HSBC Plans to Muscle In on Canada Banks Funding Trudeau Projects

  • Foreign bank looks to win 10 percent of infrastructure market
  • Timed with Liberal's plan to double road-and-bridge spending

HSBC Holdings Plc wants a piece of Justin Trudeau’s infrastructure boom and it’s taking on Canada’s big domestic banks to do it.

The London-based bank is targeting a slice of as much as 10 percent of the market for infrastructure financing that is dominated by the nation’s five largest lenders, either by partnering with incumbents on deals or leading itself, according to Jason Henderson, HSBC’s head of global banking and markets.

The push comes after voters handed Trudeau’s Liberal Party a mandate in the Oct. 19 vote to fulfill his campaign pledge to boost infrastructure spending by an average of C$4.2 billion ($3.2 billion) during four fiscal years starting next year, and double outlays on public projects -- from roads to bridges -- over 10 years.

"HSBC, as a competitor in this space, with global expertise and potentially the addition of global investors, will drive the overall funding cost lower in the long run," Henderson said in an interview at HSBC’s Toronto office, before the election was decided. "The taxpayer gets to build bridges for cheaper."

HSBC, Canada’s biggest foreign lender, made its debut in the project-financing market this year by winning a lead role on the year’s biggest deal, securing funds for the C$5 billion reconstruction of the Champlain Bridge in Montreal.

Made Splash

"Given that it was our first deal, our view was let’s make a bit of a splash," said HSBC’s Henderson. "We went into a three-way competition, the other two parties didn’t want to match our price. So we won."

Of the approximately C$1.7 billion in debt estimated for the project, HSBC and National Bank of Canada raised about C$689 million with two bond sales in June at rates of 4.1 percent for 30 years and 4.2 percent for 34 years. The banks also helped put together a syndicate, including the Bank of China and two Japanese banks, to lend the rest, according to London-based IJGlobal Database.

HSBC is looking for more deals, from the replacement of the George Massey Tunnel in British Columbia, to the bridge into the U.S. between Windsor, Ontario and Detroit, he said. The Windsor-Detroit corridor, which the Canadian government estimates will cost C$3 billion to C$4 billion to build, handles more than 25 percent of Canada’s trade with the U.S.

HSBC started laying the groundwork for its push into Canada’s infrastructure-financing market long before this week’s election based on a belief that a big infrastructure build was coming, regardless of which government was in power, Henderson said. Estimates for Canada’s infrastructure deficit, range from C$50 billion to C$750 billion, according to surveys compiled by the Fraser Institute in a report earlier this month.

Private Partnership

If the Liberals follow through on their election promises, they’d nearly double the federal government’s infrastructure investment to C$125 billion during the next 10 years. It’s part of a plan to help the economy by counteracting a collapse in prices for crude oil that the Bank of Canada said earlier this week will cause capital spending by energy firms to fall 20 percent next year.

"Trudeau is probably highlighting something very publicly that we all know," Henderson said. "We do see there being a reduction in the cap-ex being spent in oil and gas, but we do feel the pickup in infrastructure spend, financed either by provinces, municipalities or the federal government, will more than make up for that gap."

Though there’s been no specifics yet about how the investment will be financed, at least part of it will likely be done in private sector partnerships similar to the one used for the Champlain bridge replacement, according to David Frei, who manages the infrastructure investments in Fiera Capital Corp.’s C$19 billion fixed-income portfolio.

Foreign Demand

Frei said the pension funds and insurers he manages money for are eager to finance infrastructure projects because they have a need for those kinds of long-term bond investments to match their liabilities. They also have a need for the higher yields infrastructure debt offers compared with corporate bonds, he said.

There have been 238 such public-private partnerships in Canada for a total of C$81.3 billion, according to data on The Canadian Council For Public-Private Partnerships’ website.

HSBC is looking to widen the pool of investors financing Canadian projects by using its international connections to bring more foreign capital to the market, which could mean lower costs, or just more stable funding, Henderson said.

"We know there’s demand outside of Canada for this product," he said. "More competition ultimately always leads to better outcomes for consumers."

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