HSBC Sells First Bonds to Benefit From Proposed Bank Capital Rule Changes

HSBC Holdings Plc’s $3.4 billion issue of undated 8 percent notes marks the first sale of debt securities designed to qualify as capital under current and proposed bank regulations.

The bonds count as so-called Tier 1 capital under current rules by permitting HSBC to defer coupons in some circumstances and benefit the bank because it pays interest from pretax earnings, according to the deal’s prospectus. To meet new terms proposed by regulators, HSBC can convert the notes into preference shares that pay dividends from after-tax earnings.

“Few banks will be able to copy it, although many would like to,” said Bill Blain, co-head of fixed income at Matrix Corporate Capital LLP in London. “Many just don’t have the HSBC cachet. It’s a clever play by HSBC.”

The Basel Committee on Banking Supervision proposed in December phasing out so-called innovative hybrid securities such HSBC’s because they failed to absorb losses during the financial crisis. When the rules change, set for the end of 2012, innovative securities issued after the proposal date won’t qualify as Tier 1 capital.

The Basel Committee proposal isn’t final and preference shares may not be included in bank Tier 1 capital. To guard against this, HSBC can buy back the notes at face value plus any interest that has accrued, according to the prospectus.

HSBC originally planned to sell $300 million of the securities, according to a person familiar with the matter.

“This shows the pent-up investor demand for Tier 1 paper from top quality lenders,” said Blain.

HSBC is rated Aa2 by Moody’s Investors Service, the third- highest grade, and one level lower at AA- by Standard & Poor’s.

Citigroup Inc., Morgan Stanley, UBS AG and Wells Fargo & Co. helped HSBC manage the sale, according to the prospectus. The sale is the biggest issue of its kind for almost two years.

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

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