HSBC’s AT1 Curve: Where Is the Cross-Currency Value?

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Gravity Works As WeWork Doesn't; Now Plan B

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: A Goldilocks scenario outcome whereby President Trump loses the election, but Joe Biden does not win a mandate led to material US High Yield (HY) index spread tightening, driven by Caa-rated entities.Markets were overpricing a Blue Democratic Party sweep prior to the US election, as we predicted. Now they are overpricing an inhibited tax and regulatory agenda under a Biden Presidency and Republican Senate. The run-off for two Senate seats in Georgia could see Republicans’ lose the Senate. As such, the amount of potential fiscal stimulus under the new administration remains difficult to handicap. Plus, regulatory changes are now largely driven by Executive Orders.In Asia, despite improving Purchasing Managers Index results and an unexpected acceleration in China’s October exports, Asia’s HY market underperformed the US on global economic growth concerns. Increasing Coronavirus cases in Europe and a pre-Christmas lock-down are a headwind for Asia’s export growth and tourism over the near term. Concurrently, Biden’s Coronavirus plan also adds to uncertainty. Furthermore, expectations that Joe Biden may be less confrontational than President Trump with China may prove wrong as the new President would focus on mid-term elections and the need to prove himself where he won narrowly. However, despite these potential negatives, Asia’s HY index looks oversold particularly relative to US Caa-rated index levels.The suspension of Ant Financial’s (<a href="https://www.smartkarma.com/entities/ant-financial-services-group" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Group (6688 HK)</a> )initial public offering (IPO) in China and Hong Kong also negatively affected Asia’s risk sentiment and raised serious questions on China’s regulatory due process. <a href="https://www.smartkarma.com/entities/hsbc-holdings-plc-a723bd63-0890-486f-aaa0-3bb9ad2b95ce" target="_blank" data-smartkarma-citation="entities:21976:1" rel="noopener">HSBC's (HSBA LN)</a> shares sold-off following the Ant Financial announcement despite the firm not waiving interest charges on margin borrowing for the suspended IPO. With a China-centric growth strategy, HSBC’s business model is increasingly caught in the middle of a developing bi-polar world.Nonetheless, never missing an opportunity to test the market, HSBC Holdings was the only financial institution to issue debt in the global capital markets this week. We assess the attractiveness of these Euro-denominated bonds within. In Asia, primary US$-bond sales plunged to just US$0.9b from US$6.8 billion in the prior week as borrowers awaited the U.S presidential election outcome. With interest rates diving lower, we anticipate additional issuance over the next few weeks as issuers fill 2021 borrowing needs early.Against this background, Asia’s lower duration Senior Unsecured bonds outperformed Tier 2 and Additional Tier 1 securities, in concert with concerns surrounding global economic growth potential over the near term. The top performing and underperforming bonds were short- and long-duration in nature, respectively.  Market Outlook: A less expansionary US fiscal policy should reduce upward pressure on U.S. rates and is likely to support yield-seeking, including Emerging Markets (EM) fixed income securities over time. In the near term, risk asset and bank valuations may remain volatile through the year-end as large levels of cash remain on the sidelines.

Executive Summary: A Goldilocks scenario outcome whereby President Trump loses the election, but Joe Biden does not win a mandate led to material US High Yield (HY) index spread tightening, driven by Caa-rated entities.Markets were overpricing a Blue Democratic Party sweep prior to the US election, as we predicted. Now they are overpricing an inhibited tax and regulatory agenda under a Biden Presidency and Republican Senate. The run-off for two Senate seats in Georgia could see Republicans’ lose the Senate. As such, the amount of potential fiscal stimulus under the new administration remains difficult to handicap. Plus, regulatory changes are now largely driven by Executive Orders.In Asia, despite improving Purchasing Managers Index results and an unexpected acceleration in China’s October exports, Asia’s HY market underperformed the US on global economic growth concerns. Increasing Coronavirus cases in Europe and a pre-Christmas lock-down are a headwind for Asia’s export growth and tourism over the near term. Concurrently, Biden’s Coronavirus plan also adds to uncertainty. Furthermore, expectations that Joe Biden may be less confrontational than President Trump with China may prove wrong as the new President would focus on mid-term elections and the need to prove himself where he won narrowly. However, despite these potential negatives, Asia’s HY index looks oversold particularly relative to US Caa-rated index levels.The suspension of Ant Financial’s (Ant Group (6688 HK) )initial public offering (IPO) in China and Hong Kong also negatively affected Asia’s risk sentiment and raised serious questions on China’s regulatory due process. HSBC's (HSBA LN) shares sold-off following the Ant Financial announcement despite the firm not waiving interest charges on margin borrowing for the suspended IPO. With a China-centric growth strategy, HSBC’s business model is increasingly caught in the middle of a developing bi-polar world.Nonetheless, never missing an opportunity to test the market, HSBC Holdings was the only financial institution to issue debt in the global capital markets this week. We assess the attractiveness of these Euro-denominated bonds within. In Asia, primary US$-bond sales plunged to just US$0.9b from US$6.8 billion in the prior week as borrowers awaited the U.S presidential election outcome. With interest rates diving lower, we anticipate additional issuance over the next few weeks as issuers fill 2021 borrowing needs early.Against this background, Asia’s lower duration Senior Unsecured bonds outperformed Tier 2 and Additional Tier 1 securities, in concert with concerns surrounding global economic growth potential over the near term. The top performing and underperforming bonds were short- and long-duration in nature, respectively.  Market Outlook: A less expansionary US fiscal policy should reduce upward pressure on U.S. rates and is likely to support yield-seeking, including Emerging Markets (EM) fixed income securities over time. In the near term, risk asset and bank valuations may remain volatile through the year-end as large levels of cash remain on the sidelines.

Bank Credit Weekly: Election Goldilocks Priced-In as Growth Concerns Increase

Asia High Yield Bond Index

Bank Credit Weekly: Election Goldilocks Priced-In as Growth Concerns Increase