convertibility terms.
HSBC on Monday also raised a $2.25 billion perpetual offering callable in year 10, its second dollar-denominated bank capital note within six months.
In terms of conversion conditions, the perpetual StanChart paper will be converted in whole or in part into the bank’s ordinary shares when its common equity tier-1 ratio drops below 7% — similar to HSBC’s September issue. The only difference between both financial institutions is the conversion price per ordinary share.
In StanChart’s case, the conversion price per ordinary share is set at a 30% discount to its British pound-denominated share price converted into US dollars at the time of pricing.
In HSBC’s case, the conversion price was set at the bank’s 10-year low share price of 270 pence per ordinary share. With the share price currently hovering at around 580 pence, this now translates into a discount of 46.5%, and will fluctuate accordingly as the share price moves.
“HSBC is currently offering a slightly bigger discount given where its share price is trading,” said a Hong Kong-based fixed income banker, who declined to be named. “The bigger the discount the better it is for investors.”
StanChart’s issuance comes shortly after its global roadshow, which began in London on Tuesday and ended in Asia on Thursday.
Don’t despair
Investors do not have to worry about the less-friendly share conversion terms though as they are compensated adequately for the difference. In fact, StanChart’s preference share note is offering a huge pickup, especially when compared to HSBC’s outstanding AT1 paper, which is being used as a comparable.
Rated one-notch higher than StanChart’s at Baa3/BBB, HSBC’s existing AT1 note was trading at a yield-to-call of 5.4% in late Asian trade on Thursday, according to a source familiar with the matter. This translates into a potential pickup of over 100bp for investors.
Additionally, StanChart's last reported common equity tier-1 ratio is 10.7% at end-2014, which is in line with those of many of its international peers and well above the 7% share convertibility trigger.
The group said in early March that it plans to take that ratio up to 11% to 12% because investors were now more focused on bank capital and because of the uncertainties around the pending finalisation of capital rules for banks in the UK and for globally systemically important financial institutions. Regulators have categorized StanChart as too big to fail.
Although StanChart’s recent senior management shakeup could yet mean delays to meeting the group’s CET1 ratio target. However it is unlikely that the target will be lowered given that the bank is actively managing its risk-weighted assets, including disposals of sub-scale retail and non-core businesses, Moody’s said in a March 25 report.
"Longer term, we see StanChart's franchise as an attractive one given its presence in economies likely to offer significant growth potential," David Marshall, credit analyst at CreditSights, said in a February report, referencing the British bank's historical emerging markets focus.
Interest payments are distributed semi-annually in April and October each year. The interest rate will then be reset every five years at the prevailing US dollar five-year mid-swap rate plus a margin of 488.9bp per annum, according to the prospectus.
Barclays and Standard Chartered were the structural advisors and joint lead managers of the transaction. Other joint lead managers include Bank of America Merrill Lynch, Goldman Sachs, JP Morgan and UBS.
