Challenge accepted
Higher interest rates and stretched public finances created a challenging backdrop for countries across the globe in 2023. For its work on innovative deals for Egypt, Chile, Sharjah and others to help them access markets, and making progress with multilateral development banks, ESG and digital trends, HSBC is IFR’s Bank for Governments.
Public finances may not have been under the strain of a global pandemic in 2023 but governments were still squeezed by high interest rates and inflation levels not seen for more than a decade, requiring many to scramble to find new routes to access markets.
In a volatile geopolitical landscape and choppy financial markets, the timing and structure of sovereign bond deals was crucial, as was how to manage debt maturities, hedging, supply chains, climate responsibilities, digitalisation trends and the vast span of government finances.
Egypt was one of those under intense pressure. Its fragile economy was hit hard by the pandemic and Russia’s invasion of Ukraine, and early in 2023 its credit rating was downgraded and its pound tumbled. The cost of issuing conventional bonds would likely have been prohibitively expensive.
So the North African country made some new plays. In February, it sold its first sukuk, a US$1.5bn three-year offer. In October, it sold a Rmb3.5bn three-year sustainable Panda bond, the first Panda bond from an African country. HSBC was joint bookrunner on both deals.
The sukuk opened up a new liquidity pool, and 60% of the offer was sold into the Middle East. Eight months later, the Panda bond opened up another market and it was done in size. It was also guaranteed by the Asian Infrastructure Investment Bank and the African Development Bank (more on the significance of that involvement later).
“It was a very innovative structure, two MDBs involved, it's cross border – Middle East into China – and it gave them the ability to access the Panda bond market and helped them diversify their funding at a critical time,” said Michael Ellam, chairman of public sector banking.
HSBC has long had a presence in Egypt, and the two deals also played to its position as the top international investment bank in the target markets of the Middle East and China.
“The combination of our local on-the-ground presence and our global network leaves us very well placed in these more challenging times to help our government clients diversify their funding base and tap a wider pool of capital,” Ellam said.
HSBC may have pared back its global network in recent years, but that network remains its hallmark: it is still in 62 countries and its public sector banking team was busy across many of them in 2023.
Two deals for Sharjah saw the emirate set a precedent with the Gulf’s first ESG-labelled bond and then a successful sukuk issuance. HSBC was the only international bank mandated on both deals.
Sharjah set out a medium-term fiscal outlook in February 2023 to balance its budget by 2027, and came out the same month with its ESG bond, where HSBC was structuring agent and global coordinator. The deal went down well after the tenor was shortened to nine years following feedback during the roadshow, and the US$1bn offer attracted a book of US$3bn. In September, HSBC was joint lead manager on Sharjah’s US$750m sukuk, which also drew in more than US$3bn in orders.
Gender precedent
Governments often lay a pathway with new ESG trends, and that was the case in June with Chile’s sustainability-linked bond focused on gender. HSBC was structuring agent and joint lead manager on the US$3bn multicurrency package, which was Chile’s second SLB in US dollars and first in euros – and the first anywhere to incorporate gender targets.
The South American country is an ESG innovator and the choice to shift to the social rather than environmental area fits well with recent changes in policies and laws in the country.
The bond has three firm key performance indicators. To avoid higher interest payments, the bonds require female board representation at registered companies in Chile to increase from 14% to 40% by 2031.
“It's a target that I think the market appreciated and it's one that is measurable for them. It's one that is aligned to the policies of the local government and it sets a really great precedent for not only sovereigns, but other entities that are looking at SLBs in the future,” said Nora Rodriguez, head of public sector for the Americas.
HSBC worked on other innovative sovereign ESG deals, including as green structuring agent for Hong Kong’s largest CNH green bond issue, and as ESG structuring agent on the first blue bond in South Korea, a US$1bn issue from Export-Import Bank of Korea.
MDB pressure
HSBC’s deal roster in Europe in 2023 included the UK’s £5.5bn 40-year Gilt in May and Spain’s €3bn no-grow 15-year inflation-linker in October, which both went down well.
In Asia, it guided South Korea to issue its debut Samurai bond in September to take advantage of the low rate environment in Japan and diversify the country's currency mix. In November, it was on the Philippines’ US$1bn inaugural sukuk, the first by an Asian sovereign since 2014.
In the Middle East it also worked on the first international sukuk issuance from Saudi Arabia’s Public Investment Fund and a UAE US$1bn bond that achieved the lowest spread for a 10-year offering by an emerging markets issuer in the region for two decades.
The strain on government finances meant liability management remained a hot button, and HSBC helped Romania, Mexico and Peru with bond and tender offers.
Smaller countries had even greater need to be opportunistic, and Mongolia bookended 2023 with two liability management deals, to extend debt maturities and then repurchase 2024 bonds to set a more sustainable debt path. HSBC was joint bookrunner on both.
The year also saw calls intensify for multilateral development banks to step up their game. The G20 urged action, and added impetus came when Ajay Banga took over as head of the World Bank in June.
Supercharged MDBs could pioneer innovative capital issuances, mobilise private capital, prioritise partial credit guarantees, and use risk transfer mechanisms – but doing so is complex. HSBC is one of the banks most involved in discussions, and in July its CEO Noel Quinn was one of 15 CEOs named as founding members of the World Bank’s private sector investment lab.
Egypt’s Panda bond showcased how it can work: it used partial credit guarantees from the AIIB and AfDB so they acted as guarantor, which enabled an onshore investment-grade rating for the issuance.
“There's a lot of pressure from the shareholders of the MDBs to look at how they can use their balance sheets a little bit more innovatively and look a bit more creatively at how they can use guarantees,” Ellam said.
HSBC also worked on two deals in Mexico which used the Multilateral Investment Guarantee Agency, and on a joint venture with Singapore’s Temasek supported by the Asian Development Bank.
Digital game
Work with governments often includes more routine issues, such as making payment systems and other areas of finance more efficient and secure. And just as governments or supranationals regularly lead with ESG innovations, they are also often first to try new digital tools in financial markets.
HSBC works with central banks and industry groups on the development of central bank digital currencies, and its Orion platform was used in 2023 to settle trades for the European Investment Bank’s inaugural sterling digital bond issuance.
Orion was developed in-house and uses distributed ledger technology to issue digital bonds, aimed at shortening the settlement process and improving efficiency and transparency.
“It's a key innovation where we see the efficiency of bond markets increasing both in terms of shorter settlement cycles, reducing counterparty risk both in primary and secondary,” said Asif Sherani, head of DCM syndicate for EMEA and public sector DCM. “It also has added benefits in terms of enhanced security and better transparency, which all governments and government-related entities are wanting to move forward with.”
To see the digital version of this report, please click here
To purchase printed copies or a PDF of this report, please email shahid.hamid@lseg.com in Asia Pacific & Middle East and leonie.welss@lseg.com for Europe & Americas.
