Managing the headwinds:
Few G-SIBs have as tough a task in getting their message across to investors as Standard Chartered. It faces challenges from several angles, be they from regulators, the markets in which it operates and dramatic threats, such as Brexit or the US-China trade dispute. For its ability to overcome these headwinds, Standard Chartered is IFR's Financial Issuer of the Year.
At about US$8bn Standard Chartered may not have the biggest annual funding programme to negotiate, but keeping itself properly and safely funded is far from a straightforward task for the UK-headquartered emerging markets specialist.
"The Standard Chartered story is complex to explain," said Richard Staff, head of capital issuance and term funding.
The complexity comes from being a global systemically important bank operating in more than 60 markets with a number of large local subsidiaries in jurisdictions that often have very different regulatory regimes to the UK.
That is most apparent when it comes to fulfilling the Bank of England's preferred method for managing resolution planning – the single point of entry.
Given that StanChart "is probably the most complicated single point of entry resolution bank of any G-SIB", according to Staff, many of its local regulators need guiding on the implications.
A key element of the process is to convince local regulators to support internal minimum requirements for own funds and eligible liabilities (MREL) issuance.
As well as external MREL, which means that a bank's own resources can be used to absorb losses and recapitalise the business, banks also need to have internal MREL.
This capital is in place to help recapitalise subsidiaries and has the effect of passing up losses within the group so that they can be absorbed by shareholders and creditors of the resolution entity.
StanChart has five material subsidiaries – in the UK, Hong Kong, Singapore, South Korea and China – and the challenge of managing its internal MREL needs, and in particular, explaining all of this to regulators is considerable in jurisdictions where the concept of a resolution regime or bail-in debt has not previously existed.
"We're such a unique institution that we're often a test case for regulators," said Staff.
In the first quarter, StanChart became the first foreign bank to issue an internal instrument in South Korea, a W600bn (US$508m) note that was structured by the central team and subscribed to by the parent. It is exploring the possibility of doing something similar in China.
At the same time, the group's treasury needs to think carefully about the implications of its external MREL funding.
"We in the treasury team have to think very clearly and strategically about the geographic downstreaming implications of any externally issued MREL, which adds considerable complexity to the timing of our primary market activities," said Staff.
In a sense the mantra of the treasury team is no different to any other bank's: "cost, capital efficiency and diversification”.
But given the bank is much more exposed than many of its peers to headlines on Brexit or the US-China trade dispute, the timing of its deals requires careful reading of market sentiment.
And this past year access to markets was made even tougher by the fact that the team was waiting for resolution on the bank's violation of sanctions on Iran, which was settled in April.
That meant the treasury team had to make up for lost time. This was best demonstrated when in a 48-hour period in June, it priced three deals across three different markets, raising US$1.8bn-equivalent of senior MREL and AT1 capital in the process.
"No other G-SIB has done three deals in 48 hours," said Staff.
One of the deals was the bank's debut AT1 in the Singapore dollar market, through a S$750m (US$553m) perpetual non-call 5.25-year offering.
One objective was to inject a portion of capital into its subsidiary there. But there was a compelling pricing reason too with the bond printing at a yield of 5.375% – about 85bp through StanChart's US dollar curve – for a saving of US$23m-equivalent in coupon payments to the first call date.
With the bank targeting a 10% return of tangible equity by 2021, such a cost saving for the most expensive form of debt has implications beyond bolstering its capital.
Pricing was inside Credit Suisse's perpetual non-call five offering in May (which priced at 5.625%) and even beat some higher rated issues.
UBS and Societe Generale sold perpetual non-call five AT1s with respective ratings of BBB– (Fitch) and Ba2/BB+ (Moody's/S&P) at 5.875% and 6.125%. The StanChart bond had expected ratings of Ba1/BB–/BB+.
Another transaction during this issuance frenzy was a A$1bn (US$696m) dual-tranche holdco senior that got orders from more than 180 investors across Asian and Australian accounts.
The deal comprised a A$400m six-year non-call five floating-rate note and a A$600m six-year non-call five fixed-rate note.
It came about flat to where the bank could print in the US dollar market, which compared favourably with the 10bp–15bp premium that other European banks were paying at the time in the Kangaroo market.
The third transaction was the bank's inaugural sustainability bond, a €500m eight-year non-call seven senior unsecured, after establishing its sustainability bond framework in May.
Proceeds will be used to finance in areas aligned with the UN's Sustainable Development Goals, including clean energy projects, smaller business lending and microfinance loans.
More particularly, the bank aims to direct capital beyond developed nations, where sustainable financing is already well established.
"We are present in 37 low-income countries. Therefore to have a UK-regulated institution issue a senior instrument, knowing the impact it would make in these countries and it would be measured against specific sustainable goals, was a powerful proposition," said Daniel Hanna, global head of sustainable finance.
Hanna said the bond "gave investors a very clear look at where the impact would be. There aren't many projects as transparent as this one."
With books north of €3.4bn at peak, the transaction tightened 30bp from initial price thoughts to final pricing of 100bp over swaps, marking a negative 10bp new issue premium and a 30bp arbitrage against an equivalent trade in the US dollar market.
And almost unnoticed among the bigger headlines around the structure was that this was the first euro deal by a UK bank in nine months as Brexit headlines had kept them away from the market.
Aside from these three transactions, StanChart was also active in the Formosa market. In May, it printed a US$100m 30-year non-call five (and thereafter every five years) zero-coupon callable, which was the first such deal in the Taiwanese market from a UK bank holding company. By issuing through the holdco it meant the bond was MREL-eligible.
It also returned to the US dollar Reg S market for the first time since 2012 with a US$1bn 10.25-year non-call 5.25-year Tier 2 offering in early November.
That deal also broke a 20-month hiatus for G-SIBs in the US dollar Reg S Tier 2 sector. Landing at 185bp over Treasuries, it priced with a negative new issue premium of about 5bp.
Staff said the zero-coupon callable note and the Tier 2 showed that the bank "often goes against the grain" in its choice of markets and structures.
But nor did the bank neglect its core markets, issuing twice in the US dollar 144A/Reg S format in 2019.
A US$2bn dual-tranche trade in May, comprising US$1bn each of six-year non-call five and 11-year non-call 10 fixed-to-floating rate tranches, came in the middle of trade dispute volatility.
The other, also a US$2bn dual-tranche offering but this time comprising a US$1.25bn three-year non-call two FRN and a US$750m three-year non-call two fixed-to-floating note, priced as fears around a no-deal Brexit were rising and the protests in Hong Kong were escalating.
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