HSBC’s Canada unit weighs sale of covered bonds in euros

Bloomberg

HSBC Holdings Plc’s unit in Canada is considering its first euro-denominated covered bond as it expands a market pioneered in the 18th century that 300 years later has the distinction of surviving an economic meltdown relatively unscathed.
The lender is weighing up Europe, the largest market for covered bonds, for a deal as soon as next year, according to Marty Halpin, the head of balance sheet management for HSBC Bank Canada. The potential transaction would be benchmark-sized, he said.
“Being able to issue in euros will really help us to diversify the platform and diversify the investor base,” Halpin said in an interview.
After European banks, Canada is the biggest originator of the securities, with 113 billion euros ($133 billion) of the debt outstanding, according to European Covered Bond Council data as of the end of last year. Banks have raised the equivalent of 254 billion euros in the market across all currencies so far this year, compared with 257 billion euros in the same period in 2019, data compiled by Bloomberg show.
Since creating its covered bond program in September 2018, HSBC Bank Canada has priced three transactions in the US
dollar market, according to Bloomberg data. Covered bonds have a senior guarantee from the issuer as well as a first claim on an earmarked pool of assets, so the notes, which trace their origins to 18th-century Prussia, typically have higher credit ratings than the bank’s unsecured debt.
The lender’s $1 billion of covered bonds due 2023, its most recent deal out of that program, was quoted Wednesday at an equivalent spread of around 44 basis points over Canada’s government yield curve, Bloomberg data show. That’s around 10 basis points tighter than its C$1.5 billion of senior unsecured deposit notes due early 2023.
Canadian banks target investors outside their borders for covered bonds in euros and dollars partly because Canadians prefer the senior unsecured notes, Halpin said. Long-time issuers include Royal Bank of Canada and Toronto-Dominion Bank.
The securities weathered March’s pandemic-driven market crisis with a relatively moderated increase of the risk premiums. The spread of a Bloomberg Barclays index grouping euro-denominated covered bond issued by Canadian banks rose as much as 42 basis points compared to the levels seen at end of February, while of a gauge comprising senior unsecured bonds from European banks jumped as much as 159 basis points in the same time period.
That’s likely to encourage forays by some of HSBC Bank Canada’s rivals, according to Halpin.
“Covered bonds proved to be quite resilient through that stress period,” he said. “I think is a quite important tool treasurers to have at their disposal.